September 15, 2006

Employee embezzlement costs American employers about $6 billion per year. Embezzlement is the fraudulent taking of personal property with which one has been entrusted. By definition, the offender is someone trusted by the employer. When detected, embezzlement brings great heartache to the perpetrator’s victims and families. The typical motive for embezzlement is simple greed. However, theft arising out of addiction to gambling has grown along with the Minnesota gaming industry.

The most common embezzlement methods are:

• Failure to record cash transactions.
• Claims for false reimbursements.
• Use of company accounts for personal transactions.
• Payroll fraud.
• Fraud through supplier accounts and other payables.
• Kickbacks.

How does an employer prevent embezzlement? As a famous judge once observed, “Sunshine is the best disinfectant.” Or, as the Americans and Soviets agreed, “Trust but verify.” A business should screen new hires thoroughly. References should be checked, and criminal and credit background checks performed.

This process is not, of course, foolproof. Employers will want to lay off some of the risk by making sure that all employees who handle finances are appropriately bonded. Blank checks and deposit slips should be secured, and when payments come in, they should be restrictively endorsed immediately. When asked to sign checks, employers should require supporting documentation, and review it. If unknown vendors appear, employers should ask questions about them. Employers should also review their processes for collecting and spending money. There should be checks and balances at each stage, with especially strict procedures for cash transactions.

An employer should not expect its auditors to catch an embezzler, who may be experienced with audit procedures. Rather, the employer should break up the embezzler’s routine by reviewing unopened monthly bank and credit card statements, cancelled checks, deposit slips, and receipts, looking for checks out of sequence or written to “cash.” Write-offs warrant special attention, since that is how an embezzler will try to put the theft out of sight and mind.

Those unannounced, informal checks become especially important when there are warning signs of fraud. While the employee who appears to be living beyond her means bears watching, perhaps the best indicator of fraud is the employee who fights to protect job responsibilities involving access to money. Beware the employee who guards zealously some particular portion of the process, or who self-righteously insists on doing everything. An embezzler may resist taking vacation time, for fear that any substitute might become suspicious. Similarly, the employee who fights to keep using a particular vendor, against all economic rationality, may be protecting an illegal relationship.

Sudden, unexplained changes in revenue, cash flow, or profit are other warning signs, as are increased write-offs or transfers. Supplier complaints about slow payments and double-billing may increase when embezzlement is occurring. A security breach in the company’s computer system may also be a warning.

What should a business do when strong suspicions arise? A false accusation can lead to civil liability. Instead, employers should contact their attorneys and accountants for advice.

If, after investigation, it is confirmed that an employee has embezzled funds, prosecution is typically recommended. This sends a strong message to other employees that cheating will not be tolerated, and it may save another employer from the embezzler. Further, while the embezzler may have spent most of the money, a criminal court restitution order, which is not dischargeable in bankruptcy, will hang over the criminal’s head for a long time.