Several cases over the last few months may illustrate how important it is to check potential employees carefully and be vigilant once they are hired especially with employees who handle money or have access to the books.
One small service-related company with about 10 employees needed a bookkeeper and hired someone who appeared to have good experience and qualifications. The person was friendly, got along well with the other employees, and appeared to be doing a great job. The employee was soon trusted with the payroll and checkbook. Checks were presented for signatures to various people, and nothing seemed out of the ordinary. The company was struggling financially, and the owners looked to each other for solutions. Eventually, they discovered that the employee had been regularly doubling up on her payroll checks, paying invoices twice and depositing one of the payments into her own account, and using other means to steal money from the company. It turns out that the primary skill this bookkeeper had was stealing from employers. While stealing from this company, she was already on probation (community control) for embezzling from her former employer. A more diligent background check would have revealed this and saved the company a huge amount of money.
Another case involved a long-time cashier at a retail establishment. The employee figured out how to manipulate the cash register system and began ringing up phantom returns and pocketing the cash that, over a four- or five-year period, amounted to hundreds of thousands of dollars.
When these situations happen, small business owners are interested in two things; justice and getting the money back. Reporting what you find to the police will launch an investigation, but will rarely result in a quick resolution. The facts in these situations are often unclear, and police departments generally lack the resources or expertise to analyze the books. A well-devised scheme may be hard to detect and even harder to prove.
These situations are often beyond the capability of the local police departments. The police detective may ask you to hire your own forensic accountant to analyze the records and come up with the necessary evidence.
Contact your lawyer first. Immediate actions can be taken to help the police and, more importantly, your business attach bank accounts and property that the employee and perhaps family or accomplices still have.
Criminal prosecution requires an accumulation of significant evidence to present to a grand jury and to prove a case beyond a reasonable doubt. The authorities often lack the resources to accumulate that information quickly. By contacting your law firm early in the process, they can prepare and file a lawsuit and seek immediate relief and prejudgment attachment before the perpetrator is tipped off and able to skip town with the money stolen from you or your company. The amount of evidence necessary to obtain a prejudgment attachment is far less than what the prosecutor will eventually require to take the matter to the grand jury. A judge will usually accept a well-documented affidavit for the short term and issue the preliminary orders freezing accounts and encumbering property. Once the lawsuit has been filed, you will have subpoena powers to obtain bank and other financial records necessary to go forward with the case.
Once assets are tied up, settlements are often easier to negotiate.
Prevention, of course, is the better course of action.
In the first case, a background check or following up more carefully with the history of the employee would have revealed the prior conviction for embezzlement from the prior employer. Always check references and account for gaps in employment.
In the second instance, better inventory control and vigilance would have revealed the ongoing theft. Business owners often get so involved in the day-to-day activities that they neglect the big picture and miss the signs that would alert them to potential trouble.
The best practice may be to trust but verify. Have your accountant independently check your books on a regular basis, and talk with your lawyer about setting up proper mechanisms to screen employees and catch losses before they get out of hand.
H. RITCHEY HOLLENBAUGH is a partner and Business Litigation Practice Group leader at Carlile Patchen & Murphy. Reach him at (614) 228-6135 or HRH@cpmlaw.com.