Fraud at the Office? Should You Prosecute?

August 11, 2014

When an employer discovers employee embezzlement or fraud, there is often a quick settlement consisting of restitution and resignation by the wrongdoer, but no report to law enforcement.

In fact, 35 percent of employers who experienced employee fraud did not refer the case to law enforcement, according to the latest report of the Association of Certified Fraud Examiners in 2012. The reasons they gave were:

1. Fear of bad publicity (38.3 percent)

2. Sufficient internal discipline (33.3 percent)

3. Private settlement (20.5 percent)

4. Cost (14.5 percent)

5. Lack of evidence (8.1 percent)

6. Civil suit (3.3 percent)

7. Perpetrator’s disappearance (0.7 percent)

The median loss in cases not referred to law enforcement was $76,000, compared to $200,000 for those cases that were reported.

But, in many cases, a quick settlement without a thorough investigation may be the worst thing to do.

Potential wrongdoers may be emboldened if they believe that the worst consequence they may face is job loss and restitution, particularly if they believe they can conceal their thefts for an extended period.

The discovery that a business failed to prosecute a wrongdoing employee can raise questions about management’s judgment and integrity among business partners, customers and sources of capital.

Take the case of a school district that discovered embezzlement by its chief business official. The district did a quick investigation and determined that the amount of the thefts was roughly $250,000.

After consulting with counsel engaged by the district’s superintendent, the school board quietly decided to accept restitution of $250,000 together with the official’s “retirement.” The theft was not reported to the police nor disclosed to the public.

But the matter did not end there. Nearly two years later, an anonymous letter circulated among the district’s residents not only disclosed the embezzlements but alleged that the total was far larger than originally believed – perhaps exceeding $1 million.

The school board was forced to acknowledge the events of two years earlier and to defend its decision not to press charges or disclose the thefts to the public. The initial disclosure was followed by a torrent of further disclosures, each more troubling than the last.

The district attorney, belatedly brought in to investigate, began to uncover a pattern of misconduct that stretched over several years and went far beyond the “retired” business official, who soon was facing charges for the originally discovered thefts as well as the newly uncovered wrongdoing.

The business official not only had stolen money outright but had used district funds to make payments on her mortgage, car and other loans, to buy materials for a family-owned business and to travel to Las Vegas.

The district superintendent was forced to resign and was himself arrested after auditors found that the district had paid $800,000 to a software company with an address that matched his.

In total, the district’s auditors identified suspicious expenditures of more than $7 million. By failing to act promptly when the initial embezzlement was discovered, the district created precisely the bad publicity it had hoped to avoid, only to a much greater degree than it could have imagined.

The discovery that a business failed to prosecute a wrongdoing employee can raise questions about management’s judgment and integrity among business partners, customers and sources of capital.

While this episode involved a public entity, where issues of public trust are particularly sensitive, efforts to sweep employee fraud under the rug can have adverse consequences in the private sector as well.

Of the 390 cases reported to law enforcement in which an outcome was known in the 2012 ACFE report, 55.6 percent resulted in a guilty plea and 16.4 percent were convicted at trial. Another 19.2 percent declined to prosecute. In only six cases was the suspected perpetrator acquitted.

In nearly half of fraud cases, victim organizations do not recover any losses.