Since embezzlers make their money by stealing from an ongoing business, often a finite amount of money or assets each week or month and small enough so that the owners do not catch it, one would think that the typical embezzler would do whatever he or she can to keep that business open and viable. And since an embezzler can only keep stealing while employed and trusted, why risk the job by hurting the company? After all, that is the source of money, is it not? Why kill the goose laying the golden egg?
In reality, it is quite common for embezzlers to seek not only to destroy the business they are stealing from, but to find ways to libel, slander and disrupt the relationships between the key officers, employees, and owners of the business causing deep harm to the atmosphere within the entity. This often happens long before the embezzler is discovered or even suspected. They become a hidden cancer on the business, causing disruption and ill feelings that permeates among the honest employees.
And there are good reasons why embezzlers find this tactic useful and the wise businessperson will recognize this tendency and take proactive steps to nullify the damage within the business as soon as practical once the embezzler is discovered.
This article shall discuss both the motivations and techniques of such embezzlers and suggest corrective steps the business victim can take.
The Motivation of the Embezzler:
Part of the motivation is often unconscious hostility. Tacitus put it well: one tends to hate someone who one has wronged. In an effort to justify the theft, some embezzlers seek to paint the victim as someone deserving the harm, someone who should be punished. The greater the degree of theft, the greater the hostility demonstrated.
But there are more practical reasons to destroy the victim. Most district attorneys and police are not enthusiastic about prosecuting embezzlement cases. The cases are complex, judges and juries dislike the bookkeeping aspect of proof, and compared to the violent crimes, there is simply less interest among the enforcement personnel to prosecute. More often, the district attorney or police will suggest it is a civil matter and invite the wronged victim to commence legal action in the civil courts. While the victim can pressure for some criminal prosecution as well, the odds are good that the quickest and best relief will be found in the civil court. Embezzlers often know this (many are repeat offenders with many businesses) and if they can destroy the business that would be the main prosecutor, then they are that much safer. If the victim is in bankruptcy or out of business, the threat to the embezzler may be greatly lessened.
Further, a failing business may not have the economic resources to engage in the often-expensive task of proving embezzlement in a civil court. And a failed business may not be able to demonstrate damages as easily since they will not have resources to reconstruct the books often damaged, distorted or destroyed by the embezzler. The experts needed to reconstruct the distorted books may cost as much as the lawyers and if taxes were not paid in a timely manner, the business faces that issue as well.
If the other employees or even other owners can be alienated and suspicious of owner-management, then they may not support management in the prosecution of the embezzler, perhaps not even agreeing to testify or work with the police. Hearing the embezzler’s slanderous statements over the months or years as to what top management has said or done, often key personnel will quit and that hurts the business as well, especially if such key personnel go to competitors or open up their own competing business, or even work for the departed embezzler.
One embezzler, realizing her time was almost up since the boss was suspicious, created a spurious sexual harassment claim, actively and secretly enlisted other women in the company in the effort to gain support and by the time management accused her, most of the women in the company were convinced that it was in retaliation for her possible sexual harassment claim. Management found themselves on the defensive since she had been making that secret claim for months and management faced not only lack of support from other employees in the company, but an EEOC complaint as well.
One embezzler actually sought to seduce a married owner, knowing that the scandal that would erupt would likely make the thefts less obvious and opening up a possible harassment claim. (The owner was wise: he realized that he was not so attractive that the much younger woman would find him irresistible and hired outside audit which soon revealed the underlying motivation. Not all owners are so wise.)
Another embezzler, the bookkeeper, told key personnel that top management was taking far more of the money the company earned than management admitted who were claiming at the time that they could not give raises to middle management. Middle management became resentful and many quit (which lowered oversight of the embezzler as an added plus.)
Equally common, an embezzler will actively destroy true economic records, often creating false records that hide his or her actions and create records that may even indicate that others in the company were engaging in embezzlement. One particularly clever bookkeeper simply inserted transfers to his superiors rather than himself on the books, taking money out of the company in cash so no record existed. When the claims were made against him, he countered that it was top management who was the real embezzler, just look at the books. That same embezzler enlisted the IRS for an audit of top management, claiming that the records demonstrated unreported income.
All this disruption can lead to a company being immersed in internal dispute, dispute with third parties and the government resulting in additional expense which, can at times alone lead to the destruction of the company.
Unintentional Fallout from the Embezzlement:
In the digital age, the embezzler faces significant new challenges. Anything on the hard drive is often duplicated in the Cloud and the sophisticated embezzler will realize that it is vital to destroy the duplicate records if possible as well as much of the tracing of income and outgo as possible. But that effort can often lead to exposure since there are usually third parties, from tax professionals to others in the organization that will note that the records no longer are consistent or logical. (A good indication that someone is embezzling is if others in the bookkeeping or the tax department are in conflict with that person and are either fired or transferred by the embezzler who is claiming they are incompetent or argumentative. If your bookkeeping department is in turmoil, it is time to investigate why and not rely on reports coming to you.)
The destruction and distortion of the business records can lead to disputes with customers and vendors that can also have an adverse effect on the business and also bring in another third party of far more resources, namely the various taxing authorities. Of course, few embezzlers pay income tax on their illegal gains but often the entities’ taxes may be equally unpaid as the embezzler falsifies the books as to sales, credits, payments to contractors, etc. (Losses from theft may be deductible so this may be at least partially remedied.)
It is not uncommon for the audits or inquiries from the taxing authorities to lead to discovery of the embezzlement but by then the business may find itself facing penalties and interest due on unpaid taxes and those taxes are due regardless of the fact that it was the embezzler who caused the problem. The embezzler may have been a thief, but while not paying legitimate vendors or taxes was still acting as an agent of the victim. (The concept is the doctrine of apparent agency. Between the victim of your agent and you, the courts will put the onus on you.) Those third parties may sympathize with you as the victim but will still want to be paid. As one vendor e mailed a client, “I do understand you are not the one who hid my bill…but it has to be paid and you were the one who hired her, not me…”
Business is difficult as every businessperson knows, and requires advance planning based on realistic assessments of performance and trends. Such planning is distorted by the records distorted by the embezzler since the business planning is predicated on false information. The embezzler destroys the ability of the company to do adequate budgeting, planning and financial cost benefit analysis. This inevitably means that the company will soon begin to fail or at least not perform well and that can lead to even more disputes between the owners as passive shareholders question the ability of current management to operate a profitable company.
Embezzlers often engage in transactions with dubious or incompetent third parties who may not question the actions of the embezzlers and to keep the cash flow coming in regardless of eventual lack of profitability of the transaction. One embezzler we confronted had sold a thousand leather notebooks to a customer in China, receiving a fifty percent down payment, selling the notebooks under cost of production, knowing that the odds of collecting the remaining sums due with the questionable customer were zero. The down payment mostly went into the pocket of the embezzler who quietly wrote off the rest of the sums due. Multiply this over the years and the damage is significant.
In businesses which bid against other entities, if the embezzler is involved in the bidding process, the results can be catastrophic. One client was a landscaping company whose bids were often in excess of two hundred thousand in high end neighborhoods. Their “temporary” bidder obtained a dozen jobs by bidding under cost and pocketing the advance payments. The bidder was temporary because he had convinced the long-time bidder to leave due to slander directed against the owners. The owners not only faced the immediate losses of income due to the embezzler taking the money, but contractual commitments to landscape that must lose them money. Further, the “profits” reported on the projects were in the books leading to inappropriate bonuses being paid to employees and expansion that the company could not afford.
In short, both by the results of the embezzler’s actions to steal money and the “advance defense” the embezzler may create seeking to undermine the company and its personnel, the company is hurt far more by an embezzler than simply the money pocketed.
And there is one more class of harm that is less obvious.
It takes self confidence and, at times, courage to be operating a business. Chances have to be taken, decisions made, employees managed, competitors beaten, etc. etc. With few exceptions, an embezzlement is a deep blow to management who invariably blame themselves for being tricked by the thief. This is particularly true for male managers who often pride themselves on being smarter and tougher than others and find that they were “…played for suckers…” as one experienced manager advised the writer. Another wrote the following e mail; “How do I tell my owners that they can trust me when XXX was able to fool me for nearly a decade, that I trusted XXX with massive sums, that I know what I am doing? How can I even trust my own judgment when I could be so completely fooled…?”
The key aspect of embezzlement is trust. Someone you trust steals from you. And no embezzler can last a day unless they have the type of personality that inspires trust and often affection. That is the required skill to remain employed and to be put in a position of trust. Embezzlers are often the best employees a company can want. They work hard, do not take vacations or time off, are seldom sick, and volunteer to do extra work. Of course, the reason for such good habits is that many embezzlers are caught when their books are examined by others during vacations or times of illness…but until you know the thief exists, such conduct endears the embezzler to the employer.
To regain self confidence requires a conscious effort on the part of the employer. To not overreact and treat all employees as thieves may require even more effort.
One client had a good approach. In an e mail: “If you are not rich enough to have things, a thief is not going to break into your home. If your company is not making money, an embezzler has nothing to steal. It is my success, not my failure, that resulted in an embezzlement. It is, in an odd way, a complement to myself. Now let’s see what I can do without this parasite.”
The Steps to Recovery:
- Recognize Your Strengths and Get the Facts: You may have been wondering why the company was not doing better. Now you know. With that knowledge you can begin running the company without that handicap.
- Find good people to take over the tasks the embezzler was doing.
- Find good people to recreate the books
- Face the facts-do a tough cost benefit of the jobs on the books and determine what losses are being faced as you finish up the bad jobs (if they exist.)
- Get good CPAs to give you the bad news and to prepare to get recovery from the embezzler
- Conduct a thorough review of your assets on hand. Odds are good much inventory or tools are missing. Find out so they can form part of your claim and you know what must be replaced.
- Plan on approaching customers and vendors to discuss the change in management and determine what was said by the embezzler, what promises were made, what contracts may exist that the embezzler hid.
- Create a complete and tough analysis of what you need to get through the next year after the above information is on hand and what additional capital may need to be amassed-and what expenses need to be cut.
- Do not file suit until you are sure you have sufficient funds to fund it. Taxes take first priority. You have a year or two before the statute of limitations runs in most jurisdictions.
- Find out where the embezzler is, who he/she is working for and whether competing against you. Find out if intellectual property or trade secretes (or personnel) were taken and seek legal advice as to how to stop that.
- Create a Recovery Plan: You built the company with a set of skills. Use those skills to make a business plan for recovery from the thefts that is realistic but not cynical. You are going to have to face a lot of unpleasant facts, but you now have the skills and the facts that should allow you to survive this blow and prosper. “What does not kill you makes you stronger” applies. Your plan will take years to implement if your embezzler was a major source of losses and discord but note that your plan has a head start to success by his or her removal alone. You have removed the anchor that stopped your vessel from sailing free.
- That plan has to include cash flow prognosis and a reserve for additional unpleasant surprises that are going to be encountered.
- That plan needs to include efforts to reassure employees, vendors, and customers that you have not been dealt a fatal blow and that new systems of checks and balances have been implemented to avoid that issue in the future. They need to know you are better than before, not worse.
- And part of your plan includes those alterations in systems that will make embezzlement as close to impossible as reasonable. Be careful of simply taking all accounting or bookkeeping systems on yourself: a business cannot operate if the key officers are simply keeping the books. Instead, working with the accountant of the business develop a good plan of checks and balances including regular review by yourself.
- Plan on how you are going to communicate to third parties and employees the actual facts. You are going to have to be careful here since you do not want to give the embezzler a cross complaint for libel or slander or to make a statement as to any aspect of the theft that you may have to later retract. At the same time, you do have to set the record straight and let worried or angry employees know what your plans are. A good approach is to seek advice of counsel and communicate along the following lines: “Legal counsel will not let me discuss in detail any of the facts that have come to light or to express my own opinions as to what I consider vicious acts by certain employees. I can state that we intend to commence legal action to protect our rights and if you were advised by X that Y occurred, that was simply untrue and was part of an effort to discredit management before they took action to protect the company. I am not going to discuss this further until legal counsel so instructs. Instead, I want to tell you as to what changes are going to be happening to the company…”
- If the embezzler is working for a competitor or started his own business, then you may have to become far more aggressive in seeking relief against him and protecting your access to your own customers. This requires excellent and sophisticated advice from your legal counsel, or you may find yourself in a tar pit of litigation involving third parties who may or may not be innocent.
- If the embezzler is leaving the jurisdiction, again consult with legal counsel since immediate remedies may be available and you may not have the luxury to wait to sue until your business has recovered.
- It may be that you can negotiate with vendors, customers, and tax authorities to delay certain payments or allow rebidding, etc. In those discussions it will be tempting to excoriate the embezzler. Do not do so: get advice from legal counsel or you may be giving your adversary ammunition to use against you.
- Cancel all vacations and absences from the office for the next quarter. Everyone, including your employees, will want to see you there day and night saving the company. You are probably exhausted and depressed and want time away. You are simply going to have to stick it out. As when you first started. You have to show energy and determination now more than ever.
- If there is no way to make it through the next year due to cash flow, face that right now and determine if input of more money from your personal funds or funds of others you know may be required and available. Do not just put dribbles in from time to time. Make the plan for the entire year so you do not end up putting in money monthly only to determine that expenses that were obvious all along still require you to close the doors. Bankruptcy (Chapter 11 Reorganization, perhaps) has to be seriously considered and you should get legal advice on that issue. Note that a reorganization was created by the government precisely to allow a company time to recover and if the company is healthy overall but facing a particular crisis, that could be a wise decision.
- Take Care of Yourself: You are the most important tool the company has to recover. While you cannot go on vacation or work from afar, you do have to make sure that you can survive a crisis you did not expect to occur and face the barrage of unpleasant news. If the embezzler is aggressive in counter suits or has alienated your workforce or other owners with months of innuendo and slanders, you may feel isolated and betrayed. You may feel foolish: many embezzlement victims do.
- Your solution is to understand that what you feel all victims feel. Get sleep. Exercise. Surround yourself with family and friends who know your value. Remember what our client said: if you had not been successful at business, there would have been nothing to steal. You can do it and will do it if you apply yourself.
- Counseling is not a bad idea, especially if you find yourself being short and angry with your spouse and family. Grief and anger are the underlying themes of the victim of crime and often professional help is needed to make you perform your best.
- Above all, do not fall into the victim mentality of blaming yourself. You are a victim of someone’s illegal and selfish act. You are not responsible for them betraying your trust. Bertrand Russel once wrote that the worst decision one can make who has failed in love is giving up in loving. A variation of that works for victims of embezzlement: the worst decision one can make whose trust was violated is giving up on trust.