No business is immune from employee theft, but there are ways to reduce the risks.


Jamie Pettiette-Rhone, owner of Jamie’s Therapeutic Touch Day Spa in Palestine, Texas, never thought she could be a victim of employee theft. But Pettiette-Rhone was in her first pregnancy when she made the startling discovery. “I had no idea that this employee, whom I loved dearly, was stealing from me,” she writes to DAYSPA, “but I found out she stole my credit card and lied about it. I called all of the merchants and tracked [the purchases] back to her.” Pettiette-Rhone finally installed cameras in her spa so she could monitor the unscrupulous staffer’s activities from off-site and, two weeks later, the employee quit.

It’s generally not in a spa owner’s nature to be suspicious or punishing of his or her staff, but as Pettiette-Rhone learned, blind faith can have its consequences. The following article, written by attorney Mark Heymann and published in the May 2012 issue of Medesthetics magazine, offers up a solid strategy for preventing unchecked theft at your cherished sanctuary.

With so much focus on increased competition, the risk of lawsuits and diminishing reimbursement rates, there is one financial threat to small businesses that is all too often ignored: employee theft or embezzlement. And it can take many forms, from stolen retail products or petty cash to more complex financial schemes that can rob a facility of tens or even hundreds of thousands of dollars. Typical forms and methods of employee theft may include:
• Stealing cash payments before cash receipts are recorded
• Fraudulent disbursements, such as forging a company check or using a signature stamp
• Submitting inflated or fictitious business expenses
• Manipulating payroll to create a fictitious employee or to inflate pay rate or hours
• Opening a fictitious account and depositing refund checks to a fictitious patient
• Paying a bill twice and pocketing the resulting refund
• Giving a busy business owner a number of checks to sign at once, including an extra one for a fraudulent expense
• Purchasing supplies or equipment that the employee keeps for him- or herself

Theft frequently begins when an employee “borrows” some extra money with the intent of paying it back. When no one notices the missing funds, the employee keeps the money. The need “to borrow” grows and, over time, the stolen dollars can add up to significant amounts. To prevent theft, owners need to place the same focus on how their businesses are managed as they do on client care.

Houston, We Have a Problem

One of the first steps in combating employee theft is becoming aware of the warning signs. Indicators of theft might include an unusual drop in profits, disorganized financial records, unexplained changes to your accounting records, abnormally large or numerous credits given to clients, an increase in balances being written off, missing financial records, bank statements that don’t reconcile with checkbook balances or delays in bank deposits. All owners should ask themselves: “Do I know my business’s internal processes well enough to notice when unusual activity is taking place?” If the answer is yes, does your staff know that you are aware?

Some red flags to look for from employees, especially those entrusted with financial management, are:
• An employee frequently works late and during times when there are few people around, and/or refuses to take vacations
• Sudden and inexplicable changes in an employee’s standard of living
• An employee keeps all financial responsibilities to him- or herself
• An employee repeatedly “forgets” procedures or “doesn’t have time” to follow them
• An employee resents any oversight of his or her work and any changes to financial controls or systems
• All billing and financial management is computerized, but an employee claims the computer is “losing information”
• An employee begins to openly verbalize discontent with pay, and challenges the amounts that others on staff are earning

Code Blue

We are all observers of human behavior and generally know when something doesn’t feel quite right. If you suspect or discover that an employee is stealing from you, take action. The first step is to investigate and gather evidence. Depending on the potential amounts involved, this may be something you can do yourself or you might want guidance from your attorney and/or accountant. The employee involved should be removed from the workplace. This may include placing that person on administrative leave or suspending him or her from the workplace until the scope of the theft is understood. At the very least, the employee should be transferred to another location if possible.

Your employee handbook or policies should have some language that allows for such actions mentioned above in the event it is necessary to undertake an investigation into potential misconduct. The written policies should clearly state that all instances of suspected theft, acts of dishonesty, or other violations of policy or practice will be investigated to determine the appropriate course of action. During any such investigation, the employee may be suspended from the workplace or placed on leave, with or without pay, pending the outcome of the investigation. Additionally, any such misconduct or other violations of policy or practice may result in disciplinary action, up to and including termination of employment.

It is important that you have your handbook language reviewed by an employment attorney to ensure compliance with the law and consistency with your existing policies. All confirmed acts of theft should be reported to the authorities. If the amount stolen is substantial, make a full report to the local police and allow them to conduct the investigation.

If theft is proven, discharge the employee with a clear explanation as to why this is being done. This will help defend against future claims for unemployment compensation or other workplace claims, including discrimination charges, the employee may file. Confidentiality should be maintained at all times to prevent a suspected employee, or even one found to have committed theft, from charging you with defamation of character. This includes providing notice to other employees involved in the investigation—or those who are aware by virtue of their jobs—to not discuss the matter outside of the office. In all instances, it is highly advisable to seek the guidance of an attorney as soon as possible to determine what actions you can take to investigate and what action should be taken against the employee involved.

Systems in Place

Many small business owners feel that the problem of employee theft is addressed simply by terminating the offending employee. It is often easier to blame the theft solely on the perpetrator than admit you might have a flawed system. But business owners can reduce the risk and opportunity for employee theft by fostering a culture of accountability that helps to prevent acts of dishonesty.

One of the most important steps is to ensure that no one employee is ever in control of all aspects of a financial transaction.

Divide job duties to ensure, for example, that the person who receives payment is not the same employee responsible for posting payments in the computer or accounting system, or the one responsible for making deposits. The employee reconciling bank statements should be someone other than the person who writes the checks or makes deposits. If possible, pay bills online and mandate that checks be printed from the computer to leave no room for alteration. Do not use signature stamps for any purpose. If a non-owner is a signer on the business bank account, limit the dollar amount he or she can authorize for payment and require owner approval for larger amounts. Conduct quarterly or semi-annual financial audits of payroll records and more regular audits of cash on hand. Many businesses mandate that vacations be taken and then conduct audits while the responsible employee(s) is out of the office.

Most importantly, communicate to your employees the importance of following proper financial procedures. The issue is not one of trust or mistrust. Rather, it’s a matter of sound business practice. It is also critical to set a good example. If you’re taking money from petty cash on a casual basis, what message does that send to your staff? Maintain a culture of accountability, and make it clear to your employees that you are “minding the store.” This alone will reduce the risk of theft.

When a new employee starts work, review the financial processes and related aspects of the business. Make it clear that any acts of fraud, deceit or dishonesty will not be tolerated. Your good employees will appreciate the clarity in protocol.

Business owners who are willing to review their own processes and communicate openly with staff with respect to financial management will significantly reduce the risk of theft. If you determine the need to make significant changes in your management, utilize your available resources, including management specialists or accountants. These experts can advise you on best practices and help you communicate the reasons behind the changes to your existing staff. Any risk of hurt feelings in the short term is outweighed by the long-term benefits of keeping your business on sound financial footing.

Mark Heyman, JD, is a Burlington, Vermont-based freelance writer covering labor and human resources issues.

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