Employee fraud is estimated to cost U.S. businesses $1 trillion a year, equating to 7% of company revenues. Small businesses are particularly vulnerable to employee fraud because they employ limited controls over accounting & treasury functions. The median loss suffered by organizations with fewer than 100 employees is $200,000.
Creating a zero tolerance environment, performing regular bank reconciliations, running surprise function audits can help mitigate the risk of employee fraud, but what to do in the event you uncover one of your employees has been stealing from you. Here are a few things to consider:
1) Terminate the employee to set an example of zero tolerance. It is estimated that 80% of employees who steal, do so because they feel they can get away. Expelling an employee, even for a small infraction, can set the tone that there will be repercussions thus curtailing employee appetite for fraud.
2) Estimate the amount of the loss. This is crucial step to determine whether it’s worth filing charges and pursuing recovery. When large dollars are at stake, it is best to consult with an attorney to file criminal, and or civil charges. Fraud is a criminal offense punishable by incarceration.
3) How about filing a civil lawsuit to recover the funds? In most cases, the fraudster would have already exhausted the embezzled funds, and will have negative equity. You may force liquidation of his personal assets by filing expensive lawsuits, which you may or may not win. Proving fraud in the court room requires confession by the fraudster, or non-assailable evidence.
Even a victorious lawsuit does not guarantee recovery. At the end of the day, if the fraudster has little equity, then your net recovery may be negative due to the legal & accounting fees you incur, in addition to the time and energy diverted to the lawsuit.
4) However, there’s a sweet and legal way to render some justice. Send the fraudster a 1099 Form for the amount of the embezzled funds and for an extra kick, label the source as “FRAUD EARNINGS.” After all, these are funds earned by the employee, although illegally and criminally, and the fraudster is liable to pay taxes on them.
The beauty of the 1099 is that it will put the criminal in the hands of the IRS. Let’s not forget that Al Capone was convicted for tax evasion and not for his criminal acts.
The best way to fight employee fraud begins with good controls. In the event you become the victim, consider the likelihood of funds recovery before expending more funds in fighting a lawsuit. The best way for revenge is to simply send the criminal a 1099 and put him in the hands of the IRS.
