Published on June 5, 2019
by Dan Verton, Content Leader & Strategist

Understanding The Risk of Embezzlement — What You Don't Know May Surprise You

Dan Verton, Content Leader & Strategist

The risks posed by employee theft are larger than most companies realize. Understanding how to identify the signs of embezzlement can help you develop an effective risk mitigation strategy to avoid costly losses.

It’s no surprise that discussions around risk management today tend to focus on the hot topics and trends — cyberecurity, terrorism, active shooter and sexual harassment. But embezzlement is the silent risk that every organization is vulnerable to and can cost hundreds of thousands of dollars in losses.

A recent survey of chief financial officers, controllers and accounting managers by specialist insurer Hiscox Inc., found that the average cost of an embezzlement scheme in 2018 was $357,650. More importantly, more than half of the companies that reported being a victim of an embezzlement scheme recovered only 39 percent of their losses through legal settlements and insurance payments.

But the losses don’t end there. Three-quarters of survey respondents said the companies where they currently work do not have insurance to cover embezzlement.

“Companies that were victims of embezzlement lost far more than money: they lost customers, had more difficulty attracting new customers, and lost business partners,” according to the 2018 Hiscox Embezzlement Survey. “They admitted the embezzlement negatively impacted the company’s reputation.”

Different Breed of Insider

Embezzlers fit many of the characteristics of the typical insider threat: They are loyal at the time of hiring, they have been working at the company they steal from for at least 8 years, and they often engage in embezzlement because they experience a personal financial crisis or have become disgruntled.

But there is one aspect of the embezzlement risk that is different from the traditional insider threat: In 79% of cases more than one person is involved, and in 46% of cases, more than three people took part in the scheme.

In 85% of cases, the embezzler was in a management role in the company with one-fifth of the cases perpetrated by C-level executives.

Examples

The Lunch Ladies

Two sisters who worked as lunch ladies were charged with stealing nearly $500,000 from two school cafeterias over a five-year period. School officials asked the police to investigate when they discovered financial discrepancies in the handling of cash.

The High-End Retail Ring

An employee of a high-end New York department store recruited other sales associates to make purchases on store computers using stolen credit card information. They then sold the designer goods on the black market. The group got away with $430,000 in fraudulent purchases before the scheme was discovered.

Chief Fraud Officer

The chief operating officer of a nonprofit organization padded his paycheck and used the organization’s credit card for personal expenses. All told, he embezzled more than $100,000 in just 18 months.

Mother & Son

The chief fiscal officer of a state agency and her son embezzled more than $1 million from the organization over a seven-year period. The CFO wrote checks to herself using the agency’s bank account and then created bogus invoices from vendors the agency used.

Prevention Is Possible

In 65% of cases, someone in the company noticed something was amiss and the scheme was uncovered.

Embezzlement schemes often involve more than one individual and can begin with simple, low-level thefts. But over time, the embezzlers can get greedy and see opportunities to reap greater rewards. In 65 percent of cases, the scheme was uncovered by an employee who noticed something was amiss.

Organizations should encourage employees to report potential embezzlement risks and should provide employees with an anonymous tip reporting platform that maintains privacy for all involved and includes automated routing of tips to the appropriate corporate stakeholders, such as legal, HR, and security.

Read More about the study here: https://www.hiscox.com/blog/2018-Hiscox-Embezzlement-Study


About Dan: Dan Verton is the Content Leader & Strategist at LiveSafe. He is also an award-winning journalist, former military intelligence officer, and author of Left of Boom: The Citizen's Guide to Detecting and Preventing Terrorist Attacks.

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