A Banner Year for Embezzlement

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2011 was another banner year for employee theft in the United States, continuing a frenetic pace set in 2010

This was the conclusion of analysts in the 2011 Marquet Report on Embezzlement, a report published by Marquet International, Ltd. This is an annual report that studies major embezzlement cases, those involving thefts of $100,000 or more and that were detected and investigated. In 2011, they reviewed 473 specific cases that met this threshold, involving nearly $355 million in employee theft.

I look forward to receiving this report each year. It keeps me abreast of current embezzlement cases – with interesting statistics, analysis, and summaries. Here are some highlights of the 2011 report:

  • The top three most common forms of embezzlement were forgery/unauthorized use of company checks (38.4 percent), theft/conversion of cash receipts (20.5 percent), and unauthorized electronic transfers of funds (13.4 percent).
  • The average duration of the embezzlement scheme was 4.9 years (almost 59 months).
  • The average age of the perpetrator when discovered was 47.9 years.
  • The average loss per case was $750,040 – note that the average loss caused by a male perpetrator was $863,713 compared to $693,970 by female perpetrators even though male perpetrators accounted for 36 percent of the cases and females 64 percent. The conclusion made in the 2011 Marquet Report, which is consistent with previous years, is that females embezzle more often, but males embezzle more money.
  • The majority of victim organizations were financial services (12.4 percent) which also experienced the largest gross losses; non-profits and religious (16.5 percent combined), and healthcare (10.5 percent).
  • Finance and accounting positions within a company account for 72 percent of all embezzlements – of those positions, 73 percent are held by women.
  • The primary motivating factor for major embezzlers is the desire to live a more lavish lifestyle (not to alleviate personal financial problems as one might expect, especially in a poor economy). Another major factor is gambling especially in states where casinos and/or Indian gaming is allowed.

So, what can you do to avoid being a statistic on the next Marquet Report? Implement internal controls. The most basic control to prevent embezzlement is separating three main business functions: authorizing transactions, controlling (custody) of assets, and recording transactions.

Unfortunately, for many small businesses this control is burdensome to implement as it requires hiring a different person for each function. This is one of the reasons that the Association of Certified Fraud Examiners’ (AFCE) 2012 Report to the Nations on Occupational Fraud and Abuse notes that small businesses are more vulnerable to fraud and the smallest organizations in that study suffered the largest median losses. Another disheartening statistic from the AFCE report was that barely half of all occupational fraud victims ever receive any restitution.

Some business owners are under that impression that if fraud is occurring in their company, their CPA firm or outside bookkeeper will detect it. This is a huge assumption. Even if you have your CPA firm perform a standard financial audit, it is not designed to detect fraud. You, the owner/manager, are the major controlling factor in discovering fraud in your business. How do you do that?

Here are some ideas: Eliminate or reduce the opportunities to steal by implementing internal controls; perform pre-employment criminal background checks – but be aware that most embezzlers are first-time offenders; communicate your anti-fraud policy; maintain an open/supportive environment for your employees to talk to you (and maybe even tip you off of “funny” business); ask questions – demonstrate that you check and verify accounts; and observe – look for red flags (remember – living beyond one’s means is a major motivating factor in embezzlements).

Both of the reports referenced above are available online – either in their entirety or in abbreviated form. Please take some time to review the reports and use them as a guide in developing or updating your anti-fraud procedures. You should also ask your CPA for ways to reduce embezzlement opportunities in your business. Let us not make 2012 another banner year for employee theft!

Scott Hays is a business professor at Central Oregon Community College.

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