EMBEZZLEMENT BY AN EMPLOYEE
Every so often we receive a call from an employer seeking advice on how to deal with an all too common problem: Embezzlement. Typically, the employer discovers that one of its employees, usually one working in the accounting department, is stealing from the company and it needs to know how to deal with the situation and prevent further thefts. Construction companies are not immune to employee embezzlement.
Consider the story reported in the Boston Globe on January 23, 2007, of a 43-year old employee of J & J Materials, a construction materials firm in Rhode Island, who, from 1999 to 2006, allegedly embezzled at least $6.9 Million from the company. The employee was an accountant and had control over the company’s expense accounts. Over a seven year period she began writing herself weekly expense checks in the amount of $2,000.00, which grew to $50,000.00 by the time she was caught. The employee would deposit the checks in her personal bank account. The employee maintained a modest home near the business; however, in neighboring locations she owned a 104-acre ranch in West Haven, Vermont, a 4-bedroom, Colonial style house in Rhode Island, beach property in Maine, and timeshares at Disney World and in the Bahamas. The employee also engaged in lavish spending that apparently went unquestioned. To cover her crime and explain her wealth, she told friends and co-workers that her husband had won the lottery. The employee’s alleged embezzlement made the company president believe the company was failing which led to layoffs and store closings.
While the Boston Globe story is extreme, it is nonetheless a problem faced by many employers. What could J & J have done to prevent or at least reduce the risk of embezzlement? The first line of defense to prevent embezzlement from happening is to make embezzlement difficult. The classic embezzlement case involves someone in the accounting department with access to business checks and who maintains the business records. Typically, the employee has little oversight and is trusted. An employer should separate accounting functions among multiple employees so there are checks on each employee’s work. The same individual should not be dealing with accounts receivable, writing checks and balancing bank accounts.
Second, random audits should be conducted. The audit should not be performed by the employees involved with finances. The audit should be conducted by an outside professional.
Third, employees should be required to take vacation so that other people must perform the absent employee’s job functions. Not surprisingly, many cases of embezzlement are discovered while an offender is out of the office. Finally, an employer should be suspicious of extravagant spending and radical changes in job performance. In the Rhode Island case, the employee was engaged in extravagant spending, throwing lavish parties and flaunting her wealth, despite a modest $40,000.00 a year salary. An employer should talk to its financial advisor about other possible preventative measures.
If your business is faced with possible employee embezzlement, an audit should immediately be performed by an outside professional to determine if embezzlement is taking place and to assess the extent of the loss. The suspected employee should not be part of the investigation. Legal advice should be obtained and a plan prepared so that an employer can maximize a recovery from the offending employee or a financial institution. In many cases, the employee has spent the embezzled money on personal items and property which can be recovered by the employer; however, if the employee is informed too early, they may liquidate or hide assets.
If the embezzlement involves forged checks or bank deposits, it is extremely important to make a claim against the banking institution immediately. There are many laws in place which limit a bank’s liability after relatively short periods of time once the bank has sent a statement to the employer. There are also short time periods in which a lawsuit can be filed against a financial institution for wrongfully processing checks or bank deposits. Finally, it is in all likelihood appropriate to take the matter to the local prosecutor so that the offending employee can be prosecuted for their crime.