Replenishing the Company Cookie Jar: Responding to Embezzlement
By: STEVEN Z. KAPLAN
November 2003
Joe, the accounts payable supervisor, has gotten sloppy. He’s forgotten to record a false payable to cover the company check that he generated and deposited to his personal account. A co-worker asks Joe about the transaction and receives an evasive answer that prompts her to investigate further. After finding several invoices to vendors whose names she does not recognize and checks totaling $650,000 deposited to the same account in payment of them, she comes to you, the CFO. You call Sam, the company’s sage counsel, who does the following:
- Retains a forensic accountant to access Joe’s computer and research the company’s payable records before anyone accuses Joe or takes action against him.
- Advises the company to terminate Joe immediately and preclude him from accessing any company records or accounts from outside the office after the accountant finds that Joe has taken $1.5 million and covered these thefts with false payables to non-existent vendors. To make matters worse, Joe has charged the amount of the thefts to customers and included them in the amounts billed to them.
- Reviews the company’s insurance coverage and learns that it lacks any fidelity coverage. Sam then prepares a lawsuit against Joe for recovery of the $1.5 million, plus the costs of investigating the thefts. Knowing that the company has more leverage over Joe if it does not sue; however, Sam calls Joe before deciding to start any suit. He finds him suitably contrite and desirous of making amends. Joe complies with Sam’s instruction to retain a lawyer immediately.
- Agrees to provide Joe’s counsel with copies of the accountant’s report and supporting documents if Joe provides a detailed financial statement and immediately wires substantially all of his funds to his counsel’s trust account pending a final agreement. Appreciating that his best hope of avoiding prison rests in his making prompt restitution, Joe wires the $700,000 that he has on deposit to his lawyer’s trust account and provides the financial statement.
- Drafts, and has all parties sign, a restitution agreement establishing Joe’s $1.5 million debt to the company, his obligation to transfer the $700,000 from his lawyer’s trust account to the company, and his promise to repay the remaining $800,000 by (a) selling his home and (b) paying the remaining balance, with interest. After selling his home, Joe is still $650,000 short.
- Advises that the company is not obligated to notify law enforcement of the thefts and, indeed, doing so may impair Joe’s ability to make full restitution. When Joe’s lawyer asks whether the company intends to contact law enforcement, Sam responds that he cannot discuss this subject.
- Recommends that the company, an accrual method taxpayer, not amend its past tax returns to correct the overstatement of its cost of goods sold. That overstatement was offset by the revenues received from the over-billing of customers, meaning that the company actually reported the correct amount of taxable income in those years. In the current tax year, however, the company will deduct the refunds that it owes to its customers and will also accrue as income the full $1.5 million Joe has agreed to pay as restitution. If Joe becomes unable to pay any portion of the balance owed, the company can then deduct that amount as a bad debt or a theft loss on a subsequent year’s return.
Sam’s actions are merely a few of the possible responses to discovery of a theft by an employee or other trusted person. The facts of each case will require consideration of a host of possible responses, including a referral to law enforcement. The point to bear in mind is that, if your company finds itself with a real “Joe” on its hands, it needs to consult counsel immediately before taking any other action.