As discussed in some detail in our article on embezzlement, theft by employees within the United States and, for that matter, in the general world wide business community, has long been recognized as the single largest unreported loss faced by businesses. While the range of such thefts stretch from occasional theft of minor office supplies to large scale forgery of checks, most employers will cheerfully overlook the small thefts so long as they can prevent the far more occasional but often disruptive larger embezzlements that plague businesses.

Each business person reading this article is likely to face substantial employee or independent contractor theft some time in the next five years assuming they engage in business on either coast of the United States or have more than three employees. The statistics indicate that this is not only a high likelihood but one should keep in mind that most such thefts are never reported for reasons stated in the embezzlement articles. One must conclude that the actual incidence of such employee thefts is at least double that reported.

Which means that every business person must, as a matter of course, take steps to safe guard against employee theft as part of their regular business planning and implementation of systems within an office. Yet, aside from such obvious acts as restricting signatures on bank accounts, few businesses do take proactive steps as to employee theft. This is an oddity of American business that strikes our business colleagues abroad as particularly intriguing.

One Brazilian attorney laughed and told the author that it was part of the naivety one sees so often in United States business people. Perhaps, but more likely the equalitarian ethos of most American businesses combined with strict employee protection laws make it both unpleasant and perhaps a bit dangerous legally for the average business to become overt or crude in dealing with the danger of possible embezzlement or theft by its own employees.

However, with computers and laser jet printers, it is easier than ever for people to make documents that look legitimate. Computer checks can be printed that bear your bank account number. Elaborate fake invoices can be created. Depending upon where the opportunist is in a company, a scam can be created to do almost anything, to shuffle money off, hide income, increase expenses.

Our companion articles on embezzlement discuss procedures to take once an employee or fiduciary is located within the company. This article shall suggest methods to locate and perhaps prevent such thefts before they begin.


Simple Protective Measures:


1. Opening Bank Statements: For small businesses, one of the easiest ways to head off checks

going to the wrong places is for the owner to be the first one to open the bank statements. Before anyone else has a chance to touch the checks and the bank statement, the bank statements should be scanned for unusual transfers and transactions and the checks should be scanned for unusual payees and payments. One of the hardest scams to catch is when forged checks are made by the same person who does the bank reconciliation. It is not unusual to have the person alter a bank statement to hide the forged check. How? It need not be high tech. We have seen a situation where the person cut the line out of the bank statement where the check number and amount appeared and then photocopied the statement so that it looked like nothing was missing. Obviously, the person destroyed the original bank statements and the forged checks. The bank did not catch the forged checks because they did not check the payer's signature. Few banks do and in most states the liability of the bank for such sloppiness is extremely limited.


2. Cash Receipts and Disbursements. The appearance of tight controls over cash receipts and

disbursements makes opportunists think twice. For cash coming in, if possible, have the receiving and depositing of cash and checks handled by someone who has nothing to do with the accounting system,

especially accounts receivable. Thus, if a customer pays and that payment is stolen, it is likely to surface when you go to collect the receivable. Where a cash register is involved, the “Hip Pocket National Bank” is a very strong temptation. Since many types of transactions can flow through the cash register, errors are common. Put simply, even some honest employees have trouble making change. This makes it hard to determine thefts.

Cash register theft is not complex. The No Sale is the most common; accepting the customer's cash, pressing the No Sale button, when the customer leaves, the cash from the sale is taken. Having more than one employee working sometimes help. One client had a regular “trap system” and would ask a friend to drop by the store with an open eye every two weeks.


3. Inventory Theft. Most often, the opportunist just takes inventory. Even when you reconcile the inventory to your records, it can be quite hard to determine what has been stolen by whom. Ringing up sales by using Uniform Price Coding (bar labels) and running a perpetual inventory system can help with this. Any business accountant can advise on setting up these useful system.


4. Bonding. It often surprises this office how few of our clients think of simply bonding their employees. The price is seldom prohibitive and the deterrent effect of the application process which employees witness may be as useful as the actual ability to make claim on the bonding company for actual employee theft.


Warning Signals Of Management Employee Theft

The AICPA's (the national association of certified public accountants) standing subcommittee on methods, perpetration, and detection of fraud has compiled the following preliminary list of conditions or events which may signal the possible existence of a fraud situation.


1. Highly domineering senior management and an ineffective board of directors and/or audit committee.


2. Indications of management override of significant internal controls.


3. Compensation of significant stock options tied to reported performance or to a specific transaction over which senior management has actual or implied control.


4. Deterioration of quality of earnings evidenced by decline in the volume or quality of sales for example.


5. Increased credit risk or sales at or below cost.


6. Significant changes in business practices.


7. Excessive interest by senior management in the earnings per share effect of accounting alternatives.


8. Business conditions that may create unusual pressures:


9. Inadequate working capital.


10. Rapid expansion of a product or business line markedly in excess of industry averages.


11. A major investment of the company's resources in an industry noted for rapid change, such as high tech.


12. A complex corporate structure where the complexity does not appear to be warranted by the company's operations or size.


13. Widely dispersed business locations accompanied by highly decentralized management with inadequate responsibility reporting system.


14. Understaffing which appears to require certain employees to work unusual hours, to forgo vacations and/or put in substantial overtime.


15. High turnover rate in key financial positions such as treasurer and/or controller.


16. Frequent changes of auditors or legal counsel.


17. Known material weaknesses in internal control which could practically be corrected but remain uncorrected, such as access to computer equipment or electronic data entry devises is not adequately controlled.


18. Incompatible duties remain combined.


19. Material transactions with related parties exist or there are transactions that may involve conflicts of interest or possible violation of the corporate opportunity doctrine.


20. Premature announcements of operating results or future (positive) expectations.


21. Analytical review procedures disclosing significant fluctuations which cannot be reasonably explained, for example:

Material account balances.

Financial or operational interrelationships.

Physical inventory variances.

Inventory turnover rates.


22. Large or unusual transactions, particularly at year-end, with material affect on earnings.


23. Unusually large payments in relation to services provided in the ordinary course of business by lawyers, consultants, agents, and others (including employees).


24. Difficulty in obtaining audit evidence with respect to:

Unusual or unexplained entries.

Incomplete or missing documentation and/or authorization.

Alterations in documentation or accounts.


25. In the performance of an examination of financial statements unforeseen problems are encountered, for instance:

Client pressures to complete audit in an unusually short time

or under difficult conditions.

Sudden delay situations.

Evasive or unreasonable responses of management to audit inquiries.



Suspicions Versus Proof: Warning Signs But Be Careful

People who are stealing from their employer will sometimes give clues that, in and of itself, do not mean anything, but should raise suspicion. Care must be taken as this is a very litigious and emotional area. A wrongly suspected individual can sue...indeed, absent objective evidence a rightly suspected individual can sue. One such horror story was told to the writer by an accountant whose client was the owner of a convenience store. He caught red handed a young male employee stealing and fired him on the spot. That day, both the employee's parents confronted the store owner, telling that the owner was wrong and mistaken, and threatening to sue because the owner's allegations could ruin this young man's future. The store owner knew what he had seen but the security cameras showed nothing and it was his word against the young college student. His attorney had to advise him that the risks were too great, the cost of the matter to severe and to apologize. IF YOU HAVE A SUSPICION, DO NOT TAKE THOUGHTLESS ACTION BUT CAREFULLY PLAN YOUR MODE OF ATTACK. Read our article on embezzlement for more tactics.


The following is a list of suspicious situations concerning non management employees:

Bill collectors call your business trying to find an employee.

An employee's standard of living increases, but the employee does not have the earnings to support it.

Employee goes on expensive vacations; buys a luxury car; buys a vacation house.

Employee refuses to go on vacation.

Employee performs bank reconciliation after work hours or at home.


The Typical Methods of Embezzlement: Ways Cash and Checks Disappear.

The true test of a person’s morality is what would he or she do if he knew he or she would not get caught. This proverb is probably older than time immemorial, and is immortalized in Plato’s Republic with the question posed as to what a person would do if he or she was invisible and could accomplish any crime they wished.

Money has become a religion for many people…and cultures…and the simple fact is that one must concentrate on protecting one’s assets from those whose main goal in life seems to be to increase wealth by any way they can.

The ways employees can achieve access to company assets greatly increase when cash is used in the business, as any retailer knows. But even in locales not traditionally used to having cash payments, there are ways to obtain access can be developed by dishonest but inventive employees.

In a small doctor's office, right after the doctor finished with the patient, the bookkeeper would offer a 5% discount if the patient paid with cash. The patient's bill and the cash paid was never recorded.

In another doctor's office, the bookkeeper pocketed part of the cash payments and recorded a credit to the patient's account as a write off or insurance adjustment.

A person who worked solely in accounts payable created a fictitious office supply company and would submit a small invoice to the company.

A bookkeeper, who prepared the bank reconciliation for an importer obtained a company check. She made the checks payable to herself and found someone to forge the signature.

A bookkeeper, who printed the computer checks, would keep an unprinted check from the check runs. He made the checks out to himself and for personal expenses. The bookkeeper also did the bank reconciliation and kept the general ledger.

At an automobile service center, the manager would write up the service tickets. One of the questions he would ask was, "How are you going to pay?" If the customer said "cash," the manager would pull a service ticket from the bottom of his clipboard. Since all service tickets were pre-numbered and accounted for each day, the manager used a service ticket for the cash sales that had a number no one would look for. The cash from these sales were pocketed and the service invoices were destroyed.

A maintenance person submitted petty cash vouchers for hardware purchases for his own house.


Conclusion: Being Alert

All the signposts above have one thing in common: after the fact the victim was always embarrassed that such “obvious” signs were ignored or that such simple devices to steal were not easily discovered quickly.

The problem is time and trust, of course. We do not have time to be paranoid about our own coworkers and employees and want to trust the people we work with. As once client put it, “I don’t want to work in an atmosphere of doubt and distrust.”

My answer to him is my advice to all readers of this article: “You already live in an atmosphere of doubt and distrust. The average American suffers a property crime once every two years. It is part of our way of life. And America does not stop at the door to your office. You protect your possessions from thieves outside the office. You have to protect your possessions inside the office or you will inevitably be a victim.”

The reader should also review our articles on Criminal Law and Fraud.