It's not uncommon for longtime trusted employees to embezzle, experts...

It's not uncommon for longtime trusted employees to embezzle, experts say. Credit: Getty Images/iStockphoto / nito100

Last year workplace embezzlement cases cost companies an average of $1.13 million, according to a 2017 study by global specialty insurer Hiscox.

Fifty-five percent of the cases occurred at companies with fewer than 100 employees, and 37 percent involved losses of more than $500,000.

For small businesses those kinds of losses could be crippling. That’s why it’s important to put safeguards in place to detect and deter such theft.

“Embezzlement continues to be a significant threat to large businesses, but most particularly small businesses,” says Doug Karpp, a senior vice president at Manhattan-based Hiscox.

It’s much harder for smaller businesses to recover from significant losses than their larger counterparts, he says.

Small businesses can be more vulnerable because of the amount of trust they may place in one individual; plus, they likely don’t have the sophisticated controls and audits that a large company would, says Karpp.

No business is immune, and knowing the warning signs is important.

What to watch, according to the Hiscox study: an employee who’s eager to know how everything in the office works, or is living a lifestyle out of proportion with his salary, or who may be overly diligent, coming in early and leaving late and never taking vacations.

This doesn’t mean every employee who exhibits these traits is an embezzler. “You have to look at it holistically,” says Karpp.

But if an employee is not timely with his work, that also could be a sign of trouble, says Stephen Pedneault, principal of Glastonbury, Connecticut-based Forensic Accounting Services and author of “Fraud 101” (Wiley; $70). For example, you keep asking for financial records that keep getting delayed or stalled.

“You’ll know it’s happening in their behavior long before you find it in their transactions,” Pedneault says. For instance, an employee could be defensive about her area of responsibility, insisting nobody cover for her when she’s out.

Pedneault says there are three main ways to combat fraud and embezzlement:

  • Prevention: Avoid giving any one person too much access or opportunity.
  • Detection: Periodically review bank statements and cash disbursements to look for anomalies.
  • Insurance: Consider employee theft insurance to recover embezzled funds and associated costs.

Common schemes include perpetrators taking cash or bank deposits and transferring the funds to an account they control; checks being altered or forged to be made payable to the perpetrator; and fabricated or inflated vendor invoices and false billing, according to Hiscox.

“People ultimately want to take some level of cash, more so than say inventory or an item,” says Michael J. Garibaldi, president of the Garibaldi Group, a Garden City CPA firm that does forensic accounting.

But you have to keep your eyes open across all areas, he says.

So check payroll to make sure everyone listed is a legitimate employee and the salary amounts look appropriate, he says.

When reviewing accounts, look not just for eye-popping large losses, but also smaller sums of money over time. The longest-running scheme the Hiscox study found lasted 41 years.

It’s not uncommon for longtime trusted employees to embezzle, says Douglas Nadjari, a law partner at Ruskin Moscou Faltischek in Uniondale and member of its white-collar crime and investigations group.

“They’ve built up trust, and people come to rely on these key employees,” he says.

Prevention starts on Day One with the recruitment process, he says. Confirm any information applicants provide and run background checks to the extent permissible, he says.

Put in controls, such as having some checks require two signatures for disbursement, and have company bank statements sent to both the bookkeeper and owner, says Nadjari.

Also check your accounts online on a regular basis, says Garibaldi.

“I have clients that look every day at their online bank accounts,” he says. “It really is a combination of having your eyes and ears open.”

Embezzlement by the numbers

55% — Percent of cases that occurred at companies with fewer than 100 employees

37% — Percent that were committed by someone in a finance or accounting function

48 — Median age of perpetrators

51% — Percent of perpetrators who are women

29% — Percent of cases where the fraud lasted more than 5 years

41 years — Longest-running scheme in study

Source: 2017 Hiscox Embezzlement Study of nearly 400 cases

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