The Fraud Continuum – Talking Embezzlement – Hiscox Revealed:

There is a widespread misunderstanding that embezzlements are large scale losses that are quickly caught and indicted. The fact is, the most damaging occurrences involve small amounts of money repeatedly filched over many years, making it difficult to detect, but that lead to large losses. Hiscox, a specialty insurance company that focuses on managing and mitigating employee theft and other executive risks, performs annual examinations of operational theft cases that are active in the U.S. court system.  Their key take-away conclusions are that every business is vulnerable and recognizing the warning signs of embezzlement is also critical.

Because it takes a unique individual to actually get up the gumption to create an ongoing scheme, the warning signs of embezzlers are more archetypal than one would think. Again, these people may be low key and likeable, but they engender a deep-seeded ego that secretes the warning signs if an observer is astute to the fraud signals.  What are some of those embezzler signs of long-running schemes that evolved from the Hiscox studied court cases?

  • Intelligent and curious – quick learners eager to know how everything in the office works;
  • Diligent and ambitious – come in early, leaves late, never take vacation;
  • Extravagant – the ego/gumption, even if subdued, drives them to flaunt wealth and lifestyle;
  • Financial difficulties – known issues of an employee in deep debt;
  • Disgruntled – working hard and feel they are being mistreated;
  • Most long running schemes involve bad actors working alone;
  • The most asked question following a long-running embezzlement discovery…“Why didn’t I see this so much sooner?”

Other facts to consider for small or mid-sized businesses (less than 500 employees):

  • The median age for men perpetrators was 49 – women 48; the dispersion between men and women was just about 50/50 for those actually performing the deed;
  • Approximately 29% of the cases lasted more than 5 years;
  • 37% of the schemes in financial services lasted longer than five years;
  • The longest running embezzlement in the Hiscox analysis lasted an astounding 41 years (a financial institution that was eventually bankrupted)

OK, so what? These type of events happen to other people…not us.  We think we have our act together.  Maybe so.  Let’s ask a few verifying questions.  Are your individual internal controls distinctly recognized and pointed out within your work-flow written documentation (not just pages of documented work-flow process)?  When was the last time your work flow and control points were actually updated?  Have people left employment or have job functions changed that have not been updated within the control structure?  Have control steps become operationally complacent and comfortable within the working staff over time?  Does your audit committee (or Board) ever request a thorough update on management’s continuing process for managing and documenting internal controls?  Do you have established internal processes of “safe” avenues for employees to confidentially bring fraud concerns to HR?  Think about it…as we advise every year, it’s a living process that must be continually assessed and discussed among management and their governance authorities.