Practical Steps for Addressing Theft in the Workplace

by Robert A. Berry

Business is tough. It’s even harder in today’s climate — and that’s assuming all of your employees are working for the good of the business. Unfortunately, that’s not always the case. It may be a valued and trusted employee with many years of dedicated service, or it may be someone new or temporary. Either way, it’s the same end result: The employee, working for the good of herself, has stolen from the company. What should you do when you discover what she’s done?

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Recognizing employee theft
Mava Terhaar had worked for the Elmore County Department of Motor Vehicles since 1987. In April 2010, she pleaded guilty to embezzlement (a type of theft). Over the previous nine years, she had taken cash receipts for state license plates and tags, voided out the listed payments, and then pocketed the remainder. She stole more than $270,000.

Tammy Law was a collections manager at Pioneer Federal Credit Union in Mountain Home. She was a 13-year employee who had worked her way up from a teller position. She used her knowledge of credit union procedures and the authority of her managerial position to defraud the credit union of almost half a million dollars through various complex schemes over the course of eight years. One of her schemes involved submitting altered invoices to cause hundreds of checks to be written on the credit union, payable to a vendor located in Twin Falls. Law would then cash the checks at a local check-cashing facility.

By its very nature, employee theft isn’t easily discoverable. It can be broad and may involve company property, goods that are for sale to consumers, and cash or cash equivalents. As the stories above demonstrate, the employer may not discover the theft until years after it has begun and someone follows a hunch or finds an irregularity. The most likely reason employee theft goes undiscovered is a lack of operational standards or internal controls protecting the company.

If precautionary standards aren’t in place, you should implement them. Here are some suggestions for how to prevent or discover theft or fraud in your workplace:

• Lock up all checks and deposit slips. Storing trust account checks and deposit slips separately from your operating account should make it more difficult for employees to steal and lessen the chance of someone mistakenly writing a check on or making a deposit to the wrong account.
• Require supporting documentation when signing checks or authorizing transactions. Question check requests for any vendor whose name you don’t recognize.
• Follow check-writing procedures. Scrutinize everything, including requests for “rush” signatures to meet accounting or court deadlines. Never sign a blank check.
• Limit the amount of petty cash on hand. Establish procedures for reimbursement, require original detailed receipts, and use standardized forms.
• If you need to move funds from one account to another, write a check payable to the specific account you’re transferring funds to, not to your bank. Checks made payable to your bank can be deposited into a thief’s personal account.
• When the bank statement arrives, examine transactions for any irregularities. Verify that deposits were made in a timely manner and that no deposits were reduced by cash returned to the person making the deposit. Make note of any missing checks or breaks in check sequence and investigate.
• Review financial statements at least quarterly for any radical changes in expenditures. Look long and hard at categories such as payroll or office expenses.
• Conduct periodic audits. If you uncover missing or altered documents or past-due notices for bills that should have been paid, investigate. Amounts credited to clients on billing statements should match the funds collected.
• Know your people. Run background checks, and call employee references.
• Know the people where you bank. Talk to the branch manager about your normal banking needs as well as activity that would be unusual for your type of account. Ask the bank to notify you of any suspicious teller transactions.
• Separate and rotate accounting duties if staff size allows. Centralized accounting responsibilities make it more difficult to detect theft or other problems. Payroll in particular should be scrutinized by someone other than the person responsible for cutting the payroll checks. One option is to hire a reputable payroll or bookkeeping service. Consult a CPA firm for help with setting up proper controls and accounting procedures.

Obviously, our list mainly addresses theft of cash or cash equivalents, but similar practices may be adopted to deal with theft of property.

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Employer options when theft is suspected
Instituting internal controls should help you identify irregularities within your business, which may or may not turn out to be actual theft. However, if you have suspicions, then you must consider the available actions and their potential repercussions. You can take one of three actions pending the outcome of your initial investigation into the scope of a theft or dishonesty: (1) place the employee on administrative leave, (2) suspend the employee from work, or (3) transfer the employee to another location. It’s critical to take immediate action after you’ve discovered evidence that leads you to believe a theft has occurred.

Investigating potential workplace theft. You should already have an employee handbook that outlines your policies and how business is to be conducted, sets forth your company’s expectations of employees, and describes what employees can expect from the company. The handbook should note that employees may be investigated by the company if they are suspected of failing to uphold your expectations. It should address employee dishonesty and theft and set parameters for conduct that falls into those categories. Finally, it should address any consequences that may arise.

For example, your property theft-prevention policy might state:

THEFT: Internal theft is a serious problem for many businesses. Although taking small items of company property may seem inconsequential, the cumulative effect can be very large. Stealing from ABC, Inc., is like stealing from yourself. Losses from theft immediately affect our ability to increase salaries and can jeopardize the profitability of ABC, Inc. ABC, Inc., will not tolerate property theft of any type. We consider property theft to include the unauthorized use of company services or facilities or the taking of any company property for personal use. Violators of this policy will be subjected to disciplinary action, up to and including possible discharge and prosecution.

Disciplining employees for theft. The obvious first thought of many employers that confirm employee theft is termination. In practically every circumstance, such a decision likely is justified. However, there are instances when you should consider mitigating factors. First, the company may have unwittingly approved or been somehow involved in the dishonest behavior. Second, the employee may have a long, unblemished work record, and his theft or dishonest behavior isn’t grand in the big scheme of things.

The first situation may arise when the employer selectively enforces its dishonesty policy. For example, an employer isn’t likely to terminate employees for stealing small items of little monetary value. But an employee who is terminated could turn that practice around and argue that your decision to fire her was arbitrary. You have to be careful and consistent when enforcing your policies.

The second situation may arise when an employee who has served the company for years without problem encounters an external factor that causes him to deviate from his normal patterns. Maybe he’s driven to commit a minimal infraction, like stealing a bag of chips. Discharging him for a small lapse in judgment simply may not be worth the cost of replacing and training a new employee. With proper monitoring and guidance, the employee could be even more valuable than before the minor mishap.

Terminating an employee for theft. While many states are “employment-at-will” states (meaning, in its broadest sense, that employers and employees may choose to part ways on a moment’s notice), employers should always be aware of the potential for lawsuits. Before terminating someone, you will have to examine whether any special liability exists — for example, whether the employee is a member of a protected class or is currently on disability, pregnant, or ill. You could face charges of discrimination, wrongful discharge, defamation, intentional infliction of emotional distress, false imprisonment, and assault if you follow through with terminating a protected employee. You may also face an unemployment claim filed by the employee.

Defamation is making a public statement about someone despite knowing the statement is false. Employees have a right to expect that their reputation and good name will not be unnecessarily blackened or tarnished during an investigation. As a result, when you’re investigating a suspected theft, take care to ensure the investigation remains confidential. Only people with a need to know should be provided information about the proceeding.

Another factor to consider is unemployment compensation. Generally, an employer isn’t responsible for unemployment compensation when the former employee was fired for “misconduct” in connection with his employment. Misconduct may take several forms, but theft generally is regarded as misconduct. Still, you should conduct a thorough and reasonable investigation and consult your attorney so you can present a good defense against unemployment benefits if the terminated employee makes a claim.

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What’s next after termination?
You have several options for addressing employee theft. You may sue the employee, or you may allow the police to investigate and file criminal charges against him and then hope that the court issues an order for restitution (repayment). You also may attempt to have any losses attributable to the theft reimbursed through insurance.

Suing the former employee. When the theft has been verified, you may decide to sue the employee for conversion or unjust enrichment. Those claims aren’t based on a breach of an employment contract but essentially seek to recover the value of the item wrongfully taken by the employee. The benefits of pursuing civil relief include legal counsel’s ability to ask a court to freeze an embezzler’s bank accounts and other assets to secure an eventual judgment.

Recovering losses after a criminal conviction. Local law enforcement officials may investigate an employee’s workplace theft, resulting in criminal charges and a finding of guilt. If an employee is found guilty of theft, the court may order restitution of the stolen money as part of the sentencing. The court will order restitution if it serves to rehabilitate the offender and compensate the victim or if there is no other compensation available. Note that filing a civil claim doesn’t destroy the ability to obtain restitution. If the discharged employee fails to make a restitution payment ordered by the court, he may be prosecuted for contempt of court.

Recovering through insurance. Finally, you may recover a loss through insurance. You can and should insure your company from dishonest employees through crime coverage, an employee dishonesty bond, a fidelity bond, or crime fidelity insurance. Those policies protect you from financial loss due to the fraudulent activities of an employee or group of employees. The loss can be the result of employee theft of money, securities, or other company property.

Theft insurance generally protects an employer from all current or former employees, partners, members, directors, volunteers, trustees, seasonal employees, and temporary workers under company direction and control. It generally excludes accounting errors, vandalism, and governmental action such as seizure of the property. Coverage may also be limited to employees and not cover partners or owners.

Employee dishonesty policies have some disadvantages, including insufficient policy limits that don’t cover real losses. Terms, conditions, and exclusions may limit coverage and reimburse you for employee dishonesty losses only marginally. Additionally, proving any losses and recovering under the policy may be difficult because of “inventory computation” provisions, which generally don’t allow you to prove theft or loss through inventory records. Nevertheless, recent decisions tend to allow an inference of employee dishonesty to be drawn from relatively thin circumstantial evidence and permit the full extent of the loss to be proven by inventory comparisons.

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Concluding thoughts
You should reevaluate all existing internal controls for detecting dishonest behavior in the workplace. If you don’t have internal controls, you should develop and adopt them. At the same time, you should revisit your employee handbook to determine whether it adequately reflects company policy on dishonesty and theft.

If you suspect an employee of theft, handle the situation with care in light of potential liability issues. Once you’ve obtained enough evidence to make a formal decision (for example, termination), analyze whether it’s worth it to attempt to obtain some form of recovery against the employee.

Not every employee is dishonest or a thief. It’s just that the wisdom of A.E. Housman is as sound today as it was back in 1896. It’s best to prepare for the worst because “luck’s a chance, but trouble’s sure.”