• Facing the Embezzlement Epidemic
  • January 17, 2013 | Author: Jack A. Siebers
  • Law Firm: Foster, Swift, Collins & Smith, P.C. - Grand Rapids Office
  • As employees are getting hammered by the cost of living challenges brought about by the economic downturn, they are running scared and turning to embezzlement as a temporary fix.  As a result, employee theft is becoming rampant.  We have seen how Ponzi schemes have become common place.  Be prepared for embezzlement next. As an attorney advising the business and health care communities, I have had to resolve more embezzlement cases during the last year than I have in the previous ten.

    HOW EMBEZZLEMENTS CAN OCCUR.

    Embezzlements often occur because leaders of organizations who are coping with 80 hour workweeks rely on trusted employees to operate with minimal supervision in a setting that lacks proper systems and procedures.

    AN OUNCE OF PREVENTION.

    The best way to avoid embezzlement is to put accounting controls in place that prevent an opportunity for embezzlement.  In this way your trusted employees will not be subjected to the temptation to embezzle.

    These systems are aimed at breaking up the flow of funds within an organization so one person is not responsible for incoming and outgoing funds.  Here's how!  The person who records the receipt of funds on your books should not also deal with accounts payable.  Likewise, the person responsible for accounts payable should have to get checks from someone else in the organization to make payments. Ask your accountant to review your current systems and implement recommended changes. The problem is so prevalent today that many accountants have programs to audit your systems inexpensively.

    Require employees to take their vacations.  They may not be able to cover up their activities while on vacation.  Some organizations are turning to computer surveillance.  Suspicious emails of documents to an unusual location or an employee's personal email may be cause for concern.  Some companies are turning to cameras.  These are delicate subjects.

    RESPONDING TO AN EMBEZZLEMENT.

    Despite taking these precautions, you may still be faced with embezzlement by a trusted employee who worked for you for many years as a co-worker and friend.  Now what?

    GET OVER THE HURT.

    To begin with, get over the hurt.  Everyone is hurt and dismayed by the betrayal of trust.  Moping about it won't solve your problem, so buck up, get over it and start dealing with damage recovery.  Don't say I'm not a sympathetic and caring person.  I just want to help you minimize your loss.  Not dealing with the issue can take a huge toll on the morale of your entire organization.

    CALL YOUR ACCOUNTANTS.

    Call your accountants immediately to document the embezzlement and estimate the damages.  This process must be handled discreetly and confidentially.  If it isn't, you may find yourself with a slander charge by the employee.

    CONFRONT THE EMPLOYEE.

    Next, confront the employee.  Be sure to have a witness in the room.  Do it courteously and with respect for the employee.  Ask the employee if there are others involved.  See if the employee is willing to agree to restitution and determine as best you can whether the employee has the means to do it.  The employee may be willing to draw on a credit card or withdraw from a 401(k) plan to repay the funds.  Get the employee to sign a restitution agreement.  Also, get the employee's spouse to sign it.  If possible, secure it with a second or even third mortgage on the employee's house even if there is no equity.  Depending upon the situation, you may have to confront the employee before the accountants come in. Place the employee on temporary leave to allow the accountants to do their work.

    TERMINATE THE EMPLOYEE.

    No one can afford to have a dishonest employee in the organization.  In all cases, avoid the temptation of explaining to co-workers why this terrific, reliable employee was fired.  You don't want to be faced with a slander suit.

    SHOULD YOU PROSECUTE?

    If the employee is not willing to cooperate in an effort to make restitution, call the police and prosecute the employee.  This is a tough stance and not likely to be popular with many employers.  Nevertheless, if you don't do it, it is quite possible the employee will get a new job and do it all over again to the next employer.  Meanwhile, the embezzlement epidemic will only get worse.  The propensity of embezzlements may be lessened if, as in the case of the Ponzi schemes, the prospective perpetrator realizes the embezzlement will be discovered and prosecuted.

    CHECK YOUR INSURANCE.

    Don't forget to call your insurance agent.  Many business package insurance policies include coverage for embezzlement.  In fact, don't wait for an embezzlement. Investigate the cost feasibility of protection for your organization now.  While you are at it, check on protection from employment discrimination claims since they are also becoming prevalent during these times of high unemployment.