Is Misappropriation of Assets the Same as Embezzlement?

There are many different types of external threats that can be faced by a business. Over the years, things like shifting market conditions, new competitors, and changing customer tastes can all make it difficult to keep the business moving in the right direction. However, as challenging as those variables can be, perhaps nothing is more concerning than an internal threat in the form of a theft crime.

When the threat comes from the inside, it can be much harder to fight, as you might not know exactly who the enemy is or what plans they have made. If an employee has committed misappropriation for personal gain, it might take you a while to track down this crime – and you might not be sure how widespread the problem is and if more people are involved. Staying on top of this situation and maintaining as much internal control as possible as a business owner or manager is vital.

In this article, we’d like to spend some time talking about the misappropriation of funds, embezzlement, and related topics. We’ll discuss whether or not those two are the same thing, how they can take place, and what owners can do to steer clear of these costly issues. If you need help from a third party to deal with funds misappropriation or similar theft crimes, reach out today to Space Coast Forensics for assistance. We have the experience and knowledge necessary in this space to examine the circumstances surrounding any financial crime and get to the bottom of the matter.

Start with Definitions

If we are going to figure out whether or not misappropriation of assets is the same thing as embezzlement, we’ll first need to have some good definitions in place. From those definitions, we can better determine what these crimes look like in the real world and whether or not they are the same thing.

A Definition of Embezzlement

We can define embezzlement as a type of financial fraud where an individual or group of individuals unlawfully takes the assets of a person or organization. Rather than handling those assets as expected and requested, the guilty party will use the assets for their own purposes.

Plenty of different theft crimes can fit under the umbrella of embezzlement. And, while the term “embezzlement” might bring to mind large, masterful schemes that make off with millions of dollars, the truth is that many cases are far smaller and not particularly sophisticated. For example, a bookkeeper who makes off with even a small portion of the accounts receivable in a business could be guilty of embezzlement. Of course, there are plenty of examples of large-scale embezzlement, as well, as happens in big investment scams when investors are falsely led to believe that they are putting their money behind a profitable venture when it’s really little more than a Ponzi scheme.

A Definition of Misappropriation of Assets

The misappropriation of assets is defined as the illegal use or theft of assets from a company or organization for personal benefit. Yes, that’s pretty much the same definition that we used above, which probably isn’t much of a surprise. Whether it’s misappropriating funds or embezzlement or any of a few other related terms, the outcome is the same – a criminal attempts to make off with money or another valuable item of which they are not the rightful owner.

Under this definition, it’s critical to remember that lack of authorization is a key component. If a person uses a company’s assets but has legitimate permission to do so, it’s not fraud, a crime, or anything else. When that action falls into an unauthorized area, however, it becomes misappropriation of funds and it may lead to criminal charges. Usually, this kind of activity happens inside a business, by someone who has been trusted with responsibilities and given some permissions and access to resources.

More Similar Than Different

As you can see from our discussion so far, embezzlement and the misappropriation of assets are very similar, if they aren’t the same thing. Depending on who you are talking to, and in what context you are speaking, these two terms could very well be used interchangeably. Either way, you are talking about illegal activity that takes advantage of one party for the benefit of another. If someone has been misappropriating funds to use for their own purposes, it doesn’t particularly matter what the crime is termed – it is a criminal offense and it should be punished if proven beyond a reasonable doubt.

For a business, it’s not particularly important to get caught up in the finer points of how each of these terms might be defined or used in federal court or other arenas. What’s more important is to understand how a misappropriation of funds can be avoided in their business, so the bank account of the company doesn’t fall victim to a fraud scheme that ends in criminal charges. None of that is good news for the business and it can make it very difficult to continue on toward a brighter, more profitable future.

Examples of Embezzlement

Above, we touched briefly on a couple of quick examples of what embezzlement can look like when it happens in the real world. However, we only scratched the surface in this section, so let’s take a little more time here to present some other possibilities. Of course, each case of embezzlement is unique, and there are plenty of different complicated tactics that people will attempt to use in order to steal money and other assets for personal gain.

Fake Invoices

When a business receives an invoice, it typically gets dropped into the accounting system and goes through a processing phase before it is paid out and marked as closed. Most of those invoices are accurate and legitimate, of course, but that can’t be said for all of them. Sometimes, an employee may produce fake invoices in an attempt to get the business to make a payment for a product or service that was never received – or even requested. An advanced, complex billing scheme like this can be hard to spot without the help of a trained forensic accountant to review the books and track down signs of fraud.

Invisible Employees

Some cases of embezzlement from a business involve creating payroll entries for employees who don’t exist at all. These imaginary people are added to the payroll by someone with access who intends to commit fraud, and the payroll payments made to this “person” are actually directed to an account under the control of the person who set up the scheme. While this would certainly never work in a small business where everyone knows all of the employees, it can be effective in a large company with a huge payroll list to manage. Of course, internal controls can be established to avoid this kind of fraud, so it’s often a crime of opportunity when someone notices that such controls aren’t in place or aren’t being used effectively.

Credit Card Abuse

In some businesses, credit cards are issued to specific employees who have permission to use those cards for a given set of purposes. However, those rules aren’t always followed, and the company cards could be used to embezzle funds. Spending on personal items is almost certainly not allowed by company policy, but it could happen – and many companies have fallen victim to exactly this kind of theft. Yet again, this is another place where we see the value of good internal controls. For example, the person using the card should not be the same person who reconciles the credit card statement at the end of the month. That task should be given off to someone else as a check to make sure all of the spending on the card makes sense and tracks with company policy.

Businesses Need Strong Internal Controls

Whether you want to call it misappropriation of funds, embezzlement, or any other related type of term, the important thing is finding ways to avoid becoming a victim in these kinds of cases. While it might feel satisfying to get someone charged with a felony offense and then see them receive a prison sentence for what they have done to your business, it would be far better not to go through the process in the first place. Criminal prosecution, by definition, is a reactive process, and businesses should be as proactive as possible in putting controls in place to limit the chance of misappropriation of funds.

While the appropriate internal controls are going to vary from business to business, the points below are some of the key components that should be seen in most systems.

Segregated Duties

The heart of internal financial controls can be found in the segregation of duties. If a business wants to avoid issues with misappropriation of funds, this is the right place to start. Segregated duties is just as it sounds – tasks are divided up among a variety of people, rather than putting too much power in the hands of a single individual, or even a couple of individuals. The more people that can be responsible for various tasks within the financial realm of the business, the more opportunities there will be to catch misappropriation of funds before it gets too far.

Segregation can be put to use in many ways. As one example, if one person is responsible for approving expenses that have been submitted by various employees, someone else should be responsible for actually distributing those payments. If it’s the same person that is responsible for all of it, there is a far greater chance that they could engage in fraudulent activity. By having the expenses need to go through two different people before money is received, there is a safety net in place and it will be harder to commit a misappropriation of funds with this system design.

Consistent, Periodic Financial Reports

In some businesses, ongoing financial reporting can come to be seen as a hassle and even a waste of time. It’s tempting to skip out on some reporting in favor of spending as much time as possible trying to secure more business and bring in more revenue. That’s a mistake, however, as ongoing financial reporting is not only a necessary part of proper accounting, but it is also a great way to spot signs of embezzlement and stop that activity quickly after it starts.

It’s often through the financial statements that are produced by a business that issues with fraud come to the surface. If things aren’t adding up quite right, those discrepancies can be cause for investigation. Such an investigation might simply find that some honest accounting errors were made and those can be corrected. Or, the investigation might find that fraud has been taking place, and the company can then take action to pursue those responsible for the crime.

Tightly Control Access

The financial system within a business should not be easy to access. Only those with a legitimate need to access the system should have the formal permission to do so, and going a step further, there should be access limitations within the system to only allow people to see what they need to see. Every additional bit of access beyond what is necessary is just opening up the possibility for misappropriation of funds and other types of fraud to occur more easily.

Doing Vendor and Supplier Research

It’s not only the employees of a business that present a misappropriation of funds fraud threat, but also the vendors and supplies that the business works with. If a questionable vendor decides to create a scheme of over-billing through inaccurate invoices or other measures, it might be hard to track down that scam for some time. Therefore, doing due diligence on any business that is going to be accepted as a vendor or supplier to make sure they are a trustworthy company with a strong reputation is another valuable step.

A Reporting Channel

There should always be a discrete, simple way for employees to report suspected misappropriation of funds and other fraud issues to management. Sometimes, people with information about fraud don’t say anything simply because they don’t know who to tell or how to tell them. Also, they may fear a negative impact on their career if they do come forward. So, creating a safe channel for a whistleblower to present what they know is another good way to protect the business.

Put Budgets in Place

Budgets, like financial reports, can sometimes be seen as something of a hassle. Specifically, if the budgeting process takes a lot of time, companies can grow tired of the overhead and fall out of the habit of using them properly. When employed correctly, however, budgets can be a part of solid internal controls. Since you’ll establish an estimate of spending in various areas of the business through the use of a budget, you can quickly see when costs are exceeding expectations in one category or another. If costs are running way ahead of expectations in a given budget category, you can then perform more research and determine the underlying cause.

Work With the Right Partner

You shouldn’t be in this battle alone when trying to deal with misappropriation of funds and other financial fraud situations. Space Coast Forensics is here are ready to be the partner you need in this case. Whether you already have some proof of a misappropriation offense or you simply have a suspicion and want a pro to investigate further, you have come to the right place. Take a moment today to get in touch and we can get this process started immediately.

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