Introduction:
Unlike most crimes, the victims of an embezzlement often feel somehow responsible for the actions of the embezzler. They are typically outraged and deeply hurt that someone they trusted has betrayed them, but it is also common for the victim to feel naïve or foolish in trusting the culprit and embarrassed that someone operating a business could be taken in. They often are anxious to keep the event confidential and express concern that they will lose the respect of their customers and colleagues.
As one veteran of twenty-five years in business told the writer, “How can they trust me to handle their accounts when I cannot even control my own bookkeeper?”
That attitude is misguided. It confuses being the victim of a crime with not having sufficient business sense to operate a business. Trust of employees and colleagues is required in the business environment. One cannot succeed in business without building a team of employees and contractors that will assume some responsibility for the business. Embezzlers are successful precisely because they understand that need and are usually excellent at assuming responsibility and being proactive in handling their duties in the business.
Embezzlers are commonly the best of employees, do not take sick time or long vacations, and know how to make their managers both like them and trust them. As another client commented in an e mail, “Who is going to trust someone who is lazy or tries to avoid work? She was always hardworking, cheerful, ready to pitch in and make things better. She was a perfect secretary.”
Or, put more simply, the embezzler knows how to please a boss and uses that to be successful in stealing. To distrust such seemingly ideal employees is to be a bad boss…but to trust them without checks and balances can lead to disaster.
That said, once discovered and apprehended, the embezzler’s harm to the company may only be starting. Not only can the theft result in lack of trust permeating all the relationships within the company, but it can lead to a loss of confidence of and in management, requires long hours and allocation of resources seeking to quantify and remedy the harm caused, and further distraction due to the civil and criminal cases against the embezzler.
In seeking to cover their tracks and make discovery of theft all the harder, embezzlers often fabricate invoices, often pocket cash monies paid by customers, showing their accounts as past due, often fail to pay taxes or destroy accurate accounting records so that recreation of the actual transactions becomes difficult if not impossible.
Indeed, a common effort of an embezzler is to destroy the business entirely. If the business goes bankrupt or closes its doors, there may not be anyone left to investigate the actions of the embezzler or to prosecute potential claims. One embezzler known to the writer made spurious claims to the EEOC in an effort to cloud the record, claiming both sexual harassment and drug use by her manager just as he was beginning to investigate her actions. Another embezzler would spread lies to other key management in an effort to poison the entire atmosphere within the company, claiming that her manager was taking far more fringe benefits than other managers and causing both friction and, in one case, a resignation of a key salesperson.
Thus, the business that has discovered an embezzler faces a series of challenges to achieve recovery. This article shall discuss the steps we normally recommend so that the business can move on from the turmoil and destruction caused by embezzlement.
State of Mind:
It is vital to avoid self-doubt and regrets. A good embezzler may have spent months or years undermining the various relationships within a company, alienating employees and customers, and slandering management behind their backs. Many businesspersons confronting an embezzler are going to feel that the discovery of the thefts demonstrates lack of care by management in operating the business and wonder if it demonstrates inability to handle critical aspects of business.
Get over it. You are a victim, not a fool, and those are not the same things.
When someone defrauds you, it does not mean you are a fool. It means that you encountered a thief who may be very good at his or her trade. You have learned a valuable lesson: use it to rebuild and create safeguards so it does not happen again. Use it to make a better company, not to doubt yourself. Use your doubt to create checks and balances and develop a company that will not be victimized again.
It is critical you do this. It is likely that you now have a business that needs to overcome damage and that will require all the attention and careful planning of management. One will have to investigate the state of damage, will have to assist either civil counsel or a district attorney or both, reassure employees and owners, determine extent of the damage to the accounting records, make sure customers are not harmed-in short, one is going to need every ounce of energy and skill to rebuild the entity and come out stronger than before. Taxes will have to be computed and, if required, paid. Employees will have to be advised they are still trusted that you are not going to be paranoid about every employee in the company.
Or, as one client put it, “My best revenge is to make the company better than before.” He later told the writer that rebuilding the company after the embezzlement was a challenge that made him feel better about himself, not worse.
Books, Records and Unpaid Taxes:
Embezzlers often work by distorting the books so that they can steal customer payments, not pay vendors, not pay taxes, inflate slush funds, etc. Even worse, if involved in bidding jobs, they may have miscalculated the cost of the job so that they would get the cash flow, pocket much of it, and not concern themselves with the inevitable loss that the job would cause.
Knowing that accurate books may disclose their antics and may be the best evidence to use against them, embezzlers destroy or fabricate bookkeeping for weeks, months or years. Often the first notice management gets that something is wrong is a vendor angry at not being paid, a job running far over cost, or a tax audit due to failure to make timely tax payments.
It is critical that management reconstruct the books. This is not only useful for the prosecution against the embezzler (indeed, vital for the district attorney) but critical for the company to determine what its obligations are and taxes that may be due. While a certified public accountant would be ideal to recreate the books, that is often far too expensive and an accountant should be found who has bookkeepers available to assist in the reconstruction, subject to review and guidance of the CPA.
Management must put priority on this so as to avoid alienation of vendors and possible tax penalties. Most vendors and taxing authorities will cooperate readily…many have had embezzlements of their own…and will often adjust their own timetable for payments while the victim determines the extent of the distortion.
It is often necessary to approach customers and vendors to gain access to their records to recreate the books accurately and while that may be something management does not like doing, given the tax and credit ramifications, it may simply have to be done. (Be careful how you indicate what has happened since a clever attorney for the embezzler may file a slander claim against you to muddy the waters. Consult with counsel on all third-party communications.)
At times, in an effort to avoid prosecution, the embezzler will agree to assist by advising what “tricks” he or she used to steal and what correct and accurate books should have demonstrated. At times embezzlers have hidden accurate books or can recreate the accurate records from memory. As discussed later, such cooperation from the embezzler should be sought but the information should not be trusted without checks and balances and no promises should be made to the embezzler as to actions either the district attorney or company will take simply because they are assisting in minimizing the damage caused. The most that should be said is that cooperation now will have some effect on reducing the claim for damages and will be taken into account when discussing relief with the district attorney or police.
A client commented that he was eventually delighted when he was able to recreate the books since it demonstrated that the business was far more profitable than he previously thought. The embezzler had been taking most of the profits and once removed, the business was a better investment than he thought it was. This is not uncommon. One cannot get blood from a turnip.
A good solution in recreating accurate books is to hire the replacement bookkeeper who will develop accurate books working with the CPA and will also be in a position to continue employment working with those very books. That is both efficient and saves costs but if the job search is not rapidly successful, a temporary bookkeeper may have to be retained since one cannot delay in getting the records recreated accurately and commencing accurate bookkeeping from that point forward.
This would be a good time to consult with the CPA and attorney as to what additional checks and balances can be created in the future to avoid another embezzler succeeding against the company. Various systems of checks and balances are typical in most businesses and the key is to make sure that someone other than your bookkeeper reviews the books and records on a regular basis.
Once the records are again accurate, it is time to sit down and consider the true state of debt and taxes due as well as determine what profitability will be like with employees who are no longer stealing. Most vendors and creditors and even taxing authorities will work with management in creating realistic repayment programs but quite often money may have to be borrowed to get through the transition period.
And this is also an excellent time for management to institute better checks and balances in all areas of the business…from the ordering of supplies and interaction with vendors to ongoing obligations to service providers. Management must develop the skill set necessary to spot check and review the books and records in the future. A regular schedule of such review should be created. One client used an outside CPA firm to double check on a quarterly basis all the books. Another client simply forced himself to go through the books once a month after receiving some guidance form his CPA.
Vendors and Customers as Victims or Accessories? - Taxing Authorities:
A key area of investigation must be to determine if any customers have been harmed. Have their jobs been bid properly? Have goods been delivered properly? Have their payments been credited correctly?
If errors are found, being proactive in reaching out to customers and resolving the problem (including admitting fault) can do much to minimize the damage.
The same process should be taken with vendors who may not have been paid or who may have been subject to unwarranted returns of goods.
The underlying question is whether to advise them of the embezzlement. One can admit that the books and records were not kept correctly without indicating embezzlement was involved by simply indicating there was “a problem” involving personnel…but that is a matter of choice for management.
Taxing authorities are a completely different matter and professionals are going to have to be brought in to resolve any issues of nonpayment here. Both the CPA and the attorney should be the ones dealing with the taxing agencies and their reaction may be very different depending on the nature of the tax. Payroll tax is a very difficult area to resolve with the agency; they are notorious for intransigence and willingness to bring in criminal charges if they determine management conspired with the embezzler in some manner. Income tax and franchise tax, and to a lesser extent sales tax personnel, are far more willing to work with companies to resolve differences and create payment programs. And recall that penalties and interest accrue on unpaid taxes, so this must be dealt with promptly.
Knowing that audits are inevitable, many embezzlers are careful to pay all taxes due so management may be pleasantly surprised that taxes have been paid. One thing must be kept in mind: you must know. If you determine unpaid taxes, you must pay them or the taxing authority, sooner or later, will claim you evaded taxes. Remember, the embezzler was your agent when the taxes were not paid.
Note that the cost of discovering and proving embezzlement is a legitimate business expense and losses may be written off in many circumstances. While management must deal with customers, vendors, and employees directly, the professionals will have to work with the various taxing authorities in most cases and determine what tax deductions may be appropriate.
At times a vendor or customer may actually have worked in league with the embezzler. If transactions in which the customer or vendor must have realized that something was wrong are discovered, it is time to discuss the matter with legal counsel as to possible relief. Do not make any accusations, however, until one has discussed the legal implications of such claims.
Interaction with Police and District Attorneys:
Embezzlement cases are extremely difficult to prove for most district attorneys. They are cases in which numerous documents have to be presented and explained to an often-bored jury, the defendant is often charming and attractive, there is no individual showing personal injury as a victim sitting next to the district attorney and a conviction seldom creates significant publicity. Police are equally prone to lower the priority on embezzlement prosecutions.
Neither district attorneys or police have backgrounds in business and accounting and somehow have to be educated into the often-complex methods utilized by the embezzler. Their budgets are limited and hiring excellent forensic accountants to prove the case may be beyond the average budget.
They will often feel that civil remedies will solve the problem and encourage the wronged party to commence civil litigation instead or concurrent with the prosecution, hoping that the civil case will settle, and the criminal case may be dismissed.
All this combines to make embezzlement cases seldom a matter of keen interest to the police and district attorney. They will arrest and prosecute if given powerful evidence but the various violent crimes that exist will easily trump their concentration on the embezzlement. Not always, but often. Very large embezzlements or a serial embezzler may interest them far more and there are district attorneys and police who do take this type of crime seriously.
It is may far easier for the employer to obtain a confession from the embezzler and methods to perhaps achieve that are discussed in other articles on this website. If such a confession cannot be obtained, it makes sense to create for the district attorney and police as complete a file containing evidence and proof of theft as possible so that the boring but vital work is presented to them in a package. Since a civil case will likely be commenced to obtain recovery (and to deter future embezzlers) the same work that will prepare the civil case can be shared with the district attorney and prosecution will be more likely.
Recall that the burden of proof for criminal conviction is proof beyond a reasonable doubt to a moral certainty. For a civil action, it is proof by a preponderance of the evidence. Thus, the district attorney faces a far higher burden of proof than a civil action.
Often both cases are resolved simultaneously with the criminal case resolution based on some type of compensation paid to the victim. The combination of the two cases can be the best way to proceed.
Do not be shocked if the police and district attorney are not enthusiastic about prosecuting. With their high burden of proof, they will need extremely effective evidence to convict. It is vital to have your private attorney work to gather such evidence and present the package to the district attorney and police since he or she will have the most credibility dealing with their evidence issues.
If you have discovered an embezzlement and the embezzler does not yet know that you have detected them, it is possible to create a “sting” operation by which they commit an act easily proven in court. Marked monies or a transaction easily traced which is subject to theft from the embezzler can make proof issues much easier for the police. Before you confront the embezzler, discuss the matter with legal counsel to determine the best way to proceed. Remember that employment laws also come into play, and you could face a counter complaint to the EEC if your investigation or confrontation is performed in violation of that law.
That said, this office had a precious metals refinery that often lost gold to dishonest employees and would routinely set up sting operations and have the culprit arrested on site and walked through the plant to discourage other employees from stealing. Each company will have its own agenda in this matter.
It is vital to develop a full plan of action of apprehension, interaction with police and district attorney and what will be said to other employees, contractors, vendors, and customers. Given the danger of claims of slander, such a plan requires the involvement of legal and employment expertise.
Civil Action:
Bringing civil action against the embezzler makes good sense, especially if in conjunction with the police and district attorney. A judgment obtained for intentional wrongdoing can not be eliminated by bankruptcy and can be good for decades, accruing interest at ten percent per annum. One of our clients obtained a collection on its judgment seven years after the verdict which by then had doubled in size. Other creditors of the embezzler (who had a gambling addiction) had been eliminated by bankruptcy, so our client was able to make full collection.
Often the judge in the criminal proceeding will require restitution to agree to a lesser sentence. Often the embezzler, facing significant legal costs for criminal as well as civil defense, will agree to a stipulated judgment to “get on with life.” Few embezzlement civil cases go all the way to trial, so the cost benefit is normally justified.
Do not be shocked if the defendant files some cross complaint to improve his or her bargaining position. It is increasingly common to have various employee claims, from failure to provide benefits to various forms of harassment alleged to give the employer “something to lose.” Do not overreact. Once a trier of fact hears of the wrongdoing of the embezzler, such counter claims are of little value. And, as stated before, most cases settle long before trial.
If you have insurance that covers embezzlement, so much the better. The insurance company will have the right to pursue any claim against the wrongdoer and you have a duty to assist as necessary.
Other Employees Present and Future:
Many business owners are surprised at the reaction of the other employees. Quite often the other employees suspected something was wrong all along but were not willing to come forward and say it. Most will actually resent the wrongdoer who endangered their own jobs by hurting the company.
But quite often an embezzler will have done all he or she could do to hurt the reputation of the boss. Lies and innuendo are common tools since the embezzler has an interest in being the “victim” of bad management and hurting the company may actually protect the embezzler, as stated above. The immediate reaction of employees who see the embezzler fired and accused of wrongdoing may be that it is retaliation.
Thus, the other employees should be told of the wrongdoing and that the company is planning to prosecute. That both invalidates much of what the embezzler has said, acts as deterrence for further actions by other employees, and perhaps educates the employees as to what the actual motivations of the employee were. However, given the dangers of counter claims for slander and libel, be quite careful in how the information is imparted. Consult with legal counsel before communicating.
Do not be surprised if claims of punishing a whistle blower or a victim of harassment or discrimination are made. These are common defenses of a captured embezzler in today’s world of employment. That is one more reason to have powerful objective accounting evidence at hand since triers of fact (and most employees) will quickly grasp the fact that such claims are a smokescreen.
A key aspect of continuing on is background checks on future employees and contractors. Many embezzlers are serial embezzlers. Past employers, anxious to reclaim monies owed rather than punish the embezzler, do not prosecute, indeed, some recommend the embezzler to the next employer hoping that earning money will allow the embezzler to achieve some restitution. Thus, standard background checks should be implemented with a signed release from a prospective employee so allowing.
And do take the time to personally talk to past employers. Often the employers, verbally, will reveal to the owner of a business facts that they hesitate to put in writing.
Owners often do not realize that employees know far more about what is happening in the business than the employers think. Rumors are worse than facts. Consult with legal counsel and plan on how to educate the employees as to the truth both about the embezzler…and the company.
Another key to safeguard the future is a system of checks and balances. Every task has another person or method to check over what is being done on a regular basis so that no one person can distort the system to achieve thefts. For example, each bookkeeper’s accounts are checked over by the CPA quarterly. Another example is all receipts, cash, check and charge, are reviewed and correlated to sales no less often than weekly, but on random days.
Any good CPA or bookkeeper can provide systems that double, or triple check any employee in a position of authority and he or she should be consulted. While the owner may be the one doing it, having a backup to the owner when he/she is too busy or on vacation makes good sense.
Notice to Vendors and Customers:
Many businesses do not want either their vendors or customers to know of the embezzlement, worried that their reputation will suffer since they, “did not take care of business” and were victims. This fear is usually exaggerated. Embezzlement has become remarkably common and many of the customers and vendors may have had a similar experience…and, after all, you discovered the culprit and apprehended him or her. That demonstrates some skill.
And you may have no choice. If the embezzler hid payments made by customers or failed to pay vendors you will have to contact them, explain the situation, and arrange adjustments. Failure to do so would be a violation of your obligations to vendors and customers and could make you liable for the acts of the embezzler. Indeed, since the embezzler was your agent, you have a responsibility, both legally and morally, to make other victims of his or her acts whole.
One of the key tasks of your initial accounting was to determine who else may have been affected by the acts of the embezzler and this will require review of all the various transaction involved. (If the embezzler was restricted to a single department…such as working the counter…then the investigation may be more limited since only customers would be subject to his or her acts, not vendors.) Sooner or later, it is likely you will have to communicate with third parties such as customers or vendors about the illegal actions to determine extent of possible injury to them. Better it comes from you before they discover the problem on their own.
Assuming that the embezzler did not take any action that could harm a customer or vendor but only your own company, there is no legal obligation to advise third parties. It is vital for you and your accountant to so determine. And if you are the only victim, then you can certainly keep it confidential but note our advice to let other employees know as described below…these matters may very well become common knowledge whether you like it or not.
Again, a victim of a crime is not necessarily foolish or weak…but a victim. Do not let your own emotions get in the way of good business decisions.
Restitution or Vengeance?
It is common for embezzlers to have few significant assets. Either due to an addiction such as gambling, or the fact that economic pressure is what compelled them to steal in the first place, many injured businesses who do not have insurance find that the odds are good that there will be no assets to attach even if a judgment is obtained. While the judgment normally cannot be eliminated by bankruptcy since it is based on intentional wrongdoing and while it increases at ten percent per annum, it may take a long time to collect.
For those businesses seeking monetary recovery, it is tempting to not prosecute the embezzler, get a confession of civil judgment from him or her, and agree to a multiyear pay back program, secured with a deed of trust if possible and with the threat of a confession of judgment being entered based on intentional wrongdoing if a payment is missed. Desperate to avoid criminal prosecution, the embezzlers often agree to such a method. (Note one cannot threaten jail time or criminal prosecution unless money is paid back. That is extortion under the law and a criminal act in itself. Seek legal counsel before settlement discussions occur to avoid these types of traps.)
Since an embezzler in prison is unable to pay and the conviction can probably eliminate future hope of employment, many victims see prosecution as simply eliminating the ability to recover damages. The choice seems to be between punishing the wrongdoer with criminal prosecution or obtaining restitution.
Indeed, failure to prosecute and, instead, obtain whatever repayment one can is more common than criminal prosecution since many businesspeople would hope to gain any repayment possible. The feelings of retribution are curbed and replaced with hoped for partial or complete repayment.
This approach may be misguided. Often the judge in the criminal matter will imposes a suspended or reduced sentence if the embezzler agrees to a repayment program. Often it can be part of the deal made with the district attorney.
But the real underlying issue is moral. As one client commented while rejecting such an approach, “All it means is he steals from the next employer in line. I am indirectly aiding and abetting more thefts!”
True in many cases and one reason serial embezzlers are common, using the new job to pay off the old employer over and over again.
Note also that the embezzler eventually must face problems with the Internal Revenue Service unless he or she paid taxes on the stolen proceeds which is not common. Since the IRS has priority over most other debtors, you may find that your anticipated future payments are superseded by payments of the criminal to the IRS in any event.
If this path is taken in any event, be sure to obtain a judgment predicated on intentional wrongdoing to avoid the danger of the defendant eventually filing bankruptcy and removing your ability to collect.
Conclusion: The State of Mind:
It is remarkable how common it is to find the victim blaming him or herself. Similar to an abused wife, the victim at times feels that if they were better at business or more alert then the embezzler would not have even tried. Somehow the feeling is that the victim is responsible for the reprehensible acts of the criminal.
Do not fall into that trap. There are many studies as to how victims of crime often blame themselves as if they feel that they must be deficient in some way to be victimized. Embezzlers could not achieve their goals if they did not perform as good employees and most are likeable, indeed, charismatic. It is hard to punish someone you felt was a good person and who you trusted.
Worse, many businesspeople lose faith in themselves and feel that perhaps they are not good at business. How else could the embezzler succeed?
But that is erroneous thinking. Inherent in business is the need to trust those you delegate responsibility to and to delegate is vital to the success of any business. Put effort into making sure good checks and balances are in place. Put effort into supervising each employee whether you like him or her or not. But as President Reagan said, “Trust, but verify” is the name of the game. Institute with the help of your
CPA and attorney various systems that will not allow one person to have free access to accounts, whether customer or vendor, or to your own various checking and bank accounts. Institute regular checks of what each employee is doing.
One client put it well in an e mail to the writer about an embezzler found in her business: “I became a better businesswoman because of X. She taught me the difference between a family and a business, between being a boss and being a friend. She taught me that trust is fine so long as the systems are in place. She was a business degree in herself. I suppose I should be grateful to her!”