Business Fraud and the Trusted Employee

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orange-county-lawyer-hammerBusiness owners are often filled with pride at the notion of employing friends and family in the workplace. Employers treat employees “like family” and often accomplish great things based upon the mutual trust they establish with employees. Unfortunately, the same trust that may propel a company to great success can be its undoing. Business fraud can and often does occur within small businesses. If left unchecked, the most trusted of employees can level great and irreparable harm to an overly trusting business owner.

Workers who are most attentive and likely to follow the rules may be the ones to watch most carefully. This position was advanced in a recent Washington Post article by Ariana E. Cha, who cited a Harvard study for the premise that strict adherence to the rules by an employee may be an indicator of a secret, “Machiavellian” agenda.  See, Washington Post Article by Ariana E. Cha, Dec. 15, 2015.

In 2012, the ACFE or Association of Certified Fraud Examiner’s estimated the median loss for a small organization that experienced fraud was $140,000. In fact, the Association found that small organizations, those with less than 100 employees, are the most likely to be victimized by business fraud. Nearly 32% of all small business experience some kind of fraud. The most common types of inner office fraud include billing fraud, corruption, check tampering, skimming, and expense reimbursement fraud.

Small businesses are especially vulnerable because they often lack the manpower needed to segregate duties and design adequate internal controls. Business owners enlist a small number of trusted employees to handle financial affairs and often do little follow up to ensure financial statements are correct. Employers assume criminal fraud can only be committed from the outside, and that they’ll see it coming long before they suffer any loss. They do not consider that the smiling bookkeeper or associate who greet them every morning can be diverting funds or skimming with expense reimbursements.

Those who commit business fraud do not fit the criminal stereotype. The typical employee thief has worked at a company 4 or 5 years, is in good standing, and is usually a first time offender.  According to the ACFE’s report, 87% of those who commit business fraud have never been charged with a fraud-related offense and 84% have never been punished by an employer for fraud-related behavior. When faced with personal financial stress, even the most trusted employee may submit to the overwhelming temptation to take company money. Some employees rationalize their behavior, believing that the money is a temporary loan that they intend to repay at a later date. Others may resentful, believing that they have spent years attending to their employer’s financial wealth and are entitled to greater financial compensation.

The fraud often begins small with extra charges on a company credit card or money missing from petty cash. Even though business owners may notice some suspicious activity, they often dismiss it, believing that employees would never violate trust. This often results in greater losses for the company as the fraud continues to grow over time.
Many small businesses never report fraudulent behavior. A Business owner may be embarrassed because a particular crime has been committed by a family member or trusted employee. It’s estimated that less than 3% percent of businesses file criminal charges while over 30% of small businesses fall victim to fraud. It can take years for a small business to overcome the loss of income that results from employee fraud.

If you suspect you have been the victim of business fraud, contact us today. Attorney Stephen Hammers has over 24 years experience in general business and real estate law. He understands that fraud has a high burden of proof in our court system and works diligently to document and represent employers who fall victim to fraud. He will work with you to ensure a fair and equitable outcome.

Stephen Hammers
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