(Article originally published in NH Business Review, April 24, 2009)
An incorrect response can be rife with consequences
Q. Esther Siphon always went into the office on weekends to catch up on billing and bookkeeping. Her tireless efforts to manage the business’s accounting records and finances were appreciated by her boss, who had more important things to do – like client development. But Esther had a knack for not only managing the company treasury, but also for methodically stealing the company’s money without detection. The boss’s eventual discovery leads to embarrassment, guilt, and then questions of what she should do with the embezzling employee. What legal remedies exist for the company in this situation, and how should the company respond to the embezzling employee?
A. A company can decrease the risk of employee embezzlement through a system of checks and balances. Embezzlement often occurs in small-business settings where one person controls all the company’s accounting and finances. Comprehensive internal controls can be developed for any business by accounting or other similarly certified professionals.
At a minimum, a company should implement these three measures: require multiple signatures on checks over $500; separate check writing and account balancing responsibilities; and periodically review bank statements and credit card statements for unusual expenditures. Likely buried (if even on) the president or CEO’s priority list, this third task should be performed quarterly because it allows the CEO to see whether anyone in the company has enjoyed Red Sox games at the company’s expense.
If these simple preventive techniques fail, how should the company react?
The “right” response depends on whether the company wants to handle the situation internally or externally, and may depend on pre-existing employment contracts or labor agreements. The decision whether to confront, terminate or do nothing is a difficult one rife with collateral consequences. In every embezzlement scenario, however, the company can and must engage in mitigation techniques to stop asset depletion.
The company should treat the discovery of an embezzling employee to some extent like a lost wallet, think of how the information in your wallet can be used against you and then eliminate that opportunity. Immediately cancel any company credit cards issued to that employee. Eliminate her authority with any financial institution in which the company transacts business. Change all network passwords and restrict external network access. Shut down her computer and segregate it to allow for future forensic searches by an expert. Last, discontinue further communication with the employee.
Civil, criminal liability
After discovering the embezzlement the company must decide whether to seek recovery of its lost money through civil litigation or via restitution in a criminal prosecution. The company’s decision to pursue these legal options should be made in conjunction with the initial response to the embezzling employee. Otherwise, the company may unknowingly weaken a civil lawsuit or criminal prosecution with its knee-jerk response to the embezzler.
The company could file a civil action against the employee to recover its money. One such claim, called conversion, occurs when the employee takes the company’s money without permission or authorization and uses it as her own. If successful in court, the embezzler would be required to pay the employer back all the money stolen.
Recovery of lost company money also may occur with a court’s application of the doctrine of “unjust enrichment.” This doctrine provides the court an ability to create fairness. Specifically, the court recognizes the unfairness of allowing the embezzler to keep money it stole from the company and could order the embezzler to pay back the company.
If a company wants to pursue civil remedies, it is encouraged to engage legal counsel as soon as possible after the embezzlement is discovered. Legal counsel can ask the courts to freeze the embezzler’s bank accounts and other assets to secure an eventual judgment against the embezzler.
The company also may decide to get the police involved. If an employee is found guilty of theft, the court may order restitution or repayment of the stolen money as part of the sentencing. The court will order restitution if it serves to rehabilitate the offender, compensate the victim, and there is no other compensation is available.
The potential to sue civilly does not destroy the ability to obtain restitution. If the embezzler fails to make restitution payment in accordance with the court’s order, he or she may be additionally prosecuted for contempt of court.
A snake-bitten company can apply the right treatment to achieve recovery. The inherent betrayal in these cases increases the stressful decisions required of the company owner or chief executive. The company must act quickly to protect its legal and equitable rights with the assistance of legal counsel when confronted with an embezzling employee.
Neil B. Nicholson, a litigation attorney at the law firm of McLane, Graf, Raulerson & Middleton, can be reached at 603-628-1483 or [email protected]. The McLane Law Firm is the largest full-service law firm in the state of New Hampshire, with offices in Concord, Manchester and Portsmouth.