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How to Deal With Employee Theft

In the spirit of transparency, I am in the process of recovering from a massive embezzlement from a trusted employee. Between direct theft, costs, fees, and interest, we are looking at $120,000 of loss. It’s shocking, shameful, and emotionally devastating, but I am sad to say – it’s also quite common.

When I first found out I was stolen from, the first question was, how could I have let this happen? How was I so inattentive and gullible? Did I willfully turn a blind eye? Did I abdicate my money to a stranger? As I investigated, I realized that it was a slippery slope that got me in trouble. I was manipulated, managed, and sabotaged in a way that kept me in a state of trust for that person and doubt in myself. This thief is a pro and I was played. In the end, I am ultimately responsible for my mistakes, I broke all of my checks
and balances rules for convenience and ignored the warning signs.

I tell this story as often as I can because it is so common. The more I tell people what happened, the more I hear a story of someone they worked for, worked with, know socially, or have direct experience.  Everyone is touched by embezzlement and unfortunately, it most often happens in small businesses because we rely on trust to make our businesses run. Larger corporations start with a level of expectation of theft, small business start with an expectation of cooperation. That’s why, according to 2016 HISCOX [1] embezzlement study, says that over 80 percent of embezzlement happen in businesses with 150 or less employees. And just under 50 percent had fewer than 25 employees. So how can small businesses like ours protect ourselves from this seemingly eventuality? I have been researching this all summer as I set up my improved financial system and I want to share with you what I have found.

Who, Why, and How?

WHO

It’s usually the most trusted employee, the one who you don’t have to check up on and they know it. The study also reports that it is most often the employee you would least expect. They are well-liked, understanding, supportive and act trustworthy in many other situations. In my case, the employee was emotionally supportive and would point out security risks in our system. She was a quiet cheerleader and the person everyone went to for support – the office “mom” as it were. She also showed all the red flags warning signs of an embezzler:

Living beyond one’s means – Always has a cool new gadget.

Financial problems – Them or someone around them does not know how to manage money.

Unusually close relationship – With vendors, customers, or employees.

Recent divorce or family problems – Crisis magnets.

Continual “circumstances” that prevent a clear accounting – The system keeps breaking.

Missing documents.

Vendors are complaining about late payments.

Back reconciliations are late or not done.

Accounts don’t balance.

Vendor addresses or bank accounts changed.

WHY

People don’t usually start out stealing from you. It comes on over time as their life changes and your trust in them grows. In my case, my employee was with me for almost two years and most of what was stolen was in the last six months of their employment. There are four factors that can turn an employee into a criminal:

Pressure – There is a new stressor in their life that is easily solved by money. Gambling habits, bad investment, financial loss, medical expenses, new family expenses, college, divorce, or significant debt.

Opportunity – Employees that do not have a clear checks and balances, that get the trusted financial hall pass are more likely to take the opportunity to steal. It is usually the top level, longest term staff members who figure out how to work around your system.

Capability – They have the skill and knowledge to work your system.

Rationalization – They must find a way to rationalize this to be able to look you in the eye every day while they are stripping you blind. They feel they deserve more; they have a bigger problem than you, they are underpaid and overworked, etc.

HOW

The most common embezzler is your bookkeeper, bill payer, payroll manager or anyone that handles your money. If they can get into your accounts, customer files, loans, bill payments, they can find a way to pay themselves a bit more. The majority of embezzlement is direct transfer of money into personal accounts. Check fraud, credit card fraud, fake returns at the cash register, pocketing cash sales, are the usual methods. In this generation, there are cyber security issues such as online bill payment, ACH transactions, and personal PayPal accounts. It takes nothing to get a Square account and instead of running a customer purchase through your merchant account, they can run it through theirs.

Overtime, extra paychecks or even a raise you didn’t authorize can be a way to steal from you. Theft of equipment, product, raw materials and even intellectual property are all methods of embezzlement. From reselling your property to making a version of their own, the methods are only limited by imagination.

My story involves many electronic methods. This person paid our bills, so they had a company debit card. They paid their utilities irregularly to look like they belonged to the company, bought their groceries during shopping trips for company parties and lots of office supplies they resold to their friends. They created ACH transactions to their own account under vendor names and used their Square account to act like a supplier. In the end, they used all the company credit and debit cards to fill their PayPal account by using the swipe you get for free and connect to your phone. They generated all the financial reports, so they were able to fill accounts to make it look like we had cash until all of a sudden, we didn’t.

PROTECTING YOUR BUSINESS

Checks & Balances

This is were every business of every size protects itself from fraud. They split financial responsibilities and NO one person, other than a single owner, has all the control. The one who pays the bills, does not sign the checks (or posts the online payments). Whomever generates payroll doesn’t print and distribute it. The one who processes payments does not process deposits. Not only does this prevent theft, it catches mistakes.

Have your statements and bills sent to your home so you can review them before bringing them to the office. My banker suggested a small balance credit card for anyone who must make purchases for you. You can limit the funds available and review the statement every month. Any transaction that does not have a receipt can be charged back to the employee. It’s easy to get busy and hand the helpful, talented employee all the tasks you don’t want
to do. NEVER let watching the money be one of the tasks.

Background Checks

It’s easy to do background checks these days. Before you hire employees,
if their circumstances change, their behavior changes or they suddenly have
more money, do a background check. The lega; website, www.goodhire.com is a low
cost way to do a background search. From $55 to $80 you can verify criminal
background to education. You can also contact your lawyer or accountant for
recommendations in your area.

Build a Culture of Honesty

Most of your staff wants to be there, supports you and is interested in the health of your business. Promote that, promote honesty and trustworthiness, be that yourself and you will find that everyone will be your checks and balances. Educate your employees on what theft looks like and what it does to the business. If everyone is informed, they know when to call out something that doesn’t seem right. At our store, we celebrate our wins so when we kept having raw materials arrive late or short, or when we were told there wasn’t enough money for something, everyone called it out. From our candle maker to the president of the company, we all knew something was not right and worked together to uncover it.

Be Insured

We are fortunate to have an Employee Dishonesty policy. There are limits to the amount covered, and it can only be used once per the lifetime of an employee. Check with your insurance agent for its availability.

Audit Your Accounts

If you are not touching your bank accounts personally, do an audit on your own at least monthly.  Reports can be manipulated, so go straight to the source, your bank. Check deposits, transactions, bill payment accounts, credit card statement, merchant account statement, etc. Ask your accountant or bookkeeper for a list of accounts to audit and how to look at it for accuracy. I stopped looking. I got busy and distracted with all the manipulated crisis and my own outside interests and stopped looking at my bank accounts daily. It was a quick six months that drained my accounts. I am back in the habit of a daily review of my online accounts. I look at every transaction from the days before and match that to known purchases. This is how I caught my employee, I started looking at my bank accounts again.

I would not wish this crisis on anyone. Embezzlement probably won’t happen to you and you can ensure that reality if you take these few steps and develop systems of balances and checks. Our store is healthy, strong, insured, and recovering and I am eternally grateful for the support I get from my team and community. I can now officially be a cautionary tale and I offer you the wisdom I gained from it.


[1] https://www.hiscox.com/documents/14537-US-2016-Hiscox-Embezzlement-Study.pdf

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Jacki Smith is the co-owner of Coventry Creations (coventrycreations.com) and they are celebrating their 25th year in business. Her passion of personal empowerment and small business has been the driving force in her success and her journey of lifelong learning. Jacki is a regular contributor to Retailing Insight and loves sharing her experience, successes and cautionary tales.

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