White Collar Crimes (Embezzlement)

Introduction I’m here to talk about the dangers of embezzlement. Throughout my discussion I will discuss the underlying factor to the rise in the rate of embezzlement. We will also look at how a few big embezzlement schemes have influenced their business and their business’s industry. Because of this growing threat we will look at some factors that perpetrators are affected by that might influence him/her to commit company theft which can aid to help further prevent and detect company theft.Lastly I will discuss some preventable measures and steps companies can take to further detect criminal activity within their business, specifically employees who handle cash flow. What is Embezzlement? So what is embezzlement? The federal bureau of investigation defines embezzlement as the misappropriation or misapplication of money or property entrusted to one’s care, custody, or control. Embezzlement in Businesses (What is Embezzlement? ) – General and Relevant Facts All types and sizes of businesses can be victims to embezzlement (small/large businesses as well as non-profit and government entities).Businesses have to be vigilant when dealing with criminal activity which is especially true for small businesses. The Association for Certified Fraud has found that 39% of all fraud occurred in companies with fewer than 99 employees. Up to an astonishing 30% of small businesses fail due to criminal activity. It is estimated that small businesses faces on average $190,000 loss due to embezzlement compared to the $159,000 for average sized businesses. Why is it rising?It isn’t a disputed fact that the rate of criminal activity increases during a time of economic recession and in difficult economic conditions, businesses are struggling to compete for fewer business opportunities. This creates an incentive for companies to deviate from proper business practices and engage in fraudulent activity to maintain revenue. This idea can be depicted in t his quote, â€Å"Some individuals, especially small business owners, become obsessed with a failing business endeavor, cannot walk away from it, and will go to ‘extraordinary’ measures to keep the business going† (Lindquist & Goldberg, 2009)There was evidence of an increase in company theft during the economic downturns of 1987, 1991, and 2001. For example just after the savings and loans crisis in the 1990s arrests shot up by 52% and during the recession in the early 2000s criminal activity increased by 25% From this we can conclude that there is definitely a correlation between a recession and a rise in embezzlement. Impacts of embezzlement According to David O’ Friedrichs, a criminal justice professor at University of Scranton stated â€Å"white-collar crimes have further, reaching, deeper and more lasting impact than street crime. Thefts by employees are of the most costly problems facing new and existing businesses. Experts have shown company theft h as the potential to reach 240$ billion dollars which includes intellectual property stolen during that year. It isn’t a surprise that the cost of embezzlement is two to three times than that of street crimes. Also 30-50% of all businesses affected by embezzlement fail. Other potential effects include increase in taxes, lost investments, and increase in unemployment. Guarantee Building & Loan AssociationOn December 9th, 1930 Gilbert, the founder of Guarantee Building & Loan Association was found to have embezzled an estimated $8,000,000 which in today’s amount would be $100,000,000. Many local businesses and individuals were crushed by his embezzlement scheme. According to TIME Magazine â€Å"no less than 2,500 Guaranty depositors have gone to the poorhouse or the insane asylum, some 30 have committed suicide†¦Ã¢â‚¬  This example demonstrates the extreme ripple effects of a multi-million dollar scheme. Commonwealth Building & Loan AssociationDuring the winter of 1955, Minnie Magnum, the assistant secretary-treasurer was accused of misappropriated an estimated 3 million dollars (36 million dollars in today’s amount). This scheme was highly publicized because the scheme lasted for up to 22 years before detection. This demonstrates the evasive nature of embezzlement. In the end the Commonwealth Building & Loan Association had to file for bankruptcy. This is only one of the many businesses that fail due to embezzlement. Brunei’s Battle Royale Brunei is a small country that consists of 300,000.Their council consisted of people in royalty with high positions in their government and key businesses. It became a big story when Prince Jefri Bolkiah was accused of embezzling billions from the state treasury and his businesses. Not only was he the finance minister for his country, he also was the chairman of the Brunei Investment Agency, and head of Amedeo Group which pretty much increased his opportunity for criminal activity. John M. Ca llagy, a lawyer who represents Amedeo Hotels Ltd. , estimated Prince Jefri to have siphoned off $40 billion. The small country of Brunei needs the mission billions to help recast its economy.This example demonstrates how even government entities can also be vulnerable to theft. Behavioral Characteristics of White Collar Criminals Now that we have a better grasp on the dangers of a multi-million/billion dollar embezzlement scheme we can go onto discussing what exactly motivates perpetrators to steal from their company. Dr. Donald R. Cressey believes understanding factors that influence white collar criminals to steal from their company can manifest in helping society create better procedures to reduce the rate of embezzling during an economic recession.Dr. Cressey believes there are internal and other factors when it comes to why people violate company trust. The classic fraud triangle theory can also aid us in realizing the mentality behind company theft by employees. The fraud tria ngle theory states that there must be three basic elements for fraud to come about – they are opportunity, incentive/pressure, and rationalization/attitude. The classic fraud triangle theory can be linked to behavioral characteristics of white collar criminals. Internal Factors (Incentive/Pressure)An internal factor or conflict that an embezzler faces when he makes the decision to commit the crime is based behind the idea of personal failure. For example if an individual loses the majority of his savings because of a gambling addiction, Dr. Cressey believes that individual will commit to embezzling because he/she has too much self-respect and pride to tell his family, friends, and company (employer) of how he exhausted all his money. So to continue to support his friends and family financial he has a greater incentive/pressure to steal from his company to support his lifestyle.Other â€Å"personal failures† include shopping addiction, substance abuse, entrepreneurial f ailure, investment failure etc. â€Å"Other† Factors (Rationalization/Attitude) Other factors that influence employees to commit company theft is based on the idea behind entitlement belief – he/she believes they are more deserving of the money which ties in with the attitude element of the classic fraud triangle theory. Other factors also include financial need, supporting a personal business, and supporting a significant other which ties in with the rationalization element.How do we tie these factors to preventing and detecting? As of now there is not enough data to fully explain the embezzlement phenomenon in a psychological stand point. The psychologies behind these factors as well as the classic fraud triangle theory is essential and should be dissected further to better create procedures to help reduce the rate of embezzlement. I believe once enough research is done there can be changes to the hiring strategies for prospective employees. Preventing and Detecting: The Steps How society views white collar crimes have slowly been evolving.In the past many people viewed white collar crimes to be victimless; that perpetrator did not deserve a long prison sentence. Nowadays we understand how dangerous and harm a huge embezzlement scheme can inflict. The shift in society’s mentality behind white collar crimes emphasizes the need for polices to be implemented to safeguard against potential scandals especially during an economic recession. Step 1: Create a Policy Many companies think it is unnecessary to create a policy that states stealing is wrong.In reality this step is one of the most important and effective step a company can take to diminish company theft. Creating a policy against company theft helps creates the idea that the company is always aware of their employees and that they will not tolerate criminal activity within the workplace. Secondly, this is important because there are grey areas and company theft needs to be defined. Ex amples can include not knowing when to actually charge the company credit card to pay for meals or using the company phone for certain calls, etc.Step 2: Creating Checks and Balances One of the biggest reasons small companies are more vulnerable to embezzlement is because they do not have checks and balances that established businesses have. For example they could be a recently established business and there can be a few or one employee controlling the majority of the positions that handle cash flow. This creates a bigger opportunity for that employee to embezzle money from the company. Creating checks and balances decreases the opportunity element.One checks and balances procedures a company can commit to is a separation of duties as implied earlier. Meaning different people should handle different positions within the business. Companies should designate different employees who deal with cash receipts and deposits, cash disbursements and electronic fund transfer operations, and ba nk reconciliation. Another effective control procedure includes internal audit procedures for monitoring cash, accounting for transactions, and preparation of financial statement. Companies can also cross-train employees, require vacation time, reate a periodic financial check for their employees, and separate and monitor payroll functions to help decrease the overall rate of embezzlement in our economy. In general, the company should â€Å"follow the cash trail. † Step 3: Inspecting your employees Focusing on finding the right employee for a position is extremely important, especially for a position that handles cash flow. Some tools companies can use to help them along the hiring process would be using an employment agency. Administering drug and background checks. Of course monitoring employees does not stop there.Inspecting your employees should be an on-going process. Companies can hire an independent CPA to provide a periodic audit of dual controls and theft prevention which allows for better scrutiny of their employees because they will not know when they are going to be investigated. Lastly the company can review employee expense reports to check for illegal spending. Step 4: Setting an example/practicing zero tolerance Setting an example for people who have embezzled money can be an effective method to help deter others from doing the same.Conclusion Now that we realize there is a growing threat for the rise in the rate of embezzlement, there is a stronger emphasis for the need of companies to establish the controls procedures to help prevent and detect embezzlement. Hopefully in the future there will be more studies on the behavioral traits of embezzlers which can be a very important to helping finding the right candidate for a position. Companies without crime prevention and detection measures are sure to be more susceptible to business failure.