Embezzlement and Business Theft Problems

October 3, 2013. Meet a successful CEO and the odds are he can tell you about an employee that embezzled from his company at some point in his career. We rarely hear about business embezzlement cases in the news. It’s not because embezzlement is not happening. In fact, the lack of publicity of these cases might be one reason they continue to proliferate. The thieves move on to victimize again and business owners don’t know how often and how easily employees commit fraud. CEOs also get no tips on how to prevent it.

So how do they do it? The fact patterns are endless and with technology changing the way employees steal is constantly changing. In one case I worked on, the office manager would access accounts, cancel an old customers’ plan and then have the system issue a refund check. Before the check printed, the office manager would override it and put her name on it. Then she would forge the managers’ signatures. In another, the supply manager orders in product and sells it out the back door in a poorly managed inventory operation. The human resource director gives herself an extra paycheck in a former employee’s name. The salesman makes sales, collects the money, and keeps the transactions off the books. The administrator takes out credit cards in the company name and runs up personal bills and pays them in the ordinary course. The payable manager issues hundreds of fraudulent checks and uses ATMs to deposit the checks, avoiding the scrutiny of tellers. The bank loan officer issues a loan to his customer and takes the money himself. Frequently they start small and get away with it, the embezzlement grows over time, they get bold and brazen and more desperate.

So then how do they get caught? New employees, consultants, new office procedures, software programs, different accounting methods, the company is losing profits in a division and the manager wakes up to dig in and get to the bottom of it, the embezzler is fired for some other reason and then the theft is uncovered.

So why then aren’t these criminals taken to justice? The business is not used to criminal activity and they don’t know what to do. Prosecutors have limited resources and business crimes are not a priority in the County Attorney’s office. The business does not want the press and decides to focus on making money instead of dealing with past troubles.

A lot of embezzlement goes undetected because no employer wants to believe employees are stealing from the company. Employers would rather avoid the issue all together. Many times it is the most trusted employee. They want to avoid embarrassment of having the theft revealed, because there is usually something the business owner could have done to prevent it from happening. Having an embezzler in your firm when you are a CPA firm probably does not instill the kind of confidence in your office that you desire. Business owners are often too trusting and or too busy to do what’s necessary to prevent fraud.

So what can you do?

1. Divide accounting duties. Do not have one employee do your books, pay your bills, collect your funds, make the deposits, meet with the CPA, send your invoices, and be in charge of all of your finances. At the very least, have two. Maintain checks and balances by splitting duties between employees and have them both report to a manager, not one report to the other. Do you think this is your CPA’s job? Check again. I bet you receive the same stock letter every other CPA issues limiting their duties and expressly disclaiming liability for embezzlers. Think it is up to your bank to mind the finance shop for you? Think again. Banks have tight commercial laws that limit their exposure with short limitations periods from the time they issue your monthly statements. They also have depository and commercial agreements with great language- I know, I write the bank documents.
2. Control the opening of the bank and finance statements. Review them. Really review them. Make sure your employees know you review them.
3. Switch it up. Never have the one accounting person you can’t live without for even a long vacation.
4. Implement internal controls. For example, anytime there is a system with an override capability, such as voiding a transaction, controls should be put in place to require approval.
5. Too small to divide up duties between workers? Then the owner needs to be involved.

Be vigilant and take action. Talk these issues over with your CPA, financial advisor and attorney. In the event you do discover a thief under your roof, contact your legal counsel right away to get the best advice possible, prevent workplace violence, and position your company so you can recover and prevent it from occurring again. Consider insurance for employee dishonesty. Also, one final tip, before you issue a severance agreement with a mutual release in it, make sure the employee is not a thief. Somehow, the problem employee you just want out of your life seems to also be the embezzler. For more information on how to safeguard your company contact me at jeana@goosmannlaw.com or call 712.226.4000.