Tax Professionals: How Do You Protect Your Practice and Clients From Dishonest Employees?

This morning, I was reading an article in last year’s EA Journal about an EA who discovered that one of his employees had been stealing his clients’ refunds. It was a stunning revelation to this employer, because it had been going on for at least two tax seasons (2010 and 2011) without his knowledge. 
How did he do it? By entering his own bank account number in the electronic refund area of the tax return. And initially, by only diverting the refunds under $500, counting on the fact that those clients wouldn’t notice. Unfortunately for him, he also stole one refund of about $4,000. That woman definitely noticed. Her inquiry started the whole investigation. (Yesterday, a client called about his missing $80,000 refund. Just imagine if my employee had stolen that! Thank goodness, it’s still being processed due to correspondence about his dependent.) 
This EA’s attorney advised him to look back to prior years, to determine the extent of the theft. The EA was to prepare a spreadsheet of all the stolen deposits, compute the interest due to all those clients –- and to go file a police report with this proof in hand. 

We’re not going to talk about the prosecution or the case. What I’d like to focus on is prevention and responsibility. 
Let's start with responsibility 
Is the employer responsible for the stolen funds, with respect to his client? You betcha! If someone working for you steals from your clients, or commits identity theft, or does anything else illegal or nefarious –- the buck stops on your desk. So, make sure that you have a solid business liability policy, including coverage for employee misdeeds. Read over your current errors and omissions and/or malpractice policy to see if you are covered. If not, start shopping around for better coverage, or add a business liability policy with coverage high enough to replace the value of all your assets. 
After all, even if your clients were not aware of the theft, you will have to repay them –- plus interest. And even though you make restitution, many of those clients will never trust you again. They will leave. So, that’s another problem you’ll have to deal with. In fact, word of mouth spreads like wildfire about something like this, especially in small towns or tightly knit communities. Uh oh!

How can you prevent this? 
The author of the article, Ruth Rowlette, EA and attorney, makes a number of suggestions. They all boil down to –- know thy employee. Definitely do a complete background check, including speaking with former employers. When they are reluctant to provide information, or hem and haw, you’d be wise to reject the potential employee.

But mainly, Rowlette says, pay attention to the people who work for you and who have access to sensitive information. Are they facing financial difficulties? Is there an illness in the family, with costs not covered by insurance? Are they suddenly driving vehicles that are more expensive than they should be able to afford on the salary you pay them? Are they being generally annoying? Rowlette advises that you pay close attention to your staff and that you make friendly inquiries about their lives – just in the regular course of conversation. When problems arise, find out how they are handling them, or if you can help?


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