BusinessTN

The last thing any business owner needs in a recession is an unexpected loss of money, especially at the hands of an employee. Small business owners tend to have closer relationships with their employees, which in turn can create an atmosphere of trust and a subsequent relaxing of safeguards. But tough times can bring out the worst in a person, and when fraud happens, business owners need to move quickly beyond the shock to limit and redress the damage.

Spotting a fraudster

First, what should a small business owner do if he suspects fraud might be occurring? Mike Costello, principal CPA with Decosimo in Chattanooga, investigates fraud cases. Often, business owners call him in when they suspect something has happened. It could be as concrete as a bogus invoice or as indefinable as a hunch, but at this stage, Costello advises, it's crucial to build up evidence before an accusation. Talk to an attorney immediately, Costello says, and have the attorney write a letter of engagement for a fraud investigator.

"If we can say that we're working for the attorney, any information we find can be protected by attorney-client privilege," Costello points out.

A good fraud investigator will search public records for a suspect's recent purchasing history, looking for major buys and signs of sudden cash flow.

"Many owners think the first thing to do is terminate the employee, but it's actually a good idea to talk with the person," Costello says.

Surprisingly, he says, many embezzlers are willing to admit wrongdoing when faced with the evidence.

"For some people, it's actually a relief," Costello says. "They don't have to keep hiding everything."

That's not to say there aren't risks associated with confronting a suspected employee, according to Travis Parham, a partner in the Nashville law office of Waller Lansden Dortch & Davis.

"Some people say you shouldn't tip off a suspect before charges are officially brought," says Parham, who helps businesses pursue legal options once embezzlement has been discovered. "They have a better chance of covering their tracks if you talk to them too soon."

Ultimately, it's a judgment call, but if an employer decides to talk to a suspected embezzler, Parham advises that the session be recorded. And though Tennessee law allows for only one party in a conversation to be aware that the conversation is being taped, Parham says it's best to notify the employee of the presence of the tape recorder. Otherwise, Parham says, such subterfuge can look bad in court for a small business trying to get as much restitution as possible.

Once enough evidence is collected, terminating the guilty employee is an obvious step. In the meantime, however, certain privileges and responsibilities, such as writing checks, can and should be suspended immediately upon noticing a problem. Both Parham and Costello agree that limiting employee access to the money is a crucial way to stop the bleeding without leaving a business owner open to claims of discrimination.

Getting the money back

Getting the money back is important for a business that suffers fraud, especially if it wasn't insured for such losses. Fees for accountants and attorneys, as well as court fees, can expand a business' total loss well beyond what was stolen, and as Parham points out, "Money budgeted for payments to vendors or taxes is particularly vulnerable. You still owe that money whether you have it or not, and late penalties can apply."

Business owners should brace themselves for continued loss, rearrange budgets as necessary, and above all, record how much time and money the fraud is costing them. Most of the loss from embezzlement is tax deductible, and if the culprit can be brought to justice, extra loss can be counted against him or her.

"Sadly, in most cases of fraud, the perpetrator was using the money for immediate needs, paying bills or otherwise disposing of the income in a way that will be impossible to get back, even under a conviction," Parham says.

If one needs the money back fast, Parham suggests a civil suit. Often, in terms of restitution, a civil case will yield better results than criminal prosecution. In a civil trial, it's relatively easy to freeze whatever assets the embezzler may have purchased with company money, and such trials often move faster than criminal proceedings. "People tend to fight a civil suit less aggressively than criminal charges that involve jail time," Parham says.

Even in a worst-case scenario, a court can still issue an order of restitution that includes a lump sum to one's business, rather than a garnishment of wages over time. Most people convicted of fraud won't have the money on hand to pay it back, but the money will still be owed.

"If this person comes into a great deal of money suddenly, say from an inheritance or lottery, you can have a claim to that," Parham says. "It's not perfect, but at least there's a chance some of that money will come back to you."

Losing money or resources due to acts of fraud by a trusted employee can feel like a personal attack, but the owner needs to stay focused on the damage to the business. By staying calm and acting decisively, the owner will best mitigate that damage, allowing the business to bounce back all the more quickly.