Employee Embezzlement

 In Blog Postings, Healthcare Security, Hospitality, Places of Worship, Retail Security-Loss Prevention, Transportation, Uncategorized

If you pay attention to the news you would probably think that this crime was on the rise. However, there is no real indication available to discern whether or not there is an actual increase in this crime.  On the contrary, the chances are that the number of cases that are being reported is a true indicator of the increased number of cases being prosecuted and being reported in the news.

Employees Embezzling

In years past most employers would not report these crimes if they found an employee to be stealing from them. In fact, most employers did not want any bad press about their mismanagement of funds, especially if those funds involved their customers. In most cases the worst that may happen to an employee that was caught stealing would be termination. However, to avoid any possible information getting out about an internal theft/embezzlement caused many companies unfortunately gave the employee an option to resign in lieu of termination.  This avoided any unemployment claims, possible litigation from that employee, or any other actions from happening.  This also gave the employee an opportunity to tell their next employer that they resigned verses they were terminated.

What that means to their next employer is that they have no idea that they’re hiring someone who was caught stealing from their previous employer.  When an arrangement like this is made with an employee who is being asked to leave the company, or been terminated, it just means that the company is transferring the risk unknowingly to the next employer, and they are not dealing with the issue.  The employee gets away with theft and has opportunity to do the same at their next and future employers.

Why Does Employee Theft/Embezzlement Happen

It really comes down to three factors which cause employees to steal from their employers. In most every case of embezzlement that has been prosecuted you can tie the root cause of that case back to financial problems, gambling, and/or substance abuse.

An employee having financial problems at home can include not being able to pay their bills, large credit card debt, marriage problems, legal problems, medical bills, and a host of other issues.  When employees are faced with large financial debt they often look for a way out.  If they work in a job that handles cash, bookkeeping, or any other type of financial matters, they see large amounts of money and they realize that money may cure their problem.

This does not mean that every employee that handles money in the performance of their job is going to steal from their employers.  It just means that there is an opportunity to steal if an employee has a need.  Depending on the employer’s management of their accounts payable and accounts receivable, employee may have a very difficult time committing a theft.  However, if the bookkeeping and cash management of a company is lacking in security and oversight the chances of theft increased dramatically.  Employees will know whether or not anyone is minding the books.  Theft normally will start off in small amounts increase.  So how does it start?

How Employee Embezzlement All Starts

When you hire an employee that is having money issues in their personal lives it does not mean that they’ll start stealing from you on day one.  On the contrary, they’re more likely to watch how your system works and look for vulnerabilities in your bookkeeping or money management over a period of time.

An employee may work for you for one month or one year before they steal anything from you.  They have to feel comfortable that they’re not going to get caught.  When it starts it will normally start off small. What that means to you is they may divert some funds, namely cash, on a very small scale one or two times over a period of a month.  What they are doing is watching to see if anybody notices it.  They will have their story ready in case someone does notice.

For example, if you happen to know their cash drawer was $10 short on Friday night, and you contact them the following week and asked them about it, they may mention that they’re not sure why that happened or in fact they may say that they actually gave back the customer too much change.  If they have till tapped and removed the money from the cash drawer and you do not say anything they will take notice of that.  They may try something like this on a few occasions to see whose watching, if anyone, and to see how you respond to it.  If you have done nothing or had not noticed the missing money, the amounts of money and a frequency of theft will on doubtfully increase.

In many of the cases that made the news recently it was not a new hire that was terminated and prosecuted for embezzlement. In fact in many cases it’s been an employee that is been with the company for more than five years, often times more than 10 years.  They have learned your system so well, and they have earned your trust unconditionally in many cases, that they were emboldened into diverting large amounts of money over a long period of time.

The Signs of an Employee Embezzling

Living beyond their means:  What this means is an employee who was earning $25,000 a year is actually living like someone who was earning a far greater amount.  If you have an employee making $25,000 a year and they have a very nice house; drive a nice new sports cars; has other toys like RVs, boats, motorcycles, vacation homes; or any other thing such as this you should take notice.  In all fairness to that employee their spouse may have a very high paying job, or this employee’s family may be wealthy.  But if you employee is not married to someone who was earning a very large salary, or that employee you know is not from a wealthy family, where are they getting their money?

Often times internal embezzlement is result of a person that has fiscal management responsibilities for the company and have little or no oversight to their position.  In the case of small businesses, which comprise the majority of the employers in the United States, this is often the case.  In many small businesses no one watches the person who manages the money.  A company may have an outside independent auditor who goes over their books on an annual basis, and while that is a great step in reducing your risk, what happens and who do they tell if that auditor finds any issues during the audit? Who is that they are contacting, the person that is actually stealing?

If their point of contact is the person who is actually doing the embezzlement you need to hope that your auditor is actually doing their job.  If the auditor calls that employee and asked a question about a certain transfer of funds, and then employee is allowed to give them an answer without fear of anyone above them finding out they will do so.  In one recent case the auditor did just that.  He noticed an issue when the business paid two credit card bills to the same bank, for the same month, and he called his point of contact the office manager.  She explained to him that she made a mistake in paying the first bill by not paying it in full so she issued another check. In fact, what happened was she and the employer had a credit card at the same bank.  The first payment was made to the bank on behalf of the employer, and the second payment was made on the behalf of the employee’s personal account.

During the investigation it was determined this happen on many occasions. You should be using an outside auditor to go over your books on an annual basis. You should require that auditor to notify you the business owner of any discrepancies found, not just your internal bookkeeper.  You can request a written report of the auditor’s findings with any supporting documents or explanations.  Depending on the size your company you need to make sure that that information comes to you directly without being screened by anyone else.

What Can You Do To Reduce Your Chance Of Employee Theft

During the hiring process be sure to do an in-depth background investigation on any prospective employee that will handle your business receipts and cash.  You will often find that when you call previous employers to ask for a reference check they will tell you nothing other than that the employee worked there, what their title was, what the dates of employment were, and maybe what the rate of pay was.  So many employers are doing this now so as to avoid a former employee from suing them.  This is become mainstream America’s corporate response, versus being open and honest with the other companies letting them know work habits and performance issues with their past employees.  Remember, they’re trying to avoid the employee litigating against them, and they have no stake at all in what might happen to you if you hire that person.

Doing a criminal history background check on an employee should be standard operating procedure for your company. However, you should know that not all serious incidents are reported to the police and prosecuted, therefore many cases of embezzlement or theft will not appear on a criminal history report.

Make sure your background investigation company, or the person internally the does your background investigations for pre-employment, is using current technology and up-to-date information to screen prospective employees.  If you’re just making calls to references listed on application you’re really doing yourself a disservice.  Think about it, of course the prospective employee will list who they know will say good things about them.  They may in fact even leave off jobs that they had issues with, such as being accused of theft.

Requiring two people to sign on checks will help reduce your risk of loss.  However, you must ensure that both employees understand to do their due diligence prior to signing any financial instrument.

Employees in positions of trust and the management of your company’s financial documents and cash flow should receive an updated background investigation any time their promoted.  It is a good idea to do a complete financial audit of your records on an annual basis when that employee is on vacation.  If that employee never seems to want to take vacation you should take note of that.

Will All Employees Steal From You

The simple answer is no. However, if your financial management oversight system is lacking, you will be at a higher risk.  It is well known that employees steal from their employers. Whether it be some copy paper from the office, a candy bar, or actual cash, many employees do take something over a period of time.

Your take away from this should be that if you are a business owner, and you do not have tight controls over your financial matters, you should seek the assistance of a professional auditor to help set up a more secure system.

Even though your trusted employee has been with you 15 years, you really should accept the fact that even that person can embezzle from you.  Many small businesses have entrusted their office managers or bookkeepers unconditionally for years and have paid a steep price for that trust.  I have heard business owner recently say, I can’t believe she did that to us, she’s worked for us for 20 years and she’s like one of the family.

Employees know if you trust them unconditionally and at that employee is having financial hardships in their personal lives, or they have a substance abuse problem or gambling problem, they are looking for a way out.  There are many checks and balances that you can put in place to reduce your risk of embezzlement or theft.  Get started today and form a team that comprises people from within your company and from the outside to tighten up your financial matters.

If an employee steals from you, you have to decide if you prosecute. But remember, if you do not prosecute that employee will either continue doing it in your company or move on to another company and do the same.  If you have a dishonest employee working for you now, and as a result of an audit you discover that embezzlement has occurred, your response to the matter will be watched by all those who work for you.  If you asked a person to resign in lieu of termination you are sending a signal to everyone else that you’re not willing to go the distance of prosecution.  On the contrary, if you prosecute all cases of employee theft/embezzlement your risk of future incidents should decrease.

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