Five Red Flags for Embezzlement

Fraud costs nonprofits thousands of dollars annually and occurs in many different forms. Embezzlement is when an employee steals money from the organization for their own personal use, and it happens more frequently than you might think, especially within nonprofit organizations.

The 2020 global fraud study by the Association of Certified Fraud Examiners (ACFE) estimated that the typical organization loses five percent of its annual revenue to fraud. The median loss among nonprofits in the study was $75,000! That figure is from all types of fraud and not just embezzlement, but the losses can be staggering, both in terms of financials and in reputation and trust within the community.

Ultimately, preventing or catching embezzlement is the responsibility of the organization’s board of directors. There are some common red flags to watch out for, and all members of your board should be aware of the risk and know what to watch for. With the proper financial policies in place plus paying close attention to warning signs, you can better help protect your organization from fraud. A red flag doesn’t always mean there’s a problem, but it should always prompt the board to look more closely at the situation.

Too much trust

It’s often a highly trusted employee or volunteer who ends up embezzling from a nonprofit. When you see a red flag, don’t dismiss it because you trust the person. The fact that they are so trusted makes it possible for them to commit fraud. Be sure everyone, regardless of how trusted they are, has the proper oversight in place. On the part of the employee, the oversight should be welcomed as it removes suspicion and guards against accusations of wrongdoing.

Delayed access to information

If a board member requests access to financial records and the request is denied or delayed, that is cause for concern. Records and financials should always be available upon request. If the person is behind on data entry or knows they made an error somewhere, it’s best to make note of that and still share the information. A delay provides time for covering tracks or for a request to be simply forgotten.

Either way, financials that are not available on request is a red flag. The moment you get pushback or suspect someone might be covering their tracks, gather all of the financial information you have access to and make backup copies. Check the trash, both digital and physical, to see if there’s any evidence of discarded records.

Not taking time off

An employee who never takes a vacation or any other time off might appear dedicated, hardworking, and loyal. However, if they’re in charge of financials, they might be trying to ensure no one else has a chance to review their work. In some fields, such as banking and auditing, many employees are required to take vacations simply so others can check their work. Even if you don’t require vacations, always be sure someone is cross-trained on the financials and comes in to check their work every so often.

Change in lifestyle

There are a number of lifestyle issues that may be red flags for embezzlement. While employees are generally free to do what they want on their own time, be aware of obvious signs that might indicate theft or a propensity toward it. If an employee is living far beyond their means, that can be a red flag. Perhaps their salary is $45,000, but they just bought a brand new and expensive luxury car, or their vacations are well beyond what you’d expect for their income. While they may just be great at managing their money, it could also mean they’re stealing from your organization.

Reaction to questions

The final red flag is how someone reacts to the question or accusation of embezzlement. The spectrum of natural responses varies greatly, however a strong reaction on either end of the spectrum might be a cover for guilt. They may react with anger at anyone daring to accuse them of such a thing and become mean or aggressive. On the other hand, they might express devastation that you think so poorly of them and say how hurt they are by it. Pay attention to these reactions. While no one wants to be accused of stealing from their employer, a person’s reaction can be telling, especially when they swing from one end of the spectrum to the other because they know they have been caught.

The presence of several of these signs does not guarantee you have an issue of embezzlement on your hands, but it’s certainly worth looking into further. If something seems off, take the necessary steps to determine what’s actually going on and go from there. Don’t ignore the red flags or you could be putting the organization at risk.