Embezzlement is defined as the theft or misappropriation of funds placed in one's trust or belonging to one's employer. Unfortunately, some cities are forced to deal with the unpleasantness associated with employee embezzlement. It's important for cities to have policies in place to catch embezzlement when it begins or to prevent it altogether. Recognizing the red flags associated with embezzlement and having sound practices in place to lessen the likelihood of embezzlement will go a long way to prevent and mitigate issues associated with employee dishonesty.
The red flags associated with embezzlement do not always mean that money is being stolen. However, if the following red flags occur, it's time to take a closer look.
- Inability to reconcile accounts on a regular basis (Employee claims not enough time to reconcile accounts – red flag!)
- Unexplained variances (Labeling variances as "other" or "miscellaneous" – red flag!)
- Large number of "adjustments" (Such adjustments can be a mechanism designed to confuse others – red flag!)
- Unusual discrepancies between actual and budgeted results (A significant overrun in expenses that cannot be explained – red flag!)
- Disbursements to unknown or unapproved vendors or employees (Payments going to a vendor or a person unknown to others – red flag!)
- Gaps in receipt or check numbers (Unaccounted for receipts or checks, could indicate cash pocketed or checks written – red flag!)
- Receipts not matching deposits (Receipts are higher than deposits – red flag!)
- Always reporting "cash short" (Cash does not get lost and certainly not on a recurring basis – red flag!)
- Significant changes in employee behavior patterns (Employee driving new expensive car, employee reluctant to take vacation – red flag!)
Being proactive is the best practice when it comes to dealing with embezzlement. While there is no guarantee that embezzlement won't occur, it will be much harder for an employee to embezzle if the following guidelines are implemented.
- Don't trust too much. (It's a fact – people face financial difficulties.)
- Watch the behavior of others. (If the behavior is unusual, check it out – It might be nothing but could be something)
- Separate duties. (Have payroll prepared by human resources, entered by accounting and approved by management.)
- Have checks and balances in place. (Don't let one person handle the deposits and reconcile bank accounts. Multiple checks should be in place for this.)
- Have policies and procedures. (When staff members leave for good reasons or bad, lock them out of the system immediately.)
- Review financial statements. (This is a concise way to look at finances that could lead to further investigation.)
- Have a third party audit the financial records. (Trusted employees welcome practices that confirm their honesty.)
It's unfortunate that cities have to deal with the potential of embezzlement. By being aware of red flags and following up on them, cities can prevent embezzlement or at the very least, lessen its financial effects and the demoralization that comes with it. Having sound practices in place to prevent embezzlement altogether is an even better method of dealing with employee dishonesty. By paying attention to red flags and implementing anti-embezzlement measures, finances are protected, and honest employees don't have to go through the disappointment of having to know that their trust in a coworker was misplaced.