Handling Employee
Embezzlement
Embezzlement
is of huge concern to employers nationwide. Recent studies indicate that
embezzlement accounts for the majority of ordinary business losses suffered
by employers.
According
to a National Retail Security Survey conducted by the University of Florida,
employee theft accounts for more than 44 percent of all retail losses.
Small businesses and large businesses alike are affected by embezzlement. A
study by the Association of Certified Fraud examiners determined that businesses
with less than 100 employees suffered almost the same median loss as
employers with more than 10,000 employees.
Detecting Employee Embezzlement
Employee
embezzlement may often be difficult to detect. However, there are a number
of warning signs.
There
may be some general financial indicators, such as missing documents,
delayed bank deposits, gaps in accounting records, a large drop in profits,
disparity between accounts payable and receivable, disappearance of petty
cash, and/or customers complaining about inconsistencies in shipping and
billing practices or double billing.
There
may also be some indicators from the employee's own behavior, such as
unusual working hours, management employees who insist on handling routine
clerical tasks, employees in key positions who refuse to take time off,
unexplained close relationship with a supplier or customer, and/or
employees spending more lavishly than salary might indicate.
What Should Employers Do if They Suspect Embezzlement?
Employers
who suspect embezzlement should contact legal counsel. Legal counsel can
oversee any investigation, review insurance policies to determine if the
loss is covered, and guide the employer through criminal and civil
proceedings, including civil lawsuits to obtain restitution.
Counsel
should inform employers who suspect embezzlement to take the following
steps:
- Move quickly to
investigate and discipline the employee. Criminal and civil statutes
will begin to run upon discovery of the loss.
- Determine whether
the employee should be immediately suspended or whether the
embezzlement would best be confirmed by monitoring the employee's
continuing activities.
- Talk with
managers/employees who are directly impacted by the loss or involved
in the investigation. Identify those employees (at every level of the
company) who had both access and opportunity to commit the theft, as
well as those who may have known of the theft but failed to disclose
it. All employees with access and opportunity should be included in
the investigation, regardless of their job record, length of
employment, or stature within the company. Identifying such employees
allows the employer to focus the investigation on as small a group of
employees as possible with as little disclosure as possible. Limit any
discussions to those who have a specific business need to know.
- Maintain strict
privacy and confidentiality. Employees who must be notified of the
suspected embezzlement should be told to keep the information strictly
confidential in order to avoid defamation claims and to avoid
premature disclosure of the information to the suspected embezzler or
any accomplices. Employees should be warned that failure to keep the
information confidential will lead to disciplinary action.
- If the loss is
large, experts may need to be retained, such as a forensic accountant
or computer data retrieval specialist.
- Interview the
suspected employee at the last stage of the investigation and have a
witness present. Do not directly accuse the employee of stealing as
this may lead to defamation claims. Instead, describe any accounting
discrepancies and work to find an explanation.
- Go to the police.
The police will take over the investigation if the employer goes to
them with support for their charges. Failing to report the suspected
embezzlement sends the wrong message to other employees and allows the
embezzler to go undetected and move on to a new employer. Employers
should not threaten prosecution to the suspected employee - - simply
report it to the police.
- Don't make promises
to the suspected employee -- such as no prosecution in return for full
restitution. If the employee offers to make full or partial
restitution, accept it, but without any promises to forego other
action. The employer should not have to bargain to get his or her
money back.
- Contact your
insurance company to determine if there is coverage for the loss.
Civil Action Should Be Considered
Employers
should be advised to consider civil action to recoup losses when insurance coverage
is insufficient or nonexistent. In cases in which the theft is small or
below the policy deductible, employers could pursue this directly in small
claims court. However, if the loss is larger and the employer does not have
insurance to rely upon, the employer will have to decide whether the
chances of recovery merit the costs of litigating.
Counsel
should also review with the employer whether there are any third parties
who could bear some liability for the loss. For example, a bank that paid
on the forged instruments may be liable to the employer. There may be
accomplices who benefited from the theft who would have the assets
sufficient to merit a civil action. Perhaps an outside auditor should have
detected the theft and would be liable to the employer for negligence.
Pro-Active Steps Needed to Prevent Employee Theft
In
the future, a company can help prevent embezzlement by conducting
background checks, enacting a system of checks and balances, conducting
self-audits, and setting a tone of honesty in all business dealings.
Watchful and attentive management is always the best deterrent.
Some
steps recommended to deter theft include:
- Checking
bookkeeping and other operations periodically for signs of
embezzlement.
- Reconciling bank
accounts promptly.
- Keeping duties,
such as accounts payable and accounts receivable, separate.
- Periodically
changing computer passwords.
- Using shipping and
receiving reports that are numbered sequentially to prevent recording
of fraudulent payments.
- Reviewing
insurance coverage to protect for losses due to embezzlement.
- Enforcing
mandatory vacation policies, particularly for those with access to
financial assets or records. These employees should be required to
take time off every year and have someone else assume their duties
during their absence. Embezzlement is often discovered during such
absences.
Employers
need to take action against employee embezzlement. All employers should
review how well their company has safeguarded themselves against embezzlement
and look for solutions to best fit their business.
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