An old English Proverb says, “Opportunity makes a thief.”

HandcuffsRecently an accountant for one of my clients called. “Do you know why Henry buys large quantities of bathroom supplies?” he asked. I told him no.  He said the supplies seemed out of line for a business the size of Henry=s.  I called the client and then the police. Within three hours Henry’s secretary of fifteen years was under arrest.

This $18,000 a year employee had bonused herself more than $250 thousand during a three-year period.  And it was all tax free.  Through various schemes she had made more than the president of the company those years.  As the bottom line fell, my client focused on increasing production.  By the time he discovered the culprit the business teetered on bankruptcy.

Every year embezzlement and employee thefts account for an estimated $120 billion in losses to U.S. employers.  Small businesses are particularly vulnerable.  Frequently, their accounting systems lack the internal controls necessary to protect them from being devastated through embezzlement losses.

In my client’s case, an accountant’s alert staff spotted the problem.  While encoding the company checks she noted that month after month several small sums were paid to one company for bathroom supplies.  The secretary had authority to write checks for less than $300, and therefore the owner never saw them.  The bathroom supply company was, however, nothing more than a checking account owned by the secretary.

But issuing checks to fictitious suppliers was not the only way this lady with a high-school diploma outsmarted her college-degreed boss.  For example, sometimes she paid creditors’ invoices twice and kept the second check.


Depending on the business, many avenues are open to the embezzler.  Here is one:  The employee increases the amount on company issued checks and pockets the returned excess.  Another: the employee increases the amount on venders’ invoices and vouchers, after their approval, and keeps the excess.

Another ploy: the false purchase returns.  Here the employee codes a nonexistent return in the name of a friend or relative.  The company then issues a refund check.  For his or her assistance, the dishonest employee pays the accomplice a small sum.

Another favorite trick is to fail to record cash sales and pocket the money.  Cash intensive business without tight controls have to be especially wary.  In some cases more brazen employees steal from the cash register and make changes on the tape.

Mid-sized and larger companies must continually guard against padded payrolls with phony employees, false pay rates and incorrect work hours.  One employee punching two time cards obviously makes for a double-your-pleasure pay day.

Another trick for the quick-witted thief is to steal collections from customers, offsetting the amount with false entries for sales allowances and discounts.

Employees sometimes use outside accomplices to steal large-ticket, off-the-shelf items.  The employee makes a purchase early in the day.  He then gives his receipt to an accomplice who returns to the store, picks up the same large ticket item and goes through the checkout stand where the employee works.  The employee, of course, doesn’t ring up the sale.  If anyone challenges the accomplice, he or she produces a valid receipt.  The employee later returns his purchase and gets a refund.

The dishonest have many other ways to thieve and embezzle, too.  And while the best precaution is to have saintly employees, the employer without direct divine guidance, may want to consider other ways of handling the problem.


Segregating the duties of employees is very important.  Custody of assets, record keeping and execution of transactions should be split among different workers, even in small businesses.

Using pre-numbered documents for all checks, purchases, sales, shipments, receipts, billings and collections is another simple way to foil some schemes.  In offices where computers generate the numbers, employers must ensure that the program will not allow any tinkering with the sequential numbering system.

Frequent comparisons of recorded assets with physical amounts are another way to spot employee cheating before it gets out of hand.  Even random spot checks have a chilling effect on would-be crooks.

Thorough checks of job applicants have also proven valuable to employers.  Although former employers often resist talking about suspected problems of former employees, questions such as, “Would you hire this employee again,” can yield fruitful answers.

Having regular independent audits both discourages and snares embezzlers.  Although the number of embezzlers caught because of audits is only about 25%, if more small businesses had annual audits, the percentage would be much higher.  The knowledge that regular audits occur has a deterrent effect on employees who might otherwise be tempted. But audits can be expensive. So, you can work with your accountant to have them come in and “appear” to be doing an audit, for a fraction of the price.

As my client watched the police cart off his trusted secretary, I asked him if he had bonded her.  He didn’t understand the question. I explained that many businesses routinely purchase fidelity bonds to cover workers who handle cash or securities or have check writing authority.  His insurance man, he said, had never explained that coverage.  In an attempt to cover his losses, my client threatened the insurance agent with a suit for failure to advise him of the availability of fidelity bonds.  My client eventually had to abandon that avenue of recovery because of conflicting testimony.  And since the embezzler had spent or hidden the stolen funds, ultimately my client was left without any meaningful recourse. The employee’s jail time was a small recompense for the agony he had endured.

In a law practice that spans over thirty years, I have seen several cases of embezzlement that proved catastrophic for the businesses.  In each case minor precautions could have averted the losses.

As for my client with the sticky-fingered secretary, he retrenched and resurrected his business.  He has, however, bonded his employees and implemented strict controls.  He says today that he must share part of the blame for his loss, and not because he trusted the wrong person.  His lack of controls was more than a ripe opportunity for an inherently dishonest person: it was a temptation to anyone.  “I can’t make people do what’s right,” he recently said, “but I can make sure I’m not giving them invitations to do what’s wrong.”


Observing employee behavior and checking company records can often aid in spotting theft activity.

Watch employees for:

  •  Sudden lifestyle changes
  •  Personal financial problems
  •  Social relationships with customers or suppliers
  •  Sudden interest in financial aspects of the business unrelated to area of work

Watch books for:

  • Quick or unseasonal drops in profits.
  • Unusual travel expenses.
  • Sudden slow down in collections.
  • Increase in the number of complaints from customers about shipments (missing items or substitutions).
  • New inventory problems.
  • Numerous white-outs and changes in sales slips, accounts payable, accounts receivable, inventory figures, etc.
  • Unusual activity on cash register slips.
  • Spoiled or missing documents.
  • Sudden increase in refunds, bad debts or writeoffs.
  • Unusual credits to one or two customers
  • Discrepancies between daily receipts and daily bank deposits.
  • Increased purchases in disposable supplies.
  • Missing Transaction numbers or using the same transaction number on more than one shipment.

cdavissmIf you have further questions about business related issues, please call our office at 480-733-6800 and ask to speak with Charlie Davis. Mr. Davis, an AV Preeminent attorney is the managing partner and co-founder of Davis Miles McGuire Gardner.  Charlie has over 39 years’ experience in asset protection, business and commercial transactions, real estate transactions, taxation law and estate planning.