Employee Theft & Fraud Investigations in California

 Employee Theft Basics for Employers, Part I 

          By Shaun E. Sundahl, Licensed Private Investigator

          Date: September 20, 2011


    In 2010, the Association of Certified Fraud Examiners (ACFE) published the Global Fraud Study, a document highlighting current occupational fraud trends.  The results are alarming:

1.  American businesses lose 5% of yearly revenue due to fraud.

2. The average fraudster “works” his/her employer 18 months without detection.

Fortunately, the ACFE provided promising results to assist the private investigator to “classify” a possible suspect employee as 76% of employees investigated had some form of financial issue.

            1. 43% were reported to live beyond their means.

            2. 36% were having financial difficulties.

The majority of employees in the workforce understand what   
it means to do the right thing.

            1. 47% of fraud cases were detected by the employer using a 
                tip line.

            2. 34 % of fraud cases were detected by tips  
                generated without the tip line.

            3. 67% of fraud cases were detected by an anonymous tip line.

            How much of a financial impact does employee theft have on our businesses? To understand the shocking truth let’s consider how much an S-Corporation specializing in sales earns on average. According to IRS figures, for every $1.5 million of sales, $100,000 of income per year is generated (pre-recession).  A more accurate reflection of the American business model is the sole proprietorship, earning about $50,000 of revenue a year. If the ACFE is correct, the average S-Corporation lost $750,000 a year in revenue while the average sole proprietorship lost $2,500 of revenue a year (based on $58,256/yr).  The amount of $2,500 may not appear significant; however the pre-recession net income a year was $11,696.

            As the aforementioned statistics from the ACFE show, America has an obvious issue of employee fraud. Why is employee fraud occurring at an alarming rate? Let’s classify a thief.

            The thief in the workplace shares certain values associates with like-minded individuals:


1. Instant gratification. 

    Ex: “I need that money now. I don’t have the time to wait until 
    I get paid this week.”

2. Entitlement 


    Ex: “My employer only pays me $8.00/hr.  It’s been two years  
    since I’ve worked  here and still, no raise for my hard work.”

3. Justification/Rationalization 

     Ex:  “My employer_____________(adjective +pronoun+ adjective 
     + time);  therefore I deserve this________(noun).”

     Ex:  “My employer worked me so hard yesterday; therefore  
     I deserve this money.”

    The rational thief justifies his/her behavior by internally translating certain words as they see fit. The word “steal” means the same to the thief as the words borrow, copy, kickback, etc…

 Ex: I’ll just “borrow” this laptop.

Another form of a thievery process justifying the thief to commit fraud is blaming the victim (employer).  

 Ex: “My employer forgot to ask me for the company-issued cell phone; therefore I  won’t turn it in unless she asks for it.” 

 Ex: “My employer just fired me; therefore they deserve not to get their property  back.”

 Three Types of Fraud Occurring inside the Workplace:

  1. Embezzlement. The crime of embezzlement is complete if an object or funds are   entrusted (for a third party such as an employer) into the employee and the    employee permanently takes the object or funds without the employer’s permission.   Consider the cashier who takes the customer’s money and pockets it. The cashier in   this circumstance is entrusted by the employer (third party) to secure the     customer’s money for a later  collection time, but commits fraud by not transferring   the money to the employer.


   A. Siphoning of funds.
   B. Forgery of checks
   C. Misuse of account cards.
   D. Driving over the agreed mileage of a vehicle for personal use.
Caveat: the employer must be aware of the employee who runs errands for the    employer and detours for personal gain. The courts will consider the torts     committed by the employee within the scope of employment if the employee    commits a slight and foreseeable deviation from the course of his/her duties. When   the courts hold an employee performing an act within the scope of employment, the   employer is vicariously liable for any injuries. 

2. Creative Bookkeeping. Employees, especially managers have the opportunity to   create “phantom” invoices and “phantom” vendors.

   A.  The employee obtains a fictitious business name, writes a    check to that    business, and deposits the check into the fictitious business.  The employee    falsifies his/her business by making it appear as a vendor. This shows the     importance of performing background checks on “vendors.”

3. Confusion, Collusions, and Conspiracy

   A. Confusion with inventory masks internal theft. Common phrases such as    “I’m sorry I probably misplaced inventory XYZ with inventory ABC.     Contractor ACE gathered the misplaced inventory and returned it to their     warehouse. I can’t find the inventory received book” all are “cover” for     theft. 
   B. Collusion is defined as employees or contractors working together for a    deceitful purpose.  Identifying more than one culprit for an employer can be    very tedious and if done wrong, can cause morale to decline; thus      productivity. Collusion allows theft to become undetected.

   C. Conspiracy is the agreement of two or more persons to commit an unlawful act such as theft. The employer needs to be concerned of an     employee on one shift placing merchandise inside a dumpster, only for a     second employee on another shift to take the merchandise out. Both enjoy     the benefits of team work with a minimal chance of alerting the employer. 

 Combine the elements of Confusion, Collusion, Conspiracy, and you’ll have a recipe for employee theft without detection.  Millions of dollars of merchandise each year is stolen in this manner.
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