Seeking to understand the legal concept of defalcation? You’re not alone. As a business professional, it’s useful to have at least a basic understanding of the term—and its implications. In failing to do so, you could put your business at risk. Here’s what defalcation is—and why it matters.
Simply put, defalcation is the misappropriation of funds or the neglect of fiduciary duties, and, as such, is generally embodied in the form of embezzlement. That, naturally, can carry a range of implications, from fines and jail time to ruined trust. And when trust dissipates, productivity and profits generally drop.
Examples of Defalcation in the Business World
To paint a clearer picture of the concept of defalcation, consider a few recent examples in the business world. In September 2019, the North Carolina Business Court heard a case of a former employee accused of defalcation. The employee had allegedly misused the company’s credit card for personal expenses. In another case, a California-based executive was convicted of willfully and knowingly misusing company funds and overstating company assets in order to obtain additional funding. As a result, he’ll face up to 25 years in prison.
What Businesses Can Do to Reduce the Risk of Defalcation
Since defalcation carries, such, serious repercussions, it’s important to take steps to reduce the risk of the same. Consider implementing effective internal controls. This might mean everything from segregating duties and limiting access to financial information to instituting monitoring processes and auditing procedures. It’s particularly important to ensure that any employees who have been designated fiduciaries are adequately supervised.
By keeping personnel informed of the potential consequences of defalcation and instituting processes to reduce the risk of the same, businesses can avoid becoming the subject of a story you’ve doubtless seen before.