The question “Can you embezzle from your own business?” is a common one. The sad reality is that most cases of fraud take place in small businesses. In fact, according to the Association of Certified Fraud Examiners, the losses that the smallest businesses have to absorb are exponentially greater than those suffered by larger companies.

Fraud, by way of a broad definition, is personal gain made by deception at a company's expense. Embezzlement, similarly, is a person dishonestly taking goods (usually money) that have been entrusted to them.

There is a common denominator in the reasons why small businesses more often fall victim to fraud and embezzlement, and that is the trust that the business owner has in his or her employees.

In smaller business environments, including online businesses, employees are often entrusted with great authority. Without the financial resources to hire a great number of people, this authority ends up in the hands of a small number of people. This leads to a scenario in which duties are not segregated, which can lead to problems with internal control.

Given that this scenario is particularly common in small businesses, owners of these businesses leave themselves particularly open to fraud and embezzlement. The misplaced trust that they sometimes have in their employees has, in some cases, been earned over the course of many years. It is important to note that this does not only take place in small businesses. Trusted employees of businesses that have become incorporated can also be fraudsters.

It is very common for the fraudster to have been working for the business for a decade or more. In such a scenario, it's natural for the business owner to have let his or her guard down. Unfortunately, it is commonly the individuals who are trusted the most who steal the most frequently and embezzle the largest amounts over time.

Impacts of fraud and embezzlement

Over the course of many years of investigation, experts have seen the painful emotional and financial impacts of fraud. The ramifications on the small business go a lot further than simply the money lost as a result of the fraud or embezzlement.

The ramifications include the following:

  • Loss of productivity,
  • The costs associated with replacing an employee who was once valued and trusted, and
  • The cost of aggregating information to give to the authorities for the prosecution of the fraudster.

Prosecution is often not pursued in these cases, and there are a number of reasons for this:

  • The business owners may have lingering feelings of loyalty to the fraudster.
  • They might not want to hurt the person in addition to firing them.
  • They may have feelings of embarrassment at having fallen victim to fraud.

Reasons to pursue prosecution

Experts argue that business owners often have a responsibility to pursue prosecution. In a scenario where multiple shareholders are affected, the business owner has a fiduciary responsibility to pursue prosecution. In order to attempt to recover corporate assets, related reports need to be filed.

It's common for embezzlement to take place in companies that are owned by an individual. In these cases, the decision whether or not to prosecute is a personal one, as there are no other shareholders to consider. It's also important, however, to consider creditors and their rights. This becomes particularly important in scenarios where the embezzlement or fraud that has taken place could mean that the company is not in a position to pay its debts.

Companies should also bear in mind that another benefit of prosecution would be the crime committed by that individual becoming public record. This would protect the fraudster's future employers by ensuring that this information would be revealed if a background check was carried out.

Common methods of fraud and embezzlement

Fraud can be committed in many ways. The most common method is the embezzlement of cash, but kickback schemes and the misappropriation of goods are also common. Experts advise against the use of signature stamps, having seen many accountants use these as a way of committing fraud. Another activity commonly seen is unauthorized checks being forged. In a recent case, an accountant was found to be forging checks to made-up companies and writing checks to his own business.

Business owners need to understand that proving that a shareholder, partner, or co-owner has been stealing is no small matter. The scenario can affect a company not only financially, but also in terms of its performance. They need to make sure that each stage of the process is carried out carefully, with the assistance of a suitable attorney who will ensure that everything is done according to the letter of the law.

If you need help with a fraud or embezzlement case, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with companies like Google, Menlo Ventures and Airbnb.