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?
Use the stuff you learned in CPA firms
Checks and balances. No one person should be taking any task all the way through. For instance, someone else should always be reviewing the work. The person making deposits and paying the bills should not also be reconciling the bank accounts.
When it comes to tax returns, the firm’s owner should take one last look before the tax return is filed. After all, his firm’s name is on that tax return.
In fact, I am so concerned about misdirected electronic deposits (it’s so easy to innocently transpose digits) that I insist on taking a special, extra step. After the return is prepared, before it is e-filed, we have the client sign off that they have reviewed the bank account number (routing, etc.) and that it is correct. I’ve had too many readers or tax pros come to me after their deposit got misdirected –- and they faced a nightmare getting the money back.
But back to the employee deposit theft issue...
Let’s face it, we all work with numbers. Doing that, we often start seeing patterns. Sometimes consciously; sometimes subconsciously. Wouldn’t you notice if the same last four digits kept showing up on refund deposit field in several of the tax returns in the stack you were reviewing? I would. Of course, I might not notice the first ten or twenty times (over several days). But by the thirtieth time, some niggling thought would start itching at the back of my mind. I’d start to go back and look. And uh oh! I would find that same number appearing.
Incidentally, although Rowlette warns us to watch out for staff taking expensive vacations, I learned to watch for just the opposite problem. The dedicated employee who never takes a vacation. A special employee theft guide for doctors’ offices (from way back in 1980) pointed out why this is a danger. This employee never takes time off because he/she doesn’t want anyone looking at his/her records. Over ten or twenty years, there might be a substantial amount of embezzling going on.
Why do employees steal? Of course, some people are simply dishonest. Sometimes it’s because of financial need, like the fellow in this article. Often, it’s due to resentment because they haven’t gotten a raise in a long time, or promises you made were not kept. Or you’re living really well –- but they feel they are doing all the work and are not fairly compensated. Or you’ve been rude or high-handed and they felt mistreated. Or you are disorganized, forcing them to work late when, if you had given out assignments sooner, they could have done them during regular office hours.
Sigh, it sounds like you can’t win. True, you cannot do it all yourself. But, generally, when you pay close attention –- and truly care about your staff and their welfare -– you reduce the desire or need for theft. Or take some courses? And don’t forget to implement common-sense checks and balances.
What are you doing to keep your clients and practice safe?