Your First Call Should Not Be to the Police
When I discovered an employee had misappropriated $40,000 of client money, my first call was to a CPA—not the police. I needed someone to review all financials immediately, because when people confess, they often confess only a portion. Think of it like an iceberg—what you see may be a fraction of the actual problem.
Get an Outside Attorney Involved
Even though I practice in this area, I hired an outside attorney. Why? Because I was not objective enough to think clearly. I was dealing with emotions of betrayal, anger, and frustration. An outside attorney provides objective guidance—and if someone later accuses you of mishandling the situation, relying on counsel demonstrates you tried to do what was right.
Secure Evidence Before You Act
I did not fire the employee immediately. I was concerned he would destroy evidence or take information I needed. My first step was contacting our tech support company to back up his computer and preserve his cell phone for evidence. Premature termination can cost you critical documentation.
Build Your Checklist
Work with your CPA and attorney to assess the full scope of the problem and build a response checklist: Which government agencies need notification? Does your insurance policy require prompt notice to the carrier? Are there third parties—clients, regulators—who must be informed? The small theft you know about may signal much more, and extraordinary due diligence is the only way to prevent further harm.
Video Transcript
What Do You Do if You Discover Employee Theft?
Well, one question is, did the employee steal from the company, your clients, or some third party? This is an issue that conjures up a lot of emotions for me. Because I one time had an employee come report to me that he had misappropriated $40,000 of client money. So I will tell you what I did.
What to Do if This Happens?
Step number one, I called up a CPA. Well, first off, I told the employee, you need to put that money back immediately today. The full amount. I then called a CPA and said, I need you to review all my financials. I need to see if there was other theft because sometimes, when people confess something. They confess only a portion of their misdeeds. I was concerned that this might be like an iceberg where I see the tip, and there is a lot more underneath. So I called the CPA and asked the CPA to carefully scrutinize first all of our client money. And then second, any other large transactions in the company, especially related to this employee.
Second, I contacted an attorney, and I said, what is my responsibility here? You might say, why did you contact an attorney when you are an attorney, and I deal with this area on a regular basis. Because I was not objective and enough removed from the situation to think clearly about it. I needed an attorney outside the situation to say, here are the steps you need to deal with. At the time, I was dealing with a lot of emotions of betrayal and anger and frustration, and remorse. I was wondering how did this happen? What did I do wrong? Who could do this sort of thing? It was emotionally, very difficult, and psychologically very difficult to process. And I needed an attorney outside the situation to give me objective advice. I also wanted the protection that comes from relying on the advice of an attorney because if later somebody accused me of handling this in a wrong way, if I sought legal counsel and relied on the advice of that attorney, I have protection under the law that I tried to do what was right. So reaching out to an attorney can provide important protection and demonstrate that you are not being negligent in your duties. By getting legal counsel and counsel from my CPA, I then was able to assess the situation and follow up. And in my circumstances, I was advised that I needed to report the misappropriation to the ethics board, which handles attorney misconduct and misappropriation of client funds. So I then did, in fact, do that.
Your responsibilities may be different. Let’s say; for example, you are the owner of a bank. You will have different government agencies that you may need to report this to. You also probably want to report it to your insurance carrier right away. And that is because in order to have protection under your insurance policy, your policy typically requires prompt notice to the insurance carrier.
Best Advice
If you discover somebody has stolen from you, your company, or some sort of third party, the best advice I can give you is to work with your CPA and lawyer to carefully analyze the circumstances that you are dealing with and make a checklist of what you need to do to properly inform any government agencies or third parties and to mitigate any harm that might come from this. Of course, the small amount of theft that you know about may be a signal that there is more out there, and so it takes some extraordinary due diligence to prevent further harm and further theft.
Do You Fire the Employee?
Most likely. Yeah. But do that with the advice of legal counsel, and usually, you want to be very careful about that. In my case, I didn’t fire the employee immediately because I was concerned that the employee would destroy evidence or take information with him that I needed to get first. So another thing I did is I immediately contacted our tech support company and had them make a backup of his computer and figure out how are we going to get his cell phone so that we can preserve that for evidence. So there is a lot to think about when dealing with employee theft, especially if it deals with a large amount or a theft from a client or somebody else’s money who is in your care.
Conclusion
If you found this video helpful and you would like more educational videos like this, feel free to subscribe to this channel. If you have other questions, put them in the comments below. I am Aaron Hall, an attorney for business owners and entrepreneurial companies. You can learn more about me at aaronhall.com. And if you would like to sign up for our free resources, go to aaronhall.com/free. It was great to be with you here today.