Employee Theft – Can It be Avoided?

Author: A. Howard Metro Date: 12/21/2009

Categories: Corporate and Business Law, Employment Law & Litigation

Be careful of the thief who masquerades as your bookkeeper. The law is not as kind to employers as it once was. Recently, McMillan Metro, P.C. was called upon to represent two different employers for claims of employee theft, with one claim involving over $1M.

What happens when someone inside your business forges your signature on a check to someone who does not exist – a fictitious payee – so he can cash the check and keep the proceeds? The forger walks away with money in his pocket. If the employer is not diligent, the bank may not be liable leaving the employer holding the bag.

Historically, the law sided with the customer in actions against their bank. Banks were considered responsible because they had the signature cards and were supposed to examine the signature on each check. Banks argued for years that with the electronic environment, they could not possibly be responsible for all signatures. The state of Maryland (as well as many other jurisdictions) finally agreed and the law changed. You would not know about the change until you were confronted with the type of problem one of our clients faced.

The trusted employee bookkeeper added the name of Ms. Ina Ineedmore to the payroll. Ina received a steady check of $500 each week, and the president never heard of her because neither he nor anyone else in a position of authority looked at the canceled checks when they came back from the bank. Instead, it was left to the bookkeeper to review the canceled checks and to reconcile the bank statement.

When the Employer sued the bank, the bank won because the employer had not caught the problem for over a year. Based upon the forged signature, the employer demanded the full refund and argued that it was the bank who should have checked the signature card. The bank argued that the employer was negligent because an employer should know who its employees are and who are receiving checks. At the end of the case, the bank won and the employer was left without a remedy.

How could this have been avoided?

  1. Have the monthly bank statement only opened and reviewed by a corporate officer other than the bookkeeper. Alternatively, you can have the monthly bank statement mailed to the home address of the employer’s president to assure that the bookkeeper cannot intercept the statement. The statement should be carefully reviewed and reconciled. The review should confirm that each check is tied to a vendor account for a legitimate vendor who has provided authorized services or products to the employer. Payroll checks should be matched to actual employee records.
  2. Designate a different person to reconcile the account from the one responsible for writing checks and making deposits.
  3. Do not grant bookkeepers the authority to sign checks.
  4. Add fidelity loss coverage to your commercial insurance policy.