John Merchant, CPA, CFE

It has long been accepted that there are three factors that must exist for an embezzlement to occur – motivation, opportunity and rationalization.  Employees have motivation to steal when they have a financial need that cannot be met by their current income plus savings.  Once employees are motivated to steal, they must, of course, have the opportunity to accomplish the task.  Finally, most employees have some sense of right and wrong and must rationalize within themselves that in their particular case stealing is justified.

First – Motivation

In a weak economy such as the one we are now experiencing it is easy to see how motivation is created.  Plummeting investment values in 2008 wiped out savings and retirement funds for many.  The sluggish economy led to layoffs and record unemployment.  Mortgage foreclosures became commonplace.  All of these factors put financial pressures on employees that did not previously exist.

Second – Opportunity

The factors that led to motivation may have also led to increased opportunity.  When companies are forced to reduce their payroll cost through layoffs, the segregation of duties necessary for a good system of internal controls must sometimes be sacrificed.  The employees who are retained by those companies are asked to double up and perform duties formerly performed by others.  So, opportunities that didn’t exist before suddenly materialize.

Third – Rationalization

Finally, once motivation and opportunity are created by a weak economy, for many it is a small step to rationalization.   Layoffs unexpectedly force two-earner homes to rely on only one income.  Employees who once had comfortable incomes now face compensation reductions or in some cases total loss of income.  Employees begin to wonder whether they can make their next mortgage or rent payment.  Some begin to question whether they will have adequate income for essentials such as food and clothing.  Such economic uncertainty makes it much easier for essentially honest employees to justify embezzlement in their own minds.  Often they convince themselves that they are just borrowing and will repay the funds when they are able.  Others simply convince themselves that the amounts needed to provide for their children will never be missed by a large company.
Occurrence of embezzlement often rises in a weak economy and, as discussed above, it is easy to see why.  If you are a business owner or manager, have you evaluated the impact of the economy on your employees?  Have internal controls in your company been relaxed or compromised due to layoffs?  Is it obvious that certain employees have a heightened need for cash?  Have employees who used to be satisfied suddenly become disgruntled and critical of the company?  It may be time to consider these questions because employers and business managers must be especially vigilant in such economic times.