If you think this nightmarish scenario will never happen at your company, think again, says Reed Archambault, an attorney with Newmeyer & Dillion LLP in Newport Beach. “Recent studies show that employee embezzlement has become so widespread that that it accounts for a majority of business losses suffered by employers,” says Archambault. Some estimates indicate that more than $600 billion is stolen annually, or roughly $4,500 per employee. A 2003 Price Waterhouse Coopers survey estimated the fraud loss per company at $2.2 million — 60 percent from employee theft.
Smart Business spoke with Archambault about how business owners can protect themselves from employee theft and the right steps to take once theft or forgery is suspected.
What types of employee embezzlement are the most common?
The ways employees embezzle money obviously vary. But generally, the schemes involve larceny, skimming or fraudulent payments.
Larceny is easiest to detect because the cash has already been recorded on the books and adequate controls usually exist.
Skimming is the embezzlement of cash from an entity prior to its being recorded on the company’s books. Skimming can take the form of sales skimming, in which an employee has the customer pay him/her directly for goods or services. Receivables skimming is when the amount owed is reduced on the books by write-off schemes.
The last category is fraudulent disbursements. These can take several forms, including billing schemes, payroll schemes, register disbursement schemes, expense reimbursement schemes and check tampering.
Why should owners, CEOs and CFOs worry about employee theft?
Because, sooner or later, every company will suffer from employee theft. When it happens, the theft has ramifications that go beyond financial loss. There is also a risk of jeopardizing customer/client confidence, risk of decreasing employee morale, and even a risk of liability (and potential fines) because of underreported income.
Public companies are required under Federal law (Sarbanes-Oxley) to evaluate and test the design and operating effectiveness of antifraud controls on an annual basis. However, regardless of whether it is a public or private company, companies need to have an antifraud plan in place. Any company can be exposed to its own liability or loss because of a theft.
How does a company manage against these risks?
Every company — public or private — needs to develop a fraud avoidance and assessment plan, which is an effective tool for an organization to use to identify its vulnerability and to make informed, cost effective decisions on how to prevent and detect employee theft and fraud. Proper planning helps ensure that the matter is properly handled, minimizing the exposure to the business and its officers and directors and maximizing the chances of a full recovery.
What does a fraud avoidance and assessment plan contain?
A comprehensive fraud avoidance plan usually includes some or all of the following elements.
- Pre-employment and periodic background investigations.
- Check safes and access passwords for computers.
- Anonymous reporting systems.
- Separate accounting functions.
- Internal and/or external auditors.
- An audit committee with the responsibility of implementing an effective ethics and compliance program that is periodically tested.
What is involved in the investigation?
If the loss is potentially large or the theft appears complex, the employer should seek the advice of the company’s risk manager and an experienced legal counsel. Obtaining good legal advice and using experienced professionals maximizes the company’s chances of avoiding unnecessary disruptions to the workplace and increase the possibility of recovery.
Without the right advice, a bad situation can grow worse. Accusing an employee without these first steps could result in important evidence lost, innocent people falsely accused, careers jeopardized and the organization sued for libel, slander or wrongful discharge. Legal counsel also can assist in assessing the need for additional experts, including forensic accountants and investigators.
Experienced coverage counsel also can help evaluate the company’s rights under its insurance policies. Fidelity and commercial theft insurance policies generally require the insured to provide prompt notice and to furnish a sworn proof of loss within a short period of time. Business owners should approach this with caution, since the way a theft is categorized (for example, if theft is covered but forgery is not) can result in coverage being denied.
REED ARCHAMBAULT is an insurance coverage attorney with Newmeyer & Dillion LLP (www.newmeyeranddillion.com), a full-service business law firm with offices in Newport Beach and Walnut Creek, Calif. Reach him at (949) 271-7210 or firstname.lastname@example.org.