An Employer’s Worst Nightmare: Discovering an Embezzlement

An employer’s discovery of an employee’s embezzlement can be devastating. However, if proper steps are not taken after discovery of an embezzlement there could be even more devastating consequences.

Discovery of embezzlement for a small business can be akin to discovery of a cheating spouse, a total breach of trust, leaving a business feeling exposed to its innermost workings. In fact, many times it is the “trusted” employees who are given wide discretion and authority in administrating their employer’s finances. This could be a lethal combination if certain controls aren’t in place.

Once an embezzlement is discovered, quick action on behalf of an employer could mitigate a disaster. The below listed steps should be taken by employers. Although certain embezzlement cases require certain steps to be taken in different priorities, the important factor is prompt action.

1. Depending on the facts and circumstances of the embezzlement, an embezzler should, at a minimum, be suspended pending an investigation. Just as important is to strip the embezzler of all authority, control and access to employer accounts (i.e., bank accounts, line of credit accounts, payroll accounts, and other accounts the employee had access to).

2. Notify all financial institutions that are involved with the employer of the employee embezzlement so that financial institutions take proper action.

3. Engage in-house auditors or accountants for a forensic accounting to discover what the extent of the embezzlement. This may take weeks or months depending on the complexity of the embezzlement, but early evidence auditors or accountants provide can help the police and attorneys in freezing the embezzler’s assets as discussed below.

4. Contact the police immediately to report the fraudulent action. Although an employer may not know the extent of the embezzlement, it is still imperative to notify the authorities, so that the police could start its own investigation. Many times the proper authorities may seek to freeze an employee’s financial assets. An embezzlement in Michigan reaches felony status when an employee steals more than $1,000. Chances are the authorities will not immediately bring charges without its own investigation into the extent of the embezzlement.

5. Contact an attorney immediately. In certain instances, an attorney could seek court intervention to freeze the embezzler’s ill-gained assets. Many times embezzlers will go on a shopping spree, especially if they see that their fraudulent activities are exposed. Therefore, if an attorney is successful in persuading a court to justify an asset freeze, an embezzler maybe more reluctant to spend the employer’s ill-gained funds. On the other hand, depending on the facts and circumstances of the embezzlement, attorneys could seek damages against financial institutions based on their careless handling of an embezzlement scheme.

6. Notify an insurance carrier if the employer has ’employee dishonesty’ or ‘forged instrument’ insurance coverage so that the insurer begins its internal process. An employer should read in fine detail its insurance policies so that it complies with all conditions and obligations.

Again, the steps noted above should be taken as soon as possible to try to minimize damages caused to businesses. Many times businesses feel paralyzed when dealing with such an issue and don’t know who to turn to first. It is important to seek legal action so that any ill-sought funds are frozen and returned to the proper owners.

This is generic advice based upon our handling numerous cases like this, but an attorney should always be consulted because each case has its own particular facts and conditions.

Peter Gojcaj specializes in business law, labor and employment law, bankruptcy, collection, creditor rights and lemon law at Bloomfield Hills, Mich.-based Beier Howlett law firm.