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What is Embezzlement and How to Avoid it as an Entrepreneur

 

While the statistics concerning embezzlement are hard to quantify, the numbers from 2014 showed that the median loss caused by occupational fraud was $125,000.

However, approximately 21% of cases caused losses of more than $1 million, earmarking this as a major issue that entrepreneurs must be aware of regardless of their chosen market.

But what is the legal definition of embezzlement, and what steps can you take to prevent this in your own business?

What is the Legal Definition of Embezzlement?

In corporate law, embezzlement refers to a “breach of the fiduciary responsibilities placed upon a person”. But what does this mean in layman terms?

Typically, embezzlement is described as a white collar crime, in which a corporate entity or employee misappropriates core financial assets or capital that’s entrusted to them. So, while such assets are typically acquired lawfully from customers and clients, they’re subsequently used for unintended and completely unlawful purposes.

Traditionally, the “Ponzi” scheme has been seen as the perfect embodiment of corporate embezzlement. With this type of initiative, fraudsters pay an existing body of investors with funds raised from new participants, while falsely offering exponential returns and retaining a percentage of this capital for themselves.

In businesses, embezzlers may also create falsified bills or receipts and then use the money paid for other, more personal expenses, or leverage a fledgling market such as cryptocurrency to collect funds from third-parties before dissolving their ventures and banking the capital.

How Embezzlement Happens

As we can see, there are different examples of embezzlement, while this niche iteration of fraud can take place along a sliding scale that includes multiple potential examples.

Embezzling company funds can start as small as a checkout assistant pocketing some small change from a cash register, for example, while it can also extend to vast and false expense claims that see company funds transferred into personal accounts.

In the latter case, embezzlement is usually underpinned by the creation and falsification of small and seemingly insignificant invoices in high volume, so that nominal amounts can be syphoned off unnoticed over an extended period of time.

From a legal perspective, you should also note that embezzlement differs from fraud. The reason for this is simple; as an embezzler retains authorisation to manage the assets in question at the time of their deceit, rather than acquiring these by unlawful means.

The Last Word – How to Avoid Embezzlement in Your Business

The question that remains is how can you avoid embezzlement in your business? The key is to adopt a proactive approach, as this can avoid the financial impact of embezzlement and help to safeguard the reputation of your firm.

Similarly, we’d recommend vetting all employees thoroughly as part of the recruitment process, including detailed references and background checks that guarantee their integrity as much as possible.

Finally, it’s a good idea to separate accounting responsibilities within your business. This helps to reduce risk and increase accountability, by introducing cross-checking and removing the responsibility from a single individual.