Keeping a Lock on the Cookie Jar: Protect Yourself From Employee Embezzlement

Keeping a Lock on the Cookie Jar: Protect Yourself From Employee Embezzlement

As a business owner, you want employees who are not only competent, but who are trustworthy with the assets and reputation of your company. This is especially true for employees who have access to your accounting system. However, as diligent as you may be in your pre-employment screening process, you may, on occasion, find yourself facing an in-house thief.

There are definite warning signs of embezzlement some more obvious than others-that should raise red flags for further investigation. When you confirm fraud, you have options regarding recourse, including choices that will keep you out of court.

Although you already have enough to think about in running your business, you’ll want to keep your eyes open for the potential of embezzlement. After all, you don’t want your hard-earned profits enriching the bank accounts of unscrupulous employees.

Pathways to Fraud

A savvy employee with the right access has a number

of avenues for embezzlement. Traditional schemes are still occasionally used, including tapping the on-site cash reserve or physically drafting a check pulled out of sequence from the checkbook. However, the digital age offers new enticements.

For instance, an automated check-generating system in which the signature is either digital or stamped opens a door for fraud. This is especially true when payees are not routinely verified by another employee. Checks written to a shill payee for relatively small amounts (e.g. a $200 check from a $2,500 monthly office supply budget) are often difficult to detect.

Electronic funds transfers and automated clearinghouses are also popular means for embezzlement. For example, a false employee name can be set up in your system and funds transferred to a credit union account set up under the non-existent name. All it takes to drain the money out in that case is an ATM card.

Warning Signs

Your goal, of course, is to stop these frauds as quickly as possible. To do so, you must remain vigilant for the warning signs of potential embezzlement, some of which are:

Employees living a lifestyle beyond what is reasonable for their salary or position. When an employee making $25,000 a year drives up in a brand new Lexus, you’ve got to wonder where the money for that purchase came from rich Aunt Jane-maybe she was generous in her will-or maybe not. This warning sign is easily overlooked, so don’t let it be your downfall.

Employees who appear to have severe problems with drinking, drugs or gambling. The money to support those habits is coming from somewhere; you owe it to yourself to ensure you’re not the unwitting benefactor.

Frequent or extended visits to online gambling or shopping sites on company time. Your legal counsel can help you craft a policy that allows you to monitor where employees are going online.

There are also situations and circumstances that may entice employees with a predisposition toward fraud.

A few examples:

Employees subject to garnishment for child support, spousal support and so forth.

A major illness or injury to the employee or a dependent. This is obviously a touchy situation, but a desperate employee with access to your company’s finances could make the wrong choices.

Related or otherwise emotionally close employees who could team up to circumvent your company’s fiduciary checks and balances.

Non-signatories have access to signature stamps.

A policy that allows checks to be issued with one signature only. (Incidentally, it is fine to allow one signature on petty cash checks, since the amounts tend to be small.)

Software programs that allow the payee name to be changed after the check is printed, particularly when spot audits (pulling the physical check and comparing it against the general ledger) by another trusted employee are not routinely conducted.

An employer does not maintain close contact with those employees who have finance or bank access. You do not have to become your employees’ best friend, but you should at least be aware when they are facing any of the tempting situations listed above.

Taking Action

When you discover misappropriation of funds, you have a critical decision to make: to prosecute or not to prosecute. While most people’s initial, emotion-driven response would be to “throw the book” at the cheater, you also have to consider what is best for you and your company in the long run. What is your goal-to recover your money or to prosecute the lawbreaker?

If it’s to prosecute, consider that it will be hard for the former employee to pay restitution in jail. That employee will have equally becoming employed else-where. If it is to recover lost funds, how much and how soon can recovery occur? What will be the source of the funds? What will be told future employers when they check references? These are important questions to ask before any decision is made.

If the business is covered by employee theft insurance, of fidelity bonds, the next decision to make is whether a claim will be submitted. If that is the chosen course, most policies covering employee theft or dishonesty require that discovery of the theft be timely reported to the carrier. Most also require that the police be timely notified, and the employee be terminated.

While the last point may seem obvious, some employers take a dubious path. Incredibly, they choose to retain their embezzling employee. Perhaps the employee has a long and otherwise clean service record. Perhaps the fraud truly is an anomaly, or the person has such a valuable position that letting them go “costs” more than retaining the employee (such as an IT employee who has exclusive knowledge of your computer system). Common sense dictates this is wishful thinking, at best.

Confront With Confidence

As you prepare to confront an employee regarding

fraudulent activities, keep these tips in mind:

Gather irrefutable evidence against the embezzler. Your cheating employee won’t come clean without significant pressure.

The confrontation should be face-to-face in the presence of multiple witnesses, including your company’s legal counsel.

Carefully orchestrate the meeting, and rehearse your actions. Your goal is to trap the employee in a lie.

This type of confrontation is not pleasant, but it is necessary when your company’s financial security and reputation are on the line. You owe it not only to yourself but also to your other employees to put an end to financial infidelity.


Regulators want to make sure that insurers are serving the urban market appropriately, according to Illinois Insurance Director Michael T. McRaith, who spoke at a recent workshop sponsored by the Urban Insurance Partners Institute (UIPI), a nonprofit insurance industry organization. The workshop focused on a UIPI underwriting study that will test a wide array of both traditional and new sources of data, together with predictive modeling. UIPI believes this study may lead to an underwriting approach that is more accurate.

According to the RIMS Benchmark Survey, commercial insurance premiums fell slightly in the third quarter of this year, representing a continuation of the trends that occurred in the past two quarters. Property insurance was the only line of business that increased in the third quarter, by 1.7 percent. This modest rise in average property insurance premiums masks the sharp increases that continue to affect businesses with properties in regions exposed to hurricanes and earthquakes. Conversely, property owners in regions not prone to natural catastrophes continue to enjoy falling premiums.

US property/casualty insurers are expected to pay homeowners and businesses an estimated $971 million for third-quarter property losses resulting from a total of seven catastrophes in 20 states – the third lowest record among third quarters in the past 10 years , according to preliminary analysis by Insurance Services Office, Inc.’s (ISO) Property Claim Services (PCS) unit. That compares with insured losses of $48 billion in third-quarter 2005 – the property/casualty industry’s worst third quarter for catastrophe losses – and $24 billion in third-quarter 2004. PCS estimates the seven catastrophes of third-quarter 2006 generated nearly 280,000 claims.

Effective immediately, Pennsylvania workers will be protected from employer’s lack of insurance through an uninsured employer guarantee fund. Governor Edward Rendell signed the legislation that will also require workers’ compensation judges to include mandatory mediation conferences as part of any trial schedule. The new amendment will also limit attorneys’ fees from exceeding 20 percent of the amount awarded by a judge or agreed to in a settlement.

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