Allocated Funds And The Risk Of Embezzlement

January 25, 2023

The owners of a St. Louis hospital face an embezzlement lawsuit while in the midst of negotiating the sale of the hospital. The building contractor overseeing construction projects at the hospital filed the lawsuit, alleging the owners embezzled $1.4 million from the construction fund.

The hospital had set in reserve $6.5 million to fund various construction projects at the hospital. The two managing executives of the owners group requested the funds transfer, stating their financial management firm had approved the transfer for operational costs. However, after the second installment of the requested funds, the building contractor learned that the financial firm did not approve the funds request, and immediately stopped further transfers.

The contractor firm accuses the two executives of using the transferred money for "personal use." The owners deny the allegations made in the lawsuit. Laura Dyrda "St. Louis hospital owner accused of diverting $1.4M of hospital funds" www.beckershospitalreview.com (Nov. 08, 2022).

Commentary and Checklist

What makes this matter interesting is that the plaintiff, the building contractor, is alleging that the hospital’s construction funds being  reallocated for other purposes by the hospital is embezzlement. If proven that the funds reallocated went to personal uses, the case is stronger, but in that case, the hospital is the embezzlement victim, and the contractor may not have standing on that issue. However, a  breach of contract claim may exist.

This case illustrates the importance of managing fund disbursements by requiring multiple approval steps as a financial control best practice. One individual may be able to produce false or altered records or authority, but the opportunity for such fraud is greatly reduced when several individuals are actively overseeing the same accounts.

Consider the following oversight suggestions to limit the embezzlement risk for your organization:

  • Be familiar with general expenses and monthly accounting figures, and examine more closely anything that seems atypical.
  • Never assume that those in your organization who manage finances will not make mistakes.
  • Always require multiple individuals to review monthly accounting reports, and direct them to always question anything that is unclear or that they do not understand.
  • Make sure your accounts review process is done using original documents and statements. Never rely solely on spreadsheets or summaries provided by the accounting staff.
  • Engage an outside auditing firm to conduct an annual comprehensive audit.
  • If you employ a third party to manage financial accounts, make sure they uphold your oversight measures, and do not give them authority to disburse funds without your approval.
Finally, your opinion is important to us. Please complete the opinion survey:

What's New

Ask Jack: Can Malware Become Smarter In 2023?

The New Year means new threats. Jack looks at AI and the challenges it presents for cybersecurity.

Ask Jack: Is There One Group Of Employees That Presents A Higher Risk Of Cyber Threats Than Other Employees?

Jack McCalmon discusses whether there are groups of employees who could benefit more from cybersecurity training than other groups.

Ask Jack: Is Malvertising Really A Threat To Organizational Data?

Malvertising is making a comeback, and the FBI is concerned that organizations may fall for it. Jack explains the risk and provides information from the FBI on methodology and prevention.