Newsletter Issue 1

Beware The Trusted Thief

Call it embezzlement, fraud or theft, most crimes against business are committed by trusted employees – not outsiders.

No business is immune, but many are in denial that it could happen to them. Over the years, stories abound about thefts by long-time, employees that were considered "family" to actual family members stealing from the family business.

The sad fact is that the more trust placed in an employee, the greater the potential for theft. According to the Association of Certified Fraud Examiners, the potential thief often appears to be your most honest, loyal and dedicated employee. Additionally, the amount that is stolen is usually directly proportionate to the amount of trust and responsibility associated with the employee. Studies show that more than a third of embezzlers have been employed by the business for over ten years.

The most common reason for embezzlement seems to be simple greed. The employee feels a need to improve his or her lifestyle, coupled with a vague dissatisfaction over their financial remuneration. Other causes can include unexpected financial distress, divorce, extramarital affairs, high medical bills, living beyond their means, addictions, financial losses (e.g. stock market), jealousy over the ownership's lifestyle, and credit problems.

Many embezzlers plan to pay the money back as soon as their problems improve. However, the improvement seldom happens, the problems continue and the thefts continue to spiral out of control. Others feel that they are smarter than everyone else and will never get caught. An initial period of successfully avoiding discovery tends to reinforce that feeling and embolden the embezzler.

Most embezzlers are caught by circumstance:

• Discrepancies are found when illness, vacation or family emergency take them away from their job.
• A vendor calls to question a payment.
• A client calls to question a bill that had already been paid.
• Suddenly funds are not sufficient in a given account to cover checks.

Recognizing those primary sources of discovery, there are some actions that a business can take for protection:

• Monitor financial statements, records and documents on a regular basis.
• Collect and open your mail prior to distribution, do not delegate.
• When it comes to handling of money, check writing, account balancing, split the duties amongst two or more people.
• Avoid signature stamps and not securing your blank checks.
• Eliminate business credit cards and instead reimburse business expenses directly.
• Make it mandatory that employees take vacations and have others take over their duties while away from the office.

Additionally, there are other actions that can be taken relating to your employees – new and old:

• Always order background and credit checks of new employees, as well as verifying references and professional credentials. (Most embezzlers continue to work within the same industry.)
• Consider a fidelity bond to provide reimbursement coverage for money or property lost due to dishonest acts of its "bonded" employees. (Make sure there is a broad definition of employee to include temporary help, partners and officers of the corporation.)

When a theft is discovered, a business may want to "sweep it under the rug" to avoid publicity or because of "history" with the culprit. You need to move beyond such feelings of discomfort and report the crime to the proper legal authorities. Aside from serving as a general deterrent (you will prosecute thieves), your insurance company may not cover the loss unless it is reported to law enforcement. Additionally, bringing the thief to justice will help to assuage the victimization of colleagues, vendors, patients and employees who were duped by the fraudster.

Remember that implementation of internal controls, vigilant oversight, split-duties, common sense, and proper insurance/bonding will go a long way in protecting your business from crime. Your accountant and your insurance agent are good resources for policies and procedures to help manage this internal risk.

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