What To Do If You Suspect An Employee of Embezzlement

We’ve all heard of the famous fraud cases like Enron and Worldcom where the companies used questionable accounting measures to cover large debt to increase the value of the company. Or fraud cases such as the Bernie Madoff Ponzi scheme that bilked millions of dollars from investors.

A more common type of fraud that affects businesses is employee embezzlement. Rustin Smith, a civil practice  attorney with Stewart, Melvin & Frost, is our guest today to give business owners some advice of what to do if you suspect an employee is embezzling.

Question: Rustin, why don’t we start off with you explaining what is embezzlement?

Rustin: Embezzlement is taking money or property you already legally possess or control and converting it to your own use, which is considered theft by conversion. Embezzlement usually is a premeditated crime performed methodically, with the embezzler taking precautions to conceal his or her activities. Thus, the embezzler often commits fraud in attempting to cover up embezzlement.

When successful, embezzlement can continue for years without detection. It is often only when a relatively large proportion of the funds are needed at one time, or they are called upon for another use that requires a complete and independent accounting, that a business realizes the funds are missing.

Question: When we talk about employee embezzlement, what are some of the methods that have been used?

Rustin: One real-life example is a medical lab service, where an employee stole $1.2 million by falsifying expenses. In that case, the employee used fake companies, invoices and expense reports to collect the money. It can be simpler than that. There once was a case at a transit company dealing in cash where the employee stole $375,000 in coins over a seven-year period. That equates to about $200 a day.

Question: If you suspect an employee is embezzling, what should you do?

Rustin: This may sound counterintuitive but you should wait. Don’t confront the employee or fire them unless there are significant assets at risk. The goal is to catch the embezzler’s “hand in the cookie jar.”

You need to contact an independent accountant immediately to investigate and monitor the situation. You may not want to go to your in-house accountant because there’s a chance they are also involved in the fraud. So, unless you have ruled out that possibility with absolute certainty, don’t approach your in-house accountant with your concerns.

Secondly, consult with a private attorney to receive guidance on how to proceed. Thirdly, consult law enforcement and, if needed, the prosecutor’s office.

Question: As a business owner, what are your legal options?

Rustin: Recovering your money is the main goal of many business owners so the first option is a settlement. This depends on the relationship the business owner has with the employee. It can be risky to spend the time to try to settle amicably if the employee is still capable of embezzling more money while you wait.

Secondly, you could press criminal charges with the hope of receiving restitution if the employee is found guilty. The downside to pressing charges is that the burden of proof is showing “beyond a reasonable doubt.” that embezzlement occurred. The case will come down to accounting experts and their ability to explain it to the jury.

The third option is filing a civil suit. The burden of proof in a civil trial is called “preponderance of evidence,” which means “more likely than not” and is not as stringent as the criminal standard. Also, in a civil case, the business owner has more control over the strategies used in the case, compared to a criminal case which is largely in control of the prosecutor’s office.

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