What it means
The word comes from legal English, where wrongdoing by people holding office is divided into three types. Malfeasance means doing something that is unlawful, misfeasance means doing a lawful act in an improper or harmful way, and nonfeasance means failing to do something that was required.
Knowing the difference helps in reading contracts, insurance policies and regulatory reports. In a business setting, malfeasance usually involves an officer, director, employee or adviser using their position for personal gain or to harm others.
Typical examples include diverting company funds, taking secret commissions, falsifying records and approving payments to a connected party in breach of rules. The key feature is that the act itself is wrongful, not just carried out badly.
Malfeasance matters to finance professionals because it drives audit findings, insurance claims and legal action. Fidelity or crime insurance and directors and officers liability cover often respond differently depending on whether the conduct is malfeasance, an honest error or a failure to act.
Policy wording on dishonest or fraudulent acts can decide whether a loss is paid. Companies manage the risk through controls such as segregation of duties, approval limits, whistleblowing channels and regular audits.
A single person who can both raise and approve a payment is a classic setting for malfeasance, because the opportunity and the concealment sit in one pair of hands. Consequences can include dismissal, civil claims to recover losses, regulatory penalties and criminal prosecution.
The exact tests and penalties depend on the jurisdiction, so any real case needs advice from a qualified lawyer. For a non-finance manager, the practical point is to notice red flags early.
Unusual payment patterns, reluctance to take leave, missing documents and pressure to bypass approvals are all common warning signs, and raising them through the proper channel is far better than waiting for proof.
In practice
Real-world examples.
Example
A procurement manager at a construction firm approves inflated invoices from a supplier owned by his brother and takes a share of the overcharge. The company later recovers part of the loss through a civil claim and dismisses him. The audit committee then reviews every contract he approved over the previous three years.
Example
A municipal official awards a road maintenance contract to a bidder who paid her a private fee. The award is reversed after an audit, and the matter is referred to the authorities. The rejected bidders are invited to tender again under an independent panel.
Example
A finance director at a software company records revenue from contracts that do not exist so that the business meets a lender's covenant. When the auditor discovers the false entries, the board suspends him and commissions an independent investigation. The lender is told, and the covenant breach is dealt with openly. Prior-year accounts are reviewed to see whether the same entries were used before.
Case study
Seen in the real world.
Calderfield Foods is an illustrative, fictional food distributor with a small finance team of four people. One accounts payable clerk was responsible for creating suppliers, entering invoices and releasing payments, with no second person reviewing her work.
Over two years she set up a fake supplier and paid it a series of modest invoices, each below the approval threshold. The total reached $180,000 before anyone noticed, because each payment looked ordinary on its own. The scheme came to light only when a new controller ran a report of payments to suppliers with no purchase orders.
In this illustrative story, the company recovered some of the money through its crime insurance and tightened its controls. Invoice entry and payment release were separated, and a monthly review of new suppliers became standard. The controller also introduced a confidential reporting line so that staff who noticed oddities had somewhere safe to go.
Watch out
Common mistakes.
- Treating malfeasance as the same as negligence, when negligence is carelessness and malfeasance is a wrongful act.
- Assuming only public officials can commit malfeasance, when directors, employees and advisers can also be involved.
- Relying on trust instead of controls, which leaves opportunities open that honest people may never be tested against.
Questions
People also ask.
What is the difference between malfeasance, misfeasance and nonfeasance?
Malfeasance is an unlawful act, misfeasance is a lawful act done improperly, and nonfeasance is a failure to act when there was a duty to do so.
Is malfeasance the same as fraud?
Not exactly, because fraud is one type of wrongful act that can fall under malfeasance, which also covers bribery, abuse of office and other unlawful conduct.
Does insurance cover malfeasance?
Some policies, such as crime or fidelity cover, can respond to employee dishonesty, but wording, exclusions and the conduct involved all matter, so check the policy and notify the insurer promptly.
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