7 Important Steps to Handle Employee Theft

7 Important Steps to Handle Employee TheftYour trusted bookkeeper of 20 years has been robbing you blind. Not with a pistol but with a pencil. She has been paying herself an extra paycheck every few weeks. He has been diverting funds to fictitious vendors – on paper at least – to cover his tracks.

What do you do when you find that your company is out thousands of dollars or more?

In the vast majority of instances, the trusted bookkeeper has squandered the money over time and there is no immediate prospect of restitution. However, there are important steps you should take to protect your business once you have discovered the embezzlement.

Why Do They Do It?

First, of course, you need to get over your sense of disbelief that the trusted employee would do such a thing. Employee theft starts out as being self-delusional. The bookkeeper has a sense of entitlement seeing thousands of dollars come in and out of the company while they have “but” a $50,000 salary.

But the “why” is always: “because it is there and nobody is watching” or “I’ll pay it back later when things get better.” Temptation can overcome years of loyal service.

Crime in the Suites: Who is at Risk?

Many companies can get shaved three to five percent and never know it. If you have a high number of vendors and a high cash flow, then your company is a prime target.

At the end of the day, any company is at risk. Law firms, real estate companies, construction firms, and music businesses can be victims because of a lack of financial controls and oversight.

How Your Business Should Handle Employee Theft

What do you do when you have discovered a massive fraud in your company? Here is a checklist of immediate action you should take to protect your business and prevent further damage:

1. Get control of passwords.

The first step is to get control of the passwords to all of your email accounts, bank accounts, credit cards, and other financial records. Even though you have escorted the employee out the door (or they just did not show up one day), you are still at risk for losing money. The former employee could still be contacting customers or vendors and having funds sent to some “new” account that “your” company has just set up and the losses continue.

2. Contact your bank.

You should immediately contact your bank and determine if your signature has been forged on checks. Inevitably, you will find a forgery.

You would think that the bank would reimburse you for all of these forgeries because the signature obviously did not match your signature card. However, you will find that your contract with the bank probably limited the bank’s liability here giving you only a short time to notify the bank of any forgery.

This is usually 30 days because the bank would assume that by returning the cancelled checks to you that you would have an opportunity to not only reconcile your account but determine if checks are improper in any way.

By allowing your bookkeeper to write checks and reconcile them you have, unfortunately, given your employee the keys to the vault and the means to cover up the fraud for months, if not years.

Because of the bank’s contract with you, you will find the bank has very limited liability here beyond perhaps a month or two. Obviously, you will want to report this immediately to your bank but the bank will almost certainly not reimburse the loss except for a relatively short window of time.

3. Cancel credit cards.

Next, you will want to not only change the passwords on your various accounts but also, if necessary, cancel accounts, cancel credit cards, and ATM cards.  As noted earlier, you are still at risk for theft and you need to lock this down.

4. Back up and copy your computer files.

Have a copy made of your computers or a backup of some sort so that you have some record of the point in time at which the theft was discovered.

There are companies that specialize in computer forensic work. You will be changing and modifying your records going forward to try and straighten things out, but law enforcement will want to see how things looked at the time so criminal prosecution can proceed with any possible civil suit against the former employee. Your computers are evidence as is the data on them.

5. Contact law enforcement.

Before you contact law enforcement, you will want to have a handle on the extent of the loss and some documentation of how it occurred. Frequently, this can be nothing more than finding a number of checks that have been forged or a number of “extra” paychecks.

This is only the beginning.  I tell folks who have been through this to estimate their losses and then multiply by three.

When determining which law enforcement office to call, typically, I use the “home office” rule. For example, because the company is doing business in Nashville and the bank is in Nashville, this means that the Nashville police have jurisdiction even if the fraudulent check was written to a vendor in Knoxville.

Do not assume that when you call the police that some detective will show up in your office with sirens blazing.  The fraud unit in most departments is relatively small. The officers are almost always diligent, but there is always a high backlog of cases just like yours. Report the matter as soon as possible and continue to follow up with the police.

Usually, the District Attorney or United States Attorney in most jurisdictions has one or more individuals who handle these kinds of cases and you could reach out to the prosecutor’s office for assistance.

6. Notify your insurance company and credit bureaus.

If you have taken the precaution of employee theft insurance, then you need to notify your insurance so you can be compensated for the loss. Obviously, you will need to have the police report and documentation when you file a claim.

Theft insurance is about the least expensive insurance you can acquire. Think of it as financial flood insurance.

Affected vendors may have their own theft insurance. Notify your customers whose funds may have been stolen  by your dishonest employee.

You should also contact the credit bureaus because this fraud will unquestionably impact your credit rating.

What is worse than the theft itself is that frauds perpetrated by an employee may be attributable to you because the victim may think your company is involved since your “name” is on the check. This is all the more reason why you should contact law enforcement immediately so that it is clear that you have been a victim of embezzlement.

I have had perfectly innocent people arrested for a fraud committed by an employee. That takes weeks or even months to unwind.

7. Getting restitution from the employee.

Restitution from the employee is seldom realistic because the stolen money is often spent. This is not always the case, however, and occasionally a civil suit to attach assets may be fruitful.

Unfortunately, this is seldom a cost effective way to recover lost funds since it may be an instance of throwing good money after bad.

Criminal prosecution may occasionally produce restitution through the courts. If successful, you would be lucky to get twenty-five cents on the dollar.

In extreme instances, a company may be forced into bankruptcy by a significant employee theft. While beyond the scope of this article, bankruptcy can “stop the bleeding” while the company is seeking immediate protection from creditors and bankruptcy can gather some assets to pay creditors if the company is destroyed by the loss.

Has Your Accountant Been Asleep At The Switch?

If your company is large enough to have its own accountant then you might consider some claim against your accountant for failing to detect the embezzlement. Of course, if you have relied upon your bookkeeper to provide everything to your accountant then your own negligence may have impacted a lawsuit.  Nevertheless, you should consult with an attorney to see if there may be some liability on the part of your accountant.

This, of course, is a double-edged sword because I am sure that you have enlisted your accountant to help you ascertain the nature of the fraud. It is for this reason that you may want to consider a different accounting firm to audit your books and records to ascertain the extent of the loss.

Conclusion

Employee theft of any sort is serious and has significant effects on a business. Embezzlement is preventable. If you are the victim of embezzlement, acting aggressively can minimize the loss.

ABOUT David Raybin
David Raybin

David Raybin is a partner at Hollins, Raybin & Weissman and he heads up the criminal defense section of the firm. With more than 35 years of experience, David has been named the Best Criminal Lawyer in Nashville by Best Lawyers in America, and listed among the Best Criminal Lawyers in the state by Tennessee Business magazine.

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