There are many articles on the internet about small and medium sized business embezzlement cases and suggestions on how to avoid it.
There are perhaps couple of unwritten, chapters to the fallout of embezzlement that are worth knowing.
Personnel / Partners:
- The office dynamic:
- If you’ve been robbed by someone in Accounting, your books are probably in complete chaos.
- Embezzlers terminate and diminish competent people and hire and promote incompetent people.
- If the embezzler had direct reports for any length of time, it’s likely those people are unqualified or untrained to do their jobs.
- Embezzlers turns a company’s culture toxic.
- The Replacement(s):
- After you identify and fire an employee who was embezzling, you may feel the need to rehire for that position quickly. Consider engaging an outsourcing firm rather than hiring on the fly. You may need a person with higher skills for a while to debug your accounting and processes.
- Dishonest people who are applying for the position will tell you anything to get that same position of trust. They will convincingly feign outrage at the prior embezzler. Take care that you don’t simply hire a better thief.
- Embezzlers are not the masterminds portrayed in popular culture. They are typically incompetent and intellectually lazy. What appears to be cleverness is usually in-fact singleness of purpose.
- You’re not likely to get much time from law enforcement on an embezzlement case. For every story you hear of a bookkeeper going to jail, there are a hundred other untold stories of ones that just moved on to a new target. The person investigating your case may have 20 other cases they’re working; most of which involve violence or destruction of property.
- Don’t count on speaking with anyone with an accounting background; even in federal cases. If the nature of the theft is not extremely obvious, it will require very clear explanation and documentation.
- Jurisdictional issues: Depending on where the thefts occurred, you may find yourself searching for some authority that has jurisdiction AND is interested in your case. If the theft was through a bank or payment processor without a presence in your state, there’s little chance of cooperation from the financial institution.
The IRS (the “Other Law Enforcement”)
- In cases of embezzlement, the IRS encourages business owners who have a favorable settlement or conviction to report the theft on a 1099-MISC. Once the business owner has dutifully filed the form, the business owner will receive a penalty notice likely in the amount of $520 for a failure to file/provide by August of every year of theft.
- Business owners are also encouraged to file form 3949-A. As far as I know, there’s no penalty for filing if otherwise legally valid. Consult with your legal and tax professionals before filing.
The Defense Attorney(s):
- Pretty much universally, defense attorneys try to convince judges and juries that the defendant was simply not effective at their job; “just not a good bookkeeper”, or “over his/her head” are very popular. Lots of shoulder shrugging, “Oops”.
- The defense attorney may also turn the tables and imply that the business owner was also taking money illicitly from the business, particularly in cash intensive businesses.
- If the theft becomes known to the general public, it may adversely affect your business. Customers, even vendors may be less likely to feel they can rely on you, even if they believe you suffered an injustice. They may refuse to make deposits on orders. The general public will have a diminished view of a retail/restaurant business.
- Why are business owners robbed? Because they could be robbed. Inattention to key financial information, including; not being first one to open bank statements (include canceled check and counter transaction images), bank reconciliations, CoGS/Inventory reports, AR cycle and hiring practices practically guarantee that the business will experience a significant theft loss.
- If you don’t add or make meaningful changes to existing internal controls, and adhere to them, you will be robbed again.