In today's grim economic times, business losses suffered by employers are a huge concern. Many of these losses are caused by employee embezzlement, perceived by the public as something that only happens to a small population of the business community. However, the United States Chamber of Commerce reports that one of every three business failures is the direct result of employee theft.

Both small and large employers should be concerned with employee theft and should take preventive action before it is too late.  Employees are finding new and innovative ways to steal from employers including: writing additional payroll checks, theft of petty cash, altering deposit statements, failing to document cash transactions and creating fictitious customers, patients, transactions or vendors.

Ways to Detect Employee Embezzlement

Employee embezzlement can be difficult to discover, but there are a number of warning signs to look for in both individual employee behaviors and financial data.

Employee behaviors that should flag an employer include:

•    Unusual working hours;

•    Employees refusing to take time off;

•    Employees over spending compared to their salary;

•    Close relationships with cash handling or accounting employees; and

•    Management employees insisting on handling routine clerical tasks. 

Financial indicators to be aware of include:

•    Missing documents;

•    Gaps in accounting records;

•    Disparity between accounts receivable and accounts payable;

•    Disappearance of petty cash; and

•    Unusual patterns in deposit statements.

Preventing Employee Embezzlement in the Hiring Process

The first step in preventing employee theft is to select the right employee.  Before hiring an employee, conduct a thorough investigation of the candidate's background including credit, employment and criminal history.  Also, you can hire private investigators to run background checks or you can carry out background checks through the Department of Children and Families.  It is especially important to conduct a background check for key employees, especially any employee handling cash, checks, credit cards, or other items easily stolen.

You must receive the potential employee’s consent before gathering certain information.  The Fair Credit Reporting Act and other federal and state laws govern the gathering and use of information for pre-employment purposes.  First, obtain a signed authorization and release from potential employees and consult with your legal department to ensure you follow all legal protocols.  Before hiring an employee conduct as many of the following checks as possible:

•    Reference Checks

Most employers do not contact the references provided.  It is important to verify that previous supervisors think highly of the candidate and that he or she is an honest and trustworthy employee.  You can learn more information from an individual's references than you can from a former employer, such as work ethic, personal opinion of individual, and strengths and weaknesses.

•    Past Employment and Education Verification

It is always a good idea to verify employment history along with accurate education and licensure information.  Ask the previous employer not only if the candidate worked there but if her or she is eligible for rehire.  Also, call the licensing organization to verify the candidate holds a valid license.  It is not unusual for someone to claim possession of a license or certification that has actually been revoked due to disciplinary action.

•    Criminal History Check

Criminal conviction records can be found through most public records services.  You may also go to the courthouse and search these records in the criminal courts division or hire an investigator to conduct these checks.

II. Implementing Preventive Policies

Once you have hired an employee you should implement certain policies and procedures that will assist you in quality control. Create an atmosphere of anti-theft awareness with the employees.  This can be the most important step you take because prevention is cheaper than attempting to recover your losses.  Here are some important internal controls to implement to protect your business:

            "Segregation of Duties"

•    Require vacation and time off.  This gives you the opportunity to check an employee's work while they are gone to ensure accurate reporting and documentation.  If an employee refuses to allow another to do their job it should trigger a red flag.

•    Job rotations.  Rotating job duties will allow detection of discrepancies quicker and may prevent employees from theft in the first place if they are aware someone else is reviewing their work.

•    Make periodic unannounced visits to departments and offices.  If employees are aware of a management presence, it may prevent them from stealing.  Watch employee reactions to your presence. Nervous or resentful appearances may be because they are hiding something.

•    Divide employees duties.  Do not allow one person to control one accounting process or all aspects of a transaction.  It is a good idea to switch the duties each month or periodically.  Again, an employee is less likely to steal if their work is being reviewed by another individual.

            "Safeguard Assets"

•    Check all bank statements monthly.  Look for unusual amounts, discrepancies or patterns.  Use this as an internal monthly audit.

•    Deposit checks and cash on a daily basis.  Include details on deposit slips regarding checks and other items.  Keep a daily deposit log with detailed information on who made the deposit and the amount of cash and checks, including check numbers and patient receipts.

•    NO PETTY CASH!  Most employees who embezzle start with smaller amounts from the petty cash fund.

•    Control your own payroll.  Compare your employee records with the payroll statements.

            "Suspect Embezzlement"

•    Maintain strict confidentiality.  If you have to inform employees about a suspected theft, make sure they are aware that this information is confidential and should not be shared to avoid potential defamation claims and notification to the potential embezzler.

•    If suspicions arise, call in an independent CPA.  Do not use your in-house CPA to investigate in order to ensure a neutral opinion.

•    Interview suspected employee at last stage and with a witness present.  Never accuse an employee of stealing because this could lead to a defamation claim against you. Instead, ask for an explanation and detail the discrepancies you discovered.

•    Immediately suspend employee if embezzlement is confirmed.  Do not give the employee an opportunity to cover their tracks or to steal more before being fired.

•    Go to the Police.  By going to the police you send a message to other employees regarding the seriousness of the crime and that you intend to prosecute potential embezzlers.

•    Consider civil action.  Employers may utilize civil actions to recoup losses if insurance coverage is insufficient.  Small thefts can be pursued in small claims court.  Litigation is an option for large thefts, not covered by insurance. Legal counsel can review the claims to see if any third parties (outside auditor who should have detected the theft earlier, banks who accepted forged documents or accomplices) may bear responsibility.

All types of employers should be aware of and take action against employee embezzlement.  Review your business policies and procedures today and begin implementing safeguards against employee theft.

George F. Indest III, founder and managing partner of The Health Law Firm based in Altamonte Springs and Orlando, is board certified by the Florida Bar in the legal specialty of Health Law. His practice encompasses all aspects of business, corporate, transactional, regulatory and administrative health law practice, and he represents physicians, nurses, hospitals, home health agencies, long term care facilities and other health care providers. His practice also includes the litigation of professional licensing cases and business litigation, as well as Medicare and Medicaid audit and defense work. For information visit www.TheHealthLawFirm.com.

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