Employee Embezzlement And The Potential For Recovery By The Employer

Business owners must constantly be diligent against theft, and the most common type of theft is by trusted employees. This article addresses some of the telltale signs that an employee is embezzling and some tips for protecting your business from employee theft and embezzlement and the potential for recovery of the embezzled funds. Additionally, this article addresses related lender liability when an employee uses a financial institution to convert company funds.

Frequently, an employer who suffers an embezzlement will be the result of an employee completely trusted by the employer. Many times an employer will say “he/she was the last person I would ever have expected to steal from me” as he/she was totally and completely trusted.

What is embezzlement? Embezzlement is theft or malfeasance (bad actions) by employees or trusted others in a business. Most embezzlement involves a theft or diversion of company funds to the employee.

 According to a 2012 report from the Association of Certified Fraud Examiners (ACFE), “the typical US business loses 3% of its annual revenues to employee fraud” and small businesses have the most cases and the highest losses.

ACFE says that most employees who commit fraud or embezzlement exhibit telltale signs like living beyond their means, having financial difficulties, having unusually close relationships with vendors, and having excessive control issues. If you are alert and vigilant, you may be able to detect and prevent these business losses.

Employees Are Ingenious Regarding Their Various Methods of Embezzlement

The following cases are examples of some of my significant employee embezzlement cases. In some of these matters, I have successfully recovered against the employee and in others, I have successfully recovered against both the employee and the lending institution utilized by the employee to commit the conversion of company funds.

Case No. 1 – Over a four-year period, a highly valued and trusted employee charged with the task of overseeing the accounts receivable embezzled millions from his employer. He and a non-employee co-conspirator formed a company with the similar sounding name, “XYZ Supplies”, as the name of the employer, “XYZ Products”. They went to a local bank and opened a bank account under the name “XYZ Supplies”. As customer checks came into the office made payable to “XYZ Products”, “XYZ”, etc., the company employee would steal the checks and deposit them into his “XYZ Supplies” bank account. He would then purchase a cashier’s check made payable to “XYZ Products” for a reduced amount (approximately $2,000 less than the original invoice), generate a fake invoice and manipulate the company accounting to reflect payment for the reduced amount. This went on for over four years resulting in a loss in excess of $3 million.

During the time period of the embezzlement, business was actually so good for XYZ Products, they did not discover the missing funds. It was only through the employee’s sloppiness that it was ultimately discovered. The employee had a significant drug habit and was utilizing his 50% of the embezzled funds to fund that drug habit and other illicit activity. His co-conspirator was using his 50% share of the embezzled funds to invest in commercial investment properties.

Upon discovery of the fraud, we initiated a lawsuit against both the lending institution and the embezzlers. Initially, we were able to successfully freeze and recover significant funds in the XYZ Supplies bank account. We were subsequently able to recover over $1 million from the non-employee co-conspirator who was forced to liquidate his commercial properties. Both the employee and his outside co-conspirator were prosecuted by the U.S. Attorneys’ Office and served approximately four years in jail.  

Case No. 2 – A local business was embezzled by one of its most trusted employees of hundreds of thousands of dollars over a three-year period. The employee (the firm’s bookkeeper) was in charge of payroll. Initially, the embezzlement started small, as it frequently does. The employee would simply direct the payroll service to direct a separate payment to her over and above her usual compensation, along with the other payroll checks. The company bookkeeper was so trusted that the company’s shareholders believed it was inconceivable that this person could ever possibly embezzle from the company. However, the employee had recently remarried and unbeknownst to her employers, her new husband had a significant gambling problem. When the embezzlement was ultimately discovered, it was easily detected by two of the company’s partners taking the time to personally review the company’s payroll process. The company employee, when confronted with the embezzlement, admitted the theft. She ultimately agreed to liquidate her house and repay the firm resulting in a significant recovery.

Case No. 3 – In our most recent case of employee embezzlement, another trusted and highly valued key employee embezzled over $750,000 over a two-year period from a closely held local company. The trusted employee was being groomed by the company owner to ultimately take over and purchase the company.   As customer checks came into the company, the employee would steal a number of checks each month and simply electronically deposit them through an ATM machine into his personal bank account. Incredibly, the employee did not even bother to open up a corporate bank account. The checks were business checks made payable to “XYZ Company, Inc.” The employee would electronically deposit those checks directly into his “Joe Smith” personal bank account. The employee also had access to the accounting software system. As he stole checks, he would simultaneously manipulate the accounting to reflect that the corresponding receivable had been paid.

It was only through another company employee being suspicious of the bad actor and the other company employee’s efforts that the fraud was detected. When confronted by the employer, the embezzling employee admitted to the theft. He was subsequently terminated and is now being prosecuted.

In this case, we sued both the lender for conversion and the employee for civil theft and conversion. The Florida Statutes basically set forth a comparative negligence standard on the employer. In other words, although the lending institution is potentially liable for conversion to the employer for the converted checks, the lender has an affirmative defense of comparative negligence of the employer. These cases basically result in the lender attempting to establish that the employer failed to implement appropriate accounting controls and, thus, allowed the embezzlement to remain undetected and perpetuated. On the employer’s side, the employer will attempt to establish that it maintained significant company controls and, thus, was not negligent. These cases when they go to trial frequently result in the trier of fact apportioning liability.

These are just a few of the many examples of employee embezzlement. The takeaway from the above is that employee theft and embezzlement is rampant and employer’s must be diligent to prevent becoming victims.

Be Vigilant: Look For These Warning Signs

Keep your eyes open for the following warning signs of employee fraud or embezzlement.

• An employee refuses to take vacation (afraid the theft will be detected by replacement).
• An employee who continuously works overtime.
• An employee who wants to take work home.
• Excessive personal spending (new cars or trips by an employee whose income cannot support these extravagances.) The employee may be reselling items or just enjoying the good life at your expense.
• Petty cash disappearing too quickly.
• Extravagant expenses for employee travel.
• Employee has close relationships with vendors. Keep an eye out for employees who often lunch with vendors who are related to independent contractors who do work for your business.
• Rapidly disappearing office supplies.

Preventing Employee Theft and Embezzlement

Knowing the signs of employee losses is not enough. You must be able to specifically find out what employees are doing. Here are some internal controls (accounting management techniques) you can institute to find out what is going on.

Daily deposit and reconcile monthly. Leaving cash sitting around is too tempting for some employees and reconciling the bank statements each month helps you catch irregularities sooner rather than later.

Separate financial duties of employees. For example, the employee who writes the checks should not be the employee who reconciles the bank statement.

MBWA (manage by walking around). Let employees know you are keeping an eye on things around the company.

Communicate Your Message About Employee Honesty

From the first day at work, employees should know that you require them to be honest. A new employee will conveniently forget if you tell them, but if they must read and sign an employee handbook or policies and procedures manual, they do not have the excuse of not knowing what is required.

Prosecute Promptly

Law enforcement types will tell you that the biggest determent to crime is the likelihood of being caught and prosecuted. Catching employees stealing or embezzling isn’t enough; you must be prepared to prosecute. Being lenient because an employee “only did it because she needed the money” is not going to keep her or others from stealing from your business. Consult with a qualified business litigation attorney with experience in employee embezzlement. Consult a professional experienced in detecting and preventing employee embezzlement.

Should you be the victim of an employee theft or embezzlement, Attorney Charles Buford is prepared to represent you and utilize his experience of over 37 years in business litigation to effectuate a recovery against all appropriate parties. This would be an action against both the employee and, if appropriate, against the lending institution utilized to convert company funds.

In these cases, a money judgment which will ultimately be recovered against the employee will be pursuant to Florida’s civil theft statute which provides for treble damages. Unfortunately, in many cases, the employee has either spent or hidden the proceeds of his illicit embezzlement. In many cases, the only real chance of recovery is against the lending institution for conversion. These cases are difficult and expensive, but through proper experience and qualified counsel, can result in a significant recovery.