Dealing with Employee Embezzlement

Employee embezzlement is expensive.  Some experts estimate that 25-40 percent of employees steal when given the opportunity, with estimates of the costs to business exceeding $400 billion dollars annually.  Employee embezzlement can take many forms, but regardless of the size or makeup of the business, there are usually a common set of conditions that lead to an increased probability of employee embezzlement.

Unless appropriate safeguards are taken proactively, employee embezzlement can wreck business credit, relationships and an otherwise healthy business.

How it starts.
Employee embezzlement scenarios often begin with an employer who has ceded much (if not all) of his or her business’s bookkeeping work to a single, “trusted” employee. This is usually the result of the growth and success of a business – the employer or key executive no longer has the time to handle day-to-day bookkeeping activities.  Increased employee autonomy and decreased employer oversight can provide an incubator for embezzlement.

What form(s) does it take?
Employee embezzlement takes many forms.  It can involve the payment of impermissible personal expenditures, the diversion of employer funds, or as simple as cash stolen from deposits.  In most instances, embezzlers attempt to cover their tracks by “cooking the books” through fraudulent entries on bank deposits or balance sheets are adjusted to hide the activity.  Long-term and substantial employee embezzlement is undertaken by employees who not only have access to cash or credit, but who also have the ability to hide the theft on the employer’s books.

Red flags.
Usually, the first suspicion of embezzlement is based on circumstantial evidence – through an audit, or another employee’s report.  There are a number of red flags that should arouse an employer’s suspicions. First, has the employer experienced issues with mail delivery, or with bills or invoices being directed to an employee’s residence rather than the principal business office?  It should never be permissible for any financial information to be sent to an employee’s residence. Secondly, has the employer unexpectedly received a notice from the Internal Revenue Service or applicable state Department of Revenue regarding the non-payment of taxes that the employer believed were paid?  Third, has the employer noticed a decrease in cash deposits or any deposit discrepancies?  Finally, has the employer had difficulty paying its bills – even though business has appeared to be solid and the employer has been generating revenue?

While not conclusive, the presence of any of these factors may warrant further investigation by an employer as to the underlying cause. In many instances, employee embezzlement is hidden from the employer by diverting deposits and other business funds, not paying taxes or other bills, and hiding notice of said non-payment issues from the employer.

The first step in preventing employee embezzlement is to undertake diligence in the hiring process for any employee who will to have access to business financial resources, including deposit accounts and bookkeeping information.  Factors to evaluate include the potential employee’s work history, and any personal financial problems including bankruptcy, foreclosure or significant judgments or liens.  It is also perfectly acceptable to request permission to conduct a criminal background or credit check for such employment hires.

A second and necessary step is increased oversight over the employer’s financial affairs by someone who is not handling the bookkeeping activities. When possible, the same person should not be solely responsible for handling the receipt of deposit funds and the bookkeeping, as again, many instances of embezzlement are easily found upon a review of the employer’s books. Many organizations have mandatory vacation policies for just this reason; ensuring that another “set of eyes” is on the books, even if for a brief time period in order to expose any gaps in security or abuse.

Third, mail should never be directed to an employee’s personal residence. While it might seem logical for a part-time employee charged with bookkeeping to have mail sent to a non-business address, this can lead to a multitude of problems beyond embezzlement – especially if the employment situation ends in a less than amicable manner.

Finally, employers should check with their commercial insurance carriers to determine whether they have coverage for employee embezzlement or theft.  Although there might be potential criminal penalties and the ability to sue an employee for a loss, the chances of recovery in many of these situations are poor.  Insurance coverage may help mitigate significant losses.

After notifying authorities, you should contact your carrier immediately if embezzlement is suspected, and keep them informed of the any developments to ensure your rights under your policy.  Especially when large amounts of money are involved, have your attorney review any policy exclusions and deductibles.

Internal  Investigations
When embezzlement is suspected, it is critical to reinforce the confidentiality of the matter to other employees aware of the situation.  A low-key approach is needed to avoid exposure to defamation claims and to prevent “tipping off” the wrong party – especially when the employer does not know the full extent of the wrongdoing, or if other conspirators or outsiders are involved.  Again, speak with your attorney before conducting any internal investigation to ensure your investigation is within legal boundaries.

Despite the fact that any business can be the victim of employee embezzlement, in many instances, increased due diligence and oversight can prevent a vast majority of embezzlement instances.

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