Employee Theft: How to Investigate

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Bjorklund: You're a business owner--you suspect one of your employees as stealing from the company--what do you do next? My guest on today's AllBusiness podcast, Charles Sterck, is a CPA and auditor and business development specialist with the accounting group, Sterck Kulik O'Neill, where he's the managing director. Besides being an expert on tax planning and business development, he advises clients on how to investigate employees suspected of theft. Welcome to the AllBusiness podcast, Charles.

Charles Sterck: Well, thanks for inviting me, Chris. This is very exciting.

Bjorklund: In preparing for the show, I did a little homework--and I learned that employee theft is a much bigger problem than I had imagined. In fact, one source that I read said, that between theft, fraud and embezzlement, all that costs businesses more than 50 billion--and that's with a "b," billion dollars--a year and that it's going up every year. And I also learned--and this, maybe, didn't surprise me quite as much and that is that employers are often reluctant to play Sherlock Holmes themselves and investigate and take action when they think someone within the company is stealing from the company. So, Charles, what do you think are some of the reasons for that reluctance?

Sterck: I have, over the period of working in the area of accounting, auditing, business development--almost 30 years--seen a lot of circumstances where there is suspicion, there is actual fraud or theft or embezzlement and the reactions among business owners have varied all over the place. And some people, honestly, believe it or not, are simply too busy to want to stop and look at something--they live in denial--I guess that's what I'm saying.

Bjorklund: I would imagine that's pretty common.

Sterck: Yeah, because it's just too convenient to pretend that it's not happening or that it's so little, it's not worth looking at, it's not a big deal--some people don't like to be rude. And I know that the idea that somebody's stealing from you is pretty rude--in fact, it's very rude.

Bjorklund: And it leads to a confrontation, perhaps.

Sterck: Which is another thing that people like to avoid--confrontation. So between not wanting to be rude and finding that they might be wrong, having a confrontation with what you think is a valued employee, being too busy, being afraid that the person that you confront is wrong altogether and that you might do permanent damage to an otherwise wonderful relationship--these are just wonderful reasons to just live in this place of denial that I said earlier.

Bjorklund: And, "No thanks," basically, "No thanks, I'm not getting involved," would be the employer's first reaction.

Sterck: It could be. But because of all of these other things and because they're too busy, it's that, "Hey, it's not that big a deal, I'm just not going to look at it," and then finally, we live in a very litigious society--and you go in and accuse somebody of something so heinous as fraud, embezzlement, theft, that employers are going to stop and think, "Gee, could I be sued for this?"

Bjorklund: Oh, that's a frightening thought. And when it comes to your rights as an employee or employer, I would. either one, are the rights more on the side of the employees? And what are some of the protections, if any, they have?

Sterck: Well, California is very pro-labor and not necessarily on the employer's side. And what we're talking about here, in terms of that question--which I think is an excellent question--is really, really huge. Discrimination is huge, I think, come to the table--you have to treat everybody exactly the same. And besides discrimination, there are just so many other issues to be taken into consideration when it comes to law. I'm not an attorney, so, I'm a little reluctant to tread too deeply into these waters, but when I think about the Labor Acts and the laws, I will tell you, California is very pro-labor.

Bjorklund: Right.

Sterck: . on the side of the employee. So, as an advocate of an employer, I would say you have to be very careful when treading on these grounds.

Bjorklund: What about. are you familiar with any of the federal laws? We do have a national audience and so, maybe, something like a polygraph law that allows employees to be tested or choose not to be tested, do you know anything about that?

Sterck: I have to admit that I'm not an expert in this area but I do. what I do know is that everybody has to be treated the same. So, for example, if you're in an interviewing process and you do, for example, drug-testing to your people, you can't decide, "Well, I'll drug test this one, but not that one--because I have other reasons why I don't want to test or need to test this one, but I want to or feel like testing the other one," it doesn't work that way.

Bjorklund: "Even playing field," then.

Sterck: Absolutely.

Bjorklund: . everybody treated the same.

Sterck: Exactly. Which will get us into some discussion a little later on, I think, about procedures, internally, within the organization and some of the things that you might want to do to protect yourself against the eventuality or horrible possibility that you might be involved in a theft, embezzlement or fraud.

Bjorklund: And before we get in to the nuts and bolts of proceeding with an investigation on your own, can you talk about some of the differences between fraud, theft and embezzlement--there must be some specific definitions?

Sterck: Well, there probably are very technical definitions, but I'm going to be very pedestrian because I think we're dealing with "everyday, mom & pop business owners" here and a theft is, normally, a situation that is isolated--you know, you walk through a store or a kid walks through a store, they see a candy bar, they don't have a quarter, they slip it in their pocket, they're gone--that's theft. Now, that's a situation where you don't work for somebody--you're stealing something from another person that you don't work for. A theft can happen at work--I mean taking a pencil from work.

Bjorklund: I was going to say, "Is it pencils and paperclips?"

Sterck: I mean, if you want to really go be technical about it, "Unless you're using it for business, you're stealing from the company." Now, is it a big deal if you do something about? Probably not. But, what about software? I mean taking a piece of software form a business--I mean that's a theft.

Bjorklund: That's theft.

Sterck: As far as I'm concerned. So, I think of a theft as a one-time occurrence. It's an opportunity that presented itself--you took it, stuck in your pocket, you're done, it's over--whether you work for the organization or whether you don't. Now, an embezzlement is something, I think, substantially different from a theft--and in order to embezzle, you have to--you must do certain things to cover your tracks, that it isn't a one-time "slip in your pocket, walk away," you have to think about the ramifications and the negotiations and the people involved down the road, so that you can, on a repeated basis, typically over time, do something that is harmful to the organization. Embezzlement, taking money is the typical kind of thought that one thinks of when you embezzle.

Bjorklund: You have to cover your tracks, too.

Sterck: You've got to cover your tracks.

Bjorklund: That's part of the scheme.

Sterck: That's right. And so, beside the fact that you have to think about covering your tracks, you think about how you can set up a process given the internal systems of the organization so that you can, over time and repeatedly, take from the company. Now, that, by definition, means that you have to work for the company. So, here's one distinction--a theft, you don't need to necessarily work for an organization--but in order to embezzle from a company, typically, you'd have to be an employee of that organization.

Bjorklund: That's an important distinction.

Sterck: I think so, which leads us to the last one and that is fraud. The technical definition of fraud includes a phrase that says "with the intent to deceive," so, when you're committing a fraud, there has to be deception involved. And so, what's "deception?" There could be employee fraud, there could be employer fraud. We've heard of that, right? Enron, where the executives have "cooked the books," shall we say? These kinds of activities are conducted specifically with an intent to deceive somebody else. So, again, I think with fraud, that can happen anywhere--there's insurance fraud, people burning their houses down, right? You are intending to deceive somebody else--your insurance carrier in this case. If you're an employee or an executive officer within an organization and you're trying to make the numbers look great, then you cook up a scheme where you'll have false contracts, whatever and again, you're trying to deceive somebody. So, with fraud, there's a deception; with embezzlement, it's a process that happens over time--you have to be employed at the establishment, and with theft, it's typically a one-time shot--maybe you're employed there, maybe you're not.

Bjorklund: What about selling trade secrets? Is this a growing problem and almost another category unto itself, you may be selling some inside information to a competitor, let's say.

Sterck: Yeah, I think that this is something, Chris; that is getting bigger and becoming a bigger and bigger issue. So much of our world, over the last 20 years, has become intellectual rather than tangible. You know, once upon a time you go and buy a car, there're all kinds--even you, so heavily involved in consumerism, you know what I'm talking about when I say that. But nowadays, so many--so much value in organizations has to do with intellectual property, shall we say. And so, this is absolutely a growing problem and a growing issue for organizations and I think that in order for any organization to protect themselves against this kind of risk--that is, specifically, the risk of losing trade secrets--is to have policies and procedures in place within the organization so that everybody--again, we are saying the same thing again, is treated the same way and functions under the same rules, regardless of their position in the company. And a lot of entrepreneurs just take comfort, going back to the denial piece that we talked about earlier, in saying, "You know, this is a trusted employee," "He's been here for a long time," or maybe, "This policy doesn't apply to this person," and I think that sets the company up, because, now, all of a sudden, you're not treating everybody exactly the same way--when you go to defend yourself, you're backpedaling, you start at the bottom of the hill trying to climb your way out by saying, "Well, you know, yes, we did apply it," "Well, OK, we didn't in this case but there was a reason for that," and now, all of a sudden, it looks discriminatory--you just start pedaling backwards--"one step forward, two steps back" sort of thing. And I would also want to add, in the last point in this issue of selling and protecting trade secrets, is that some employers are actually taking to buying glue and squeezing them in to the USB ports--you know what I mean by "the USB ports?"

Bjorklund: Oh, yes.

Sterck: The back of the computer?

Bjorklund: Yes, yes, yes.

Sterck: I mean, you can get a USB card, stick it in the back of the computer and just take two "gigs" of information, you know, just like that. And so, aside from the fact that, I suppose, you can buy computers without USB ports in it, to the extent that they are in some companies--I actually know of organizations that go buy and stick glue in it, so that nobody can do that.

Bjorklund: Very interesting.

Sterck: Isn't that interesting?

Bjorklund: Well, let's talk about some of the people within your company that maybe are suspect, how--are there any telltale signs? I know that we don't want to believe this--we're in denial--but let's say, we're in less denial, now and what would be some of the signs you might look for if you thought some employee is somehow involved in an embezzlement or, let's say, a theft or a repeated theft?

Sterck: Yeah, that's a fun place to go. I think that people who steal, particularly ordinary people working for ordinary organizations, over time, give themselves away. You know, the first time they do it, they're scared to death, their palms are sweaty, they've got beads on their forehead, right? You could imagine that vision.

Bjorklund: Heart--

Sterck: Heart palpitating.

Bjorklund: Pumping, yeah.

Sterck: The next time it's a little easier; the third time is easier and easier and easier. And pretty soon it's, "You know what? I could do this, it's no big deal." And it gets bigger and bigger and bigger. And so, I think that in those situations, it's not unusual to find that these people's lifestyles start to change. Well, you know, let's face it--we're all grownups, we live in a real world, we know what people make--if we've worked with somebody for any period of time, you know what their lifestyle is. If they start living beyond their means, I think that's a little bit of a sign, "How is this happening?" "Did they inherit something?" "Did they win the lottery?"

Bjorklund: New clothes.

Sterck: New clothes, new cars, super friendly with your vendors, maybe. Or, perhaps, when the delivery people come, they make a physical move to go out there and interact with that person--when, maybe, it's not part of their normal function. And I said earlier that people give themselves away and I have seen this before--where people's lifestyles just changed right in front of your face because, you know, you get away with it so many times, that pretty soon, they forget that they're not doing something right. And then there's the other side of the coin where somebody--it's an isolated incident where somebody happens to be in trouble, maybe they have a medical bill for a child or something that's really dear to them and they just need a couple of thousand dollars and so, they get a check that belongs to the company and they kind of "borrow" it.

Bjorklund: Yeah.

Sterck: Go and deposit.

Bjorklund: They're going to `borrow' it, that's what they think.

Sterck: And they're going to give it back.

Bjorklund: Yeah.

Sterck: They're going to give it back. And the next check that comes in, they cover up the first check with the next check.

Bjorklund: Yeah.

Sterck: This is called "kiting," actually. I mean there's a word for this.

Bjorklund: Yes, yes.

Sterck: Where you--covering up, covering up--and so, not everybody sets out with the intention to steal, but eventually, it gets so big, that they feel like they just can't recover from it. So, that's just another situation. Now, I actually have several situations where people have stolen and as a matter of policy, I would tell business owners that everybody on their team should absolutely go on vacation every single year. Now, you might say, "What's the big deal about going on vacation? And why would you want somebody to leave your premises when they can be productive and make money?" Well, the fact of the matter is that if somebody has set up a system to steal from you, they can't do it while they're on vacation. Somebody else comes in and takes that position. Cross-training will also help with this, where you move around.

Bjorklund: That's a good idea.

Sterck: Move around functions; and I know, Chris, that in another session we'll talk about how to prevent this, but it just so happens that this issue ties in to a circumstance where somebody was forced to go on vacation and this kind of defalcation was uncovered. In another situation that is real to me, in that it happened to one of my clients, is one of the employees had a heart attack, well, guess what? They can't come in, you know, somebody else takes over and, "Oh, my goodness, look at all of these!" You know? So, it's important that people, you know, for other reasons too, need to go on vacation, health-wise and so forth, but when we speak to this issue of defalcations, theft, embezzlement or fraud, I think it's really important that people take their time off and go away. So, another example about lifestyle change--and I'm not sure that it fits here so well--but as I start thinking about client situations, it's just that they're just so many to speak from that I don't know where to stop. So, maybe this would be my last story now.

Bjorklund: OK, that's right.

Sterck: But.

Bjorklund: We like your stories.

Sterck: I talk about businesses that live in denial and I had a client who had an assistant who had an assistant, still does, and this assistant took care of everything for this person and this person loved it--still does. Loves it, loves it, loves it. And I said to my client, I said, "You know, this one person has entirely too much control and access to too much information, given your lifestyle," and what I mean by that is this person just loved to travel, travel there, go away, be away from the office, because all he had to do is pick up the phone and call the right-hand person and say, "Would you do this for me?" "Would you do that for me?" "Would you take care of this?" Would you take care of that?" And this person had passwords and access to credit cards and paid the bills and got the bank statements--I mean you can see now.

Bjorklund: Yes.

Sterck: What amazing access--and I say.

Bjorklund: And not a lot of oversight, really, not--no attention span for the oversight.

Sterck: Almost none, whatsoever. And why? Because this person lived in denial, because it was just convenient; and I said, "I don't like this at all," and so, we looked at something and, sure enough, this employee was up to something and my client said, "I am SO surprised!" and I said, "You are NOT surprised!" You know?

Bjorklund: Yeah.

Sterck: "You knew this. It was just that it served you conveniently." And I think that business owners have to step back and say, "How much is this convenience worth to me?"

Bjorklund: Let's get into some of the nuts and bolts now about, let's say, there isn't a suspected employee and, I guess, Decision #1, tell me if I'm right, is, "Do I investigate it myself or use a--" meaning an internal auditor or, "Do I bring in an outside investigator?" Are there some things to consider there?

Sterck: I think so. I think that business owners are not Sherlock Holmes; I think that because the rules and the laws are such that they are pro-employees, you have to be careful about what you do--especially smallish, medium-sized businesses that don't have policies and procedures to treat everybody equally. But, nonetheless, I'm not suggesting that if you think something's going on, that you would just leave it alone; but I think it would be prudent for somebody to go out and get help. But the first question is, is how much work do you do yourself; and that's what you're saying.

Bjorklund: That's what I'm asking.

Sterck: And I think that it really depends on the situation--I think that you do the best you can with the tools that you have given the policies and procedures and the kind of organization that you have and then you pick up the phone and you say, "Help!" to somebody.

Bjorklund: Right. What about--you know you've got a problem--so, you've started with that--maybe you need to quantify that problem and how much do you inform your management team? What are the next steps?

Sterck: That is--it really depends on the organization. And whom you involve, I think, is--this is a great question--I can't say that you involve only the owners, I can't say that you should go owners and management team; it really depends on how large your organization is, what's at risk, what is going on with that specific person that you're suspecting; so, I really do, I come back and say, because there are so, so many variables, that I would stop, I would gather some information and then reach out either to an attorney, a labor attorney or to some other professional to get on your side, to be on your team--perhaps your insurance carrier.

Bjorklund: I would think that there're some guidelines to follow with regard to confidentiality.

Sterck: Yes, I mean, falsely accusing somebody of something like this, I think, goes back to this--all these laws that we are talking about. You know, "How dare you accuse me of such a thing," and again, I say here that this is why we should have written policies and procedures, so that everybody is treated exactly the same. And furthermore, if you do find that something is going on, I think that what you should do is document, document, document, document.

Bjorklund: Oh, yeah.

Sterck: Document, document, document. You can't document enough. And now, why do we want contemporaneous documentation? And my answer to that would be that it is harder for an individual involved in a defalcation to cover up the defalcation so well in an investigative process, if you're documenting what's going on and then you get the right person to go over the documentation. And that person, as I said earlier, always gives himself away--we'll find inconsistencies.

Bjorklund: Yeah. Things won't match up.

Sterck: That's right--their statements won't match up--they won't make sense.

Bjorklund: There'll be different accounts of the same.

Sterck: Situation.

Bjorklund: Let's say, situation--the same procedure may have various accounts by different employees. And so, you'll see that some match up and then, one doesn't.

Sterck: Right. There'll be conflict within the stories and if you document--now, I know this is a hard thing for people to do--it's like you're sitting here, you're listening intently and you want to believe this person; you don't want to think bad of them; you're not going to sit there with a pencil writing and writing, "What's going on?" And then, when it's all said and done, the phone's ringing or some payroll needs to be called in--I mean this is a typical business owner.

Bjorklund: That's right.

Sterck: They don't take the extra 15, 20 minutes--God forbid--it'd be half an hour to sit down and type out everything that happened.

Bjorklund: What about witnesses? Should you have these statements signed by witnesses? Is that important?

Sterck: It would be nice--I think that getting other people involved is a tricky, tricky, tricky thing to do.

Bjorklund: Word will get out, too, right?

Sterck: It does get out.

Bjorklund: Employees are going to start talking to each other, "Hey, have you been in there?"

Sterck: Always.

Bjorklund: "Have you written a statement?" "What did you say?"

Sterck: Yeah.

Bjorklund: You can just hear it now.

Sterck: Always, always, always. And so, if you go through a process which we have done, where we gather information, it'd better be done right now--one person after another so there's no time.

Bjorklund: Right.

Sterck: For anybody to start to share stories. But I will tell you this, people within organizations that are not involved in a theft are highly reluctant to get involved and to point fingers. Imagine, hold up your hand as if you're shooting a gun or pointing at somebody; look at your hand and see what you see--you see one finger pointing to a person and you see three other fingers pointing back to yourself.

Bjorklund: Yeah, I remember that advice coming from my mom.

Sterck: Yeah. So, this is a big reason why people just--"I don't want to get involved, because I certainly don't want the spotlight on me."

Bjorklund: Well, they're afraid of retaliation, perhaps, by the fellow employee?

Sterck: Well, I hadn't thought about that, but absolutely. You don't know what these people are capable of.

Bjorklund: People don't want to be thought of as snitches?

Sterck: Desperate people do desperate things.

Bjorklund: So you're saying that, sometimes, the interviews with the employees that follows--you have your documentation, that written statement--sometimes you do a personal interview or you have hired someone from the outside to do those interviews. Let's say you've found, now, some pretty conclusive evidence that this particular employee is the one involved in the theft, in the embezzlement, in the fraud; what do you do now? Is there a "Come to Jesus" sort of meeting, so to speak; is there a one-on-one with that employee where you make the accusation?

Sterck: And then what do you do with that person, right?

Bjorklund: Yeah.

Sterck: You're saying that you know that this is going on--now what do we do?

Bjorklund: Yeah, "What do we do?"

Sterck: This is a really tough one--I think that person needs to go, I really do. By that same token, I also believe that everybody deserves a chance--people make mistakes and they have a chance to redeem themselves or they should have an opportunity to redeem themselves. And so, while I completely believe that people should have an opportunity to redeem themselves, I think it's poisonous, venomous, to have a person within your organization that everybody knows stole from you. And without proper management of the situation, everybody else. just imagine what everybody else on the team is going to think: "You know what? "It's OK to steal from here."

Bjorklund: Right.

Sterck: "Because nothing's going to happen." And so, if by virtue of some situation that you can or want or should keep this person around, I think that the key to making that kind of situation right is communication with the other team.

Bjorklund: Yeah. Do you find that sometimes an employee will confess when there's enough information found against them that they will come forward?

Sterck: Yes.

Bjorklund: Based on your experience?

Sterck: Absolutely.

Bjorklund: And what about the use of polygraph test, do you believe in that lie-detector test as a further confirmation that this employee is lying to you?

Sterck: I have seen and heard of people taking polygraph tests, but I haven't been close enough myself to know how accurate they are; but I am told they're extremely accurate.

Bjorklund: What are the chances of employers recovering their losses?

Sterck: Well, that's a really interesting question. Some employers have insurance coverage for this sort of things, some people don't. Insurance companies are not interested in sending people to jail--what they want is restitution because they have to pay out and so, it isn't uncommon for an insurance company to say, "Hey, pay me back and this issue will be gone," and if they don't pay back, then we're talking about prosecution. So, it really depends on whether this individual is able to come up with the money or not.

Bjorklund: You were talking about giving people another chance and yet, I've read that many of these people. it is a pattern--it is a behavior pattern--it can be a mental health issue, an actual disorder of some sort, where there's an addiction to stealing or coming up with these schemes--based on your experience, have you seen that employers do often attempt to give these people another chance?

Sterck: No. I think, more often than not.

Bjorklund: And you would advise against it?

Sterck: I would advise against it. As much as I think that everybody deserves to be redeemed, I think they need to go--I think they're poisoning your organization--and I think you said something just now that happened to another one of my clients; and that is, there's an individual who, we later learned. this is a pattern, of this person, he goes from one company, creates havoc, causes financial problems, takes what he can--it's amazing--moves on to the next one and nobody prosecutes. It's just pretty awful. And so, I think the bottom line is this.

Bjorklund: Yeah, I want to hear the bottom line, before you go.

Sterck: That if you have evidence of anybody involved in any kind of defraudation in your company, you should sever the relationship and see that the perpetrator cannot do it anymore--take a look at your internal systems and policies--which we can talk about during another session--this is kind of a fun thing to do--and let everybody in your company know that it was not OK.

Bjorklund: And don't give them a positive job reference to the next employer? I guess that's another topic.

Sterck: It is.

Bjorklund: Anyway, thank you so much, Charles, for being with me today--I'm hoping that our discussion is going to be a big help to small businesses who are really struggling with what to do about an existing employee theft problem.

Sterck: I hope so too, Chris, and this was very, very fun for me. And if we can reach out there and connect with a handful of people and help them avoid a defalcation, I think this would have been very successful. And I hope to sit here and do more of these sorts of things with you so that we can help educate business owners, because I think they need a lot of help.

Bjorklund: Thanks again, it was a pleasure.

Sterck: Mine too.

Bjorklund: Our expert today in this AllBusiness podcast has been Charles Sterck, CPA and auditor with the accounting group, Sterck Kulik O'Neill. If you would like to get ahold of Charles, you can reach him at his website, www.skocpa.com. And if you're interested in giving us feedback on this show or would like to recommend guests, send your email to podcast@allbusiness.com. I'm Chris Bjorklund, thanks for listening.