Investigating Embezzlement: Three Big ‘Don’ts’

Whether you are engaged in a business valuation or a forensic investigation, do you know exactly what to do if you suspect that an employee of the subject company is committing theft?

Darrell Dorrell and Gregory Gadawski provide company owners, CFOs, valuators, and forensic accountants with a check list of how to proceed in fraud investigations. The key procedural ingredient is caution. Here’s why.

Whether you are engaged in a business valuation or a forensic investigation, do you know exactly what to do if you suspect that an employee of the subject company is committing theft? The first thing you should do is realize that something may, in fact, be amiss—trust your intuition on that—but it might be something other than theft.

The worst thing you or a manager can do is take a hasty, haphazard approach to investigating theft. So before you take action, take a deep breath, and read and apply the following advice. Then, if theft was indeed committed, you can demonstrate that you have taken a structured and measured approach that protects your firm, your client, the subject company, and yourself.

The steps that we recommend in this article apply not only to valuators and forensic accountants but to subject company owners and employees as well. That might include executives, cashiers, accounts receivable clerks, receptionists, consultants and analysts—virtually anyone who has a relationship with the company’s money, assets (such as inventory or supplies), time worked, or personal favors. It might even involve former employees, family members, suppliers, customers, and lenders.

The terms embezzlement, fraud, and defalcation can be used synonymously in this discussion, despite distinctions in their definitions.

Do Not Confront the Suspected Employee
Confronting the person suspected of theft is the last step in the investigation—if it is to be done at all—not the first. An early accusation, whether true or false, can lead to defamation lawsuits or, at the very least, an extremely uncomfortable work environment.  It can also give the suspect an opportunity to foil the investigation (by manipulating or destroying records or other evidence, for example) before it begins. You may offend (or worse) an innocent person simply by questioning his or her integrity; you may never be able to regain that person’s trust or level of commitment.

Do Not Terminate the Employee—Yet
The desire to take decisive action is understandable, but hastily doing so may be detrimental to the company. There may be certain advantages in maintaining the suspected employee’s status, because as an employee they might be compelled to take certain actions that will benefit the company, actions which an ex-employee might not be compelled to take. This does not apply to government employees, since, unlike private-sector employees, they cannot be compelled to participate in the investigation. In rare cases, it may be absolutely necessary to immediately terminate the suspected employee—for example, one who serves in a position where continued employment could put others at risk physically, financially, or otherwise. In such a case, document the entire process and advise counsel immediately.

Do Not Share Your Suspicions with Other Employees—Yet
Until you have completed your investigation, do not share your suspicions with other employees unless their cooperation or assistance in the investigation is crucial. Even then, they must maintain strict confidentiality.

You place an arduous burden on anyone in whom you have confided. Shouldering such responsibility is uncharted territory for nearly everyone (maybe including you) and can aggravate an already stressful situation.  You may view the confidence placed in a cooperating employee as a reflection of your trust, but that employee may view the uninvited responsibility as taking sides with you at the expense of relationships with other employees. Consequently, you should take this step only if necessary and after consulting with counsel.

We have often encountered circumstances where other employees become distracted from their regular duties while they attempt to perform their own “rogue” investigations. Accountants are notorious for this transgression, since they sometimes act as self-styled investigators. In every case that we’ve encountered, such actions were detrimental, rather than helpful, to the investigation.

This article was adapted from Chapter 8 of Financial Forensics Body of Knowledge (2012), by Darrell D. Dorrell and Gregory A. Gadawski, with permission from the publisher John Wiley & Sons, NJ. In the same chapter, the authors present several “do’s,” or steps to take when commencing an investigation of suspected embezzlement. For more details, click here.  (This adaptation was first published in the July/August edition of The Value Examiner.)

Darrell D. Dorrell, MBA, CPA/ABV,  CVA, ASA, DABFA, CMA, is a principal and founding partner of financialforensics® in Lake Oswego, OR (www.financialforensics.com). He is a former member of the Editorial Board of  The Value Examiner.

Gregory A. Gadawski, CPA/ABV, CVA, CFE, CIRA, is a principal and founding partner of financialforensics®.