Examples of Embezzlement Schemes

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Embezzlement is defined as the theft or larceny of assets – including money or property – by a person in a position of trust in a company with responsibility for those assets. Embezzlement most often happens in corporate and employment settings.

There are many ways you can commit the crime of embezzlement. But below are the six most common types:

#1 Siphoning

This is a type of cash embezzlement that is often done by people who are working in front of customers in restaurants and stores. They figure out a way to pocket money from the cash register without any discrepancy between what the drawer shows and the computer shows. They do not enter the transaction into the register and they keep track of the money they get when their shift is completed.

There are other ways people may engage in cash embezzlement:

  • Taking cash from a business’s petty cash container
  • Taking cash from personal items that are left on company property, such as wallets, purses, backpacks
  • Shortchanging customers when a transaction is completed
  • Refunding items that were stolen for cash

#2 Lapping

This is done in the area of the business that accepts payments that are incoming from vendors and customers. The person working in this area could use bank deposits for several companies and alter the allocation of funds to cover their personal taking of cash payments from some customers. This being done while in a position of fiduciary responsibility is a form of money laundering.

#3 Payroll

This is using the company payroll system to take money illegally. A company usually has at least one person and sometimes an entire department that handles payroll duties for the organization. If the manager steals money in this way, he might add family members that do not work for the company and have them draw income.

#4 Kickbacks

Any worker who is involved in purchasing for an organization may participate in a kickback scheme. This normally involves a vendor that the company buys materials from through their business relationship. The person agrees to give the vendor money if they continue to buy a certain product. These types of crimes often involve inflated prices, as the vendor is probably trying to make money for himself as well.

#5 Check Kiting

The criminal makes several deposits and withdrawals between several banks. The checks grow in value over time, as money is drawn and withdrawn from banks where the money is not actually real. This process takes advantage of ‘float’ where the time it takes for a deposited check to clear the bank from which it originated. A worker who handles bill paying at a company may commit this crime. He might use the checkbook of the company to get the embezzlement scam going and continue it until banks catch on.

#6 Overtime

Falsification of overtime records is another way to embezzle funds. A manager who is paid by the hour at a local branch office may do this. He might punch the clock at the start of the shift and leave at the end of the shift but fail to punch out his card. He might come back in three hours later to supposedly pick up his wallet, but secretly clock out.

#7 Embezzling Negotiable Documents

Common sorts of negotiable document embezzlement include:

  • Unauthorized use of debit and credit memos to manipulate customer or business accounts
  • Money orders
  • Forgeries
  • Travelers checks
  • Company official checks

These sorts of embezzlement schemes can be done by any level of employee. They frequently use documents that are stolen and then forged.

9 Warning Signs of Embezzlement

Now that you know about the most common types of embezzlement, read about nine embezzlement red flags. If these are occurring in your organization, the matter should probably be investigated further:

#1 Accounts Should Be Reconciled Regularly

Accounts with a significant balance sheet should be reconciled every month or quarter. This includes cash, accounts receivable, accounts payable and inventory. The level of concern should increase if the employee responsible for reconciling accounts does not get it done for one reason or another on a regular basis.

#2 Unexplained Variances

Employees attempting to hide fraudulent activity in company finances may try to bury it with assorted general ledger accounts. All variances need to be explained. Employers should look out for account reconciliations with line items that go unexplained or are labeled ‘other.’

#3 High Number of Adjustments

General ledger details should be reviewed quarterly to look at the number of adjustments made. More information should be obtained if large quantities or significant dollar amounts of adjustments exist. Smart embezzlers are effective at making their trail confusing and complex.

#4 Discrepancies Between Actual and Budgeted Results

Budgets are an effective tool for any company. They are a good way to measure how any organization is performing financially. Any time there is a variation between the budget and real-world results should be explained. For example, if there is a major overrun in the budget for supplies expenses, the person handling the books should provide more details.

#5 Payments to Unknown Vendors or Employees

Company owners should regularly review their vendor and employee lists. A slick way to siphon cash from the organization to fraudster is to pay fake vendors or employees. It is not unusual for embezzlers to add friends or family members to the vendor or employee list. Checks can then be signed electronically without anyone realizing they are phony.

#6 Gaps in Check Numbers or Receipts

It is important for companies to use properly sequenced checks and pre-numbered cash receipt forms. Also, be certain to account for each number. Any missing receipt or check could mean an employee is simply pocketing the cash that was received or is writing checks that are outside the company accounting system.

#7 Receipts Do Not Match Deposits

Every deposit must be verified to match the money received to the money that was deposited, and to what was recorded in the company’s general ledger. One employee should not do all of these steps. It also is recommended to be on alert if there are regular cash shortages.

#8 Major Changes in Employee Behavior

If a company has an employee that is clearly living beyond their means, this may be a cause for concern – especially if that person is largely responsible for the company books.

Company owners and managers should be on watch for the following employee behavior red flags:

  • Spending habits do not match up with their salary level
  • The employee does not seem to want to take a vacation and have other workers do their work
  • The employee in charge of bookkeeping does not want help from other workers
  • The employee regularly makes excuses for why routine accounting functions, such as reconciliation, are not being performed
  • Annoyed at reasonable questions. If an employee in charge of company accounts snaps when asked a reasonable question about the books, they may be suffering from guilt or worry about someone going into additional details about company finances.

#9 Invoices Just Below Approval Amounts

Some workers may know what the dollar threshold is for management approval and will make up invoices just under the approval level. For instance, if the company’s approval level is $5000 and there are regular invoices for $4995, more research may be warranted.