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Employee Theft: Employers “Never See It Coming”

February 20, 2017

Businesses, both private and public, face a plethora of problems when trying to run a successful business, everything from supply problems to retail theft.  Sometimes the biggest concern should come from within the organization.  According to the Association of Certified Fraud Examiners, global losses from employee thefts in 2013 totaled almost $3.7 trillion.  Embezzlement is defined as the wrongful taking of money or property that has been entrusted to the employee as a result of the employment.  It is also marked by a complete violation of the trust placed in an employee by the employer. 

There are multiple items for employees to steal at a business including office supplies, inventory, petty cash, “padding” expense accounts and also complex misappropriation of funds through billing and payroll schemes.  Theft can also occur in the form of business data, software and intellectual property.  It is estimated that the average amount of money stolen through employee embezzlement is about $175,000.  About a third of all business bankruptcies are due to employee theft. 

Business owners need to look for the classic signs of fraud by employees.  According to an article by FUSE Financial Consultants, owners should look for the four “D”s – debt, divorce, drugs and disgruntlement.  All of these things can bring severe financial hardship and translate to the pressure to obtain money.  Accountant Paul M. Fullerman states in his article, “I Should Have Known”, there are four elements to commit a fraud.  They are opportunity, rationalization, pressure and capability.  Opportunity is the ability to steal without being detected while rationalization is the employee’s reasoning as to why they are not paid enough.  Pressure speaks to the financial burden on the person while capability is the mental ability to pull it off. 

So what should a business owner do to limit the opportunity for an employee to steal?  The first thing to do is prevent a single employee to have complete control over the finances of the business.  If possible, have one employee handle all invoices from vendors and the payment of those vendor invoices and a different employee handle the business’ invoices to customers.  Fraud experts state another effective way to limit this type a theft is surprise audits or periodic financial reviews such as a monthly reviews. 

What should the employer do when the theft is discovered?  Embezzlement is a crime under Virginia law and well as an intentional tort, so an employer can go to the police and file a report or file a civil lawsuit.  Virginia Code Section § 18.2-11 codifies the crime of embezzlement which carries a possible prison sentence up to 20 years.  It states, “If any person wrongfully and fraudulently use, dispose of, conceal or embezzle any money, bill, note, check, order, draft, bond, receipt, bill of lading or any other personal property, tangible or intangible, which he shall have received for another or for his employer, principal or bailor, or by virtue of his office, trust, or employment, or which shall have been entrusted or delivered to him by another or by any court, corporation or company, he shall be guilty of embezzlement.”  The intentional tort of embezzlement has the same elements as the crime.  Making a decision can be difficult for a number of reasons.  The employer needs to balance his or her interests in recovering money as well as preventing other employees from engaging in the same conduct.  A criminal prosecution likely reduces the recovery amount while a successful civil suit allows for the pursuit of assets to satisfy the judgment.  Business owners should consult an attorney that has expertise and experience with the demands of representing employers who suffer employee theft. 

When a business owner is vigilant about making sure no one employee has too much trust or responsibility, it can reduce the risk of employee theft. 

Drew Kubovcik is a Pender & Coward attorney focusing his practice on criminal and traffic law and civil litigation.  Please contact Drew with any questions or comments at (757) 502-7339 or dkubovcik@pendercoward.com.

Filed Under: Blog Category 1