Fraud and embezzlement are two different types of deceptive accounting practices. Each can have a detrimental effect on a company when it occurs.
Both fraud and embezzlement involve an abuse of power. However, the specific effects of each are different.
According to Chron.com, investors may be reluctant to put capital into a business that is already having financial difficulties for fear that they will end up losing money. Financial fraud involves making the company appear healthier from a financial standpoint in the interest of attracting investors by manipulating the accounting records. The company manager may be the instigator of the fraudulent activity.
Embezzlement is an attempt by a person in a position of financial authority within a company to steal funds for his or her own benefit. This person then manipulates the financial records to conceal the evidence that the money has gone missing. What distinguishes it from a simple case of theft by an employee is that, in a case of embezzlement, the person taking the money is someone entrusted with its management. This person abuses his or her position for personal gain and, if skilled at covering his or her tracks, the embezzlement may go undetected for years.
Both fraud and embezzlement can have adverse financial effects on a company. For example, in a case of embezzlement, profits may decline for seemingly no reason. Furthermore, both offenses can do reputational damage to a company. Those adversely affected can feel a sense of personal betrayal, especially in a small company. People charged with either fraud or embezzlement can face harsh penalties under laws designed to protect business and commerce.