By some estimates, employee theft accounts for losses of more than a billion dollars each day in the US. White-collar crime is rampant in Southern California, and employee theft is on the rise. The average loss related to white-collar crimes is $500,000, and nearly one-third of all bankruptcies are caused by internal theft.
As a small business owner, you may have already been confronted with the problem of employee theft and know the damage it can wreak on you, your family, your employees and your business. If you have not had to deal with employee theft, you can take basic steps to mitigate your risk of becoming a victim.
The purpose of this article is to educate you in why employee theft happens, how employee theft happens, basic steps to protect your business from employee theft, and what to do when you discover employee theft.
Opportunity - Simply put, most small businesses are vulnerable to employee theft. In this regard, the risk factor is lies in the development of most small businesses, including retailers, restauranteurs, health care professionals, and professional services companies. Most small business owners delegate day to day bookkeeping, banking, and accounts receivable responsibilities to one or more employees, usually those who are most trusted.
As an owner, you may have a ballpark sense of your banking and accounts receivable information, but as long as there is money in the bank and no crisis, you concentrate on your work and leave the "number-crunching" to others.
As one owner once confided to me, he was simply too busy to pay attention. At the end of the year, he looked at his total receipts and his net income. If they were close to what he expected, he did not look any further. As your business becomes more successful, owners usually become more involved in managing growth. Consequently, they become more removed from the day to day finances, and more dependent upon the employees who are responsible for those tasks. Often, owners may never take the time to institute basic accounting and bookkeeping controls.
Those controls may not have been necessary when the business started, but are essential now. Unless someone takes the time to review your system and ensure that the needed controls are in place, your business is vulnerable to employee theft. The time it takes to implement those controls (which are discussed below) are a tiny fraction of the potential losses (in time and money) you could suffer.
Motive - As discussed below, once employee theft is discovered the motive becomes clear. The employee may have an unknown addiction - to gambling, drugs or something else. The employee may simply be living beyond his or her means and conclude that he or she is entitled to a "little extra" from the company.
Often, an employee rationalizes the theft while continuing to steal larger and larger amounts. The employee may have more sinister and specific motives, such as harboring bitterness at being passed over for promotion or being demoted and intent on proving that he or she is too smart to get caught stealing.
There are two generally true statements about how employees manage to steal from their companies.
First, unless proper accounting controls are in place, there are almost limitless ways to steal. Employees can use simple but effective means to steal, by simply pocketing cash payments, using company credit cards for personal purchases, or stealing checks and forging the authorized signature. There are also extremely sophisticated schemes in which employees fabricate dozens of fictitious vendors, created non-existent employees, demand and receive kickbacks from clients or vendors for awarding company contracts, or actually coerce subordinate employees to perform services for the thief. Sometimes employees forge signatures on checks, and sometimes the employees are authorized signatories.
Second, the thief is more often than not a highly trusted employee. The prototypical thief is a long time employee who is extremely familiar with the financial aspects of you company. They interact with clients and vendors, and may handle or process accounts receivables, accounts payables, or banking functions for the company. They rarely take vacations or sick time. They are viewed within the company as loyal, trusted, giving individuals and would be last on a list of people you would suspect.
By taking some fundamental steps, you can significantly reduce the chances of becoming a victim of employee theft. Review your bookkeeping structure. Have you implemented the accounting controls listed below?
Separate the job functions of opening incoming mail and data entry for deposit/accounts receivable/accounts payable information. This simple step minimizes the possibility of an employee manipulating account information.
Separate the job functions of reviewing monthly bank statements/cancelled checks and preparing monthly bank reconciliations.
Control company checks. Keep them in a secure location accessible only to authorized employees.
If you have authorized signors other than yourself (which is likely), separate the job functions of preparing the checks and signing the checks.
If you use online banking, separate the job functions of entering payments and reconciling monthly activity.
There are additional steps you can take, such as considering employee theft insurance. But by reviewing your bookkeeping structure and implementing these five steps, you will greatly reduce the probabilities of falling victim to employee theft. If these steps seem like more trouble than they are worth, keep in mind that the average loss in these instances is $500,000, often over a period of several years. Instituting basic controls communicates to your employees that you are paying attention and discourages even the thought of stealing. You are doing yourself and your employees a favor.
If you discover that you are a victim of employee theft, you should make three telephone calls: Call the police, call your insurance company or agent, and call an attorney.
1. Call Your Attorney
Your first call should be to your attorney. Although not widely recognized, California law permits a victim of employee theft (or any theft) to immediately file a lawsuit against the thief and immediately freeze his or her assets. A Sheriff or Marshal will then seize those assets. The court will hold them until you have proven your case against the thief, at which time you receive all of the stolen funds, plus interest out of the seized funds. You may even be able to recover all your attorney’s fees and costs.
So, ask your attorney to confirm that he or she is experienced in handling prejudgment right to attach orders, writs of attachment and the law relating to implied-in-law contracts. Work with your attorney to assess the nature and scope of the loss. Bear in mind that perpetrators frequently use several different schemes, so you must be thorough and fast.
Depending on the scope and sophistication of the theft, your attorney may recommend that you hire a forensic accountant to help with this process. While you are determining and documenting at least generally the amount of the loss and the means by which the loss occurred, your attorney should be performing an initial investigation on the thief.
A good investigator will have sophisticated means of providing you with information on the thief's assets, including bank accounts, securities accounts and interests in real property. Once you know where the assets are, you can immediately move to have them seized.
2. Call the Police
Working with your attorney, your next call should be to the police. The police will want you to provide them basic information like the amount of the loss and the evidence indicating who committed the theft. Remember that the primary goal of law enforcement is NOT the return of your money. It is to prosecute the thief.
Be prepared for some additional disruption to your business, as the police may want to take statements from employee witnesses and review your financial information. Also understand that law enforcement investigations of non-violent crimes such as theft often take several months. Even then, the police or District Attorney may decide that there is not enough evidence to file criminal charges against the thief.
3. Call Your Insurance Agent
Finally, contact your insurance company or agent. Some insurance policies provide coverage for employee theft or embezzlement. If so, you may be able to recover some portion of your loss. The insurance company will require you to document your loss, so the ongoing work that you and your attorney have been undertaking will be useful at this point.
As you read this article, take a few moments to review your insurance coverage. If you do not have any coverage for employee theft or embezzlement, check with your insurer to determine how much they will charge to provide coverage as an additional benefit under your policy.
The moment of realizing you have been a victim of employee theft can be devastating and paralyzing. Taking the steps outlined above will significantly reduce the possibility that you will become one of the statistics. If you are faced with such a situation, taking the right action immediately can mean the difference between quickly recovering your losses and years of frustration.
Make certain that you have been fully and accurately informed about all of your options by speaking to an attorney who is knowledgeable, qualified and experienced in this area of the law, and by promptly contacting the police and your insurer.