Table of Contents
Title Page
Copyright Page
Dedication
Preface
Acknowledgements
Introduction
CHAPTER 1 - Hiring the Right Employees
Disclaimer
Where Do You Start?
Advice of Counsel
Application Policy
Due Diligence
Personal Information
Past Employment
Education
References
Criminal and Civil History Checks
Credit Checks
Hiring Time
Notes
CHAPTER 2 - Know Your Employees
Why Is Knowing Your Employees Important?
Open Communications
What Should You Watch for in Your Employees?
Note
CHAPTER 3 - Sales, Cash Receipts, and Collections
Here’s Where Everything Starts
Recording and Tracking Sales
Collections
Debit Memos and Other Adjustments
Accounts Receivable
CHAPTER 4 - Credit Card Sales, Transactions, and Merchant Statements
Processing Sales
Reconciling Sales
Processing Refunds or Credits
Reviewing and Reconciling Refunds or Credits
Reviewing and Reconciling the Merchant Statement
CHAPTER 5 - Purchases, Cash Disbursements, Checks, and Petty Cash
Purchases
Cash Disbursements/Checks
Unpaid Bills/Accounts Payable
Petty Cash
CHAPTER 6 - Credit Cards and Debit Cards
Credit Cards
Debit Cards
CHAPTER 7 - Employee Expense Reimbursement
Expense Submission
Where Are the Abuses?
Payment Processing
Notes
CHAPTER 8 - Electronic Banking
Traditional Banking (In-Person Deposits and Manual Check Writing)
Check Processing and Clearing Changes
Changes in Bank Deposits
ATMs
Online Banking
What Can You Do?
CHAPTER 9 - Payroll Processing
Payroll Administration: Adding/Changing/Terminating
Payroll Processing
Payroll Tax Returns
CHAPTER 10 - Inventory Issues and Controls
Prevention: Good News and Bad News
Retail Businesses: Items Available for Sale
All Businesses: Items for Use by Employees (Supplies, Tools, and Equipment)
Detection
Note
CHAPTER 11 - Bank Statements, Canceled Checks, and Reconciliations
Bank Statements
Investment Account Statements
Canceled Checks
Bank Reconciliations
CHAPTER 12 - Financial Reports
Generate Financial Reports Regularly
Why Is the Regular Review of Financial Reports So Important?
When to Consider Outside Advice and Assistance
CHAPTER 13 - Safeguarding Your Bookkeeping or Accounting Systems
Manual Bookkeeping Systems
Computerized Bookkeeping and Accounting Systems
QuickBooks Users
CHAPTER 14 - Prevention, Detection, and Insurance
Timing Is Everything
Adequacy of Coverage
Disclaimer
CHAPTER 15 - Your Response to an Identified or Potential Issue
A Dreaded Day of Discovery
Due Diligence on the Discovery
What If It Appears to Be Fraud?
APPENDIX A - Embezzlement Controls for Business Enterprises Lester Amos Pratt, CPA
APPENDIX B - Who Was Lester Amos Pratt?
About the Author
Index
To all my clients, past, present, and future, who allow me to help guide them through the maze of money, piecing together financial puzzles during the good times and when things appear at their worst.
Preface
This book was inspired by a small business owner whose story follows in the introduction. He is referred to as Jeff, and in my more than 22 years of professional experience as a certified public accountant and certified fraud examiner, I have dealt with hundreds of small business owners similar to him. Not every owner was a victim of fraud or embezzlement, but many of them shared common traits. They were excellent in regard to the products they sold or the services they provided. They were very busy, working long hours to ensure their companies were, and remained, successful. They recognized their lack of financial knowledge, sophistication, or their busy schedules, so they hired someone else to handle the financial aspects of their business. They failed to implement proper controls and delegated too much of their bookkeeping and accounting to someone else. And in many cases, they fell victim to the individual they entrusted with the financial aspects of their businesses.
Jeff’s case inspired me to seek out any resources that were available designed specifically with the small business owner in mind. I was looking for resources beyond generalized articles concerning preventing employee theft and embezzlement, but rather books or guides to identify specific steps and measures small business owners need to implement to better protect the finances of their businesses. Also, I wanted to find books or guides written for owners with varying degrees of financial background and experience, concepts, concerns, and recommendations that were easily understood and ready for implementation in most contexts. Translated using Jeff’s terminology, these sources would tell me the things I should be concerned about as a small business owner with employees, and tell me what I would need to do to have the proper financial controls in place.
In my quest, I discovered a used book available online that described exactly what I was seeking. The price concerned me, a mere 12 cents, and I wondered how good a used book could be if it cost so little. It seemed as if someone was simply trying to get rid of it, and if they thought it was only worth 12 cents, then.... So I bought it. The shipping cost was 4,000 percent more than the book (still under $10). It was the best $10 I have ever spent. The book, Embezzlement Controls for Business Enterprises, was a great find—I discovered someone had written the very book I was seeking. The author had managed to cover the major areas of concern in just 31 pages, and he was right on with his recommendations. Many were applicable to situations I am involved with, even though the book was last published in 1952.
The author’s name is Lester Amos Pratt, and throughout the writing of this book, I have done much research on his life. Lester’s book has been reprinted with permission in Appendix A, with the exception of one chapter, and more about his life and accomplishments can be found in Appendix B.
The goal of this book is to deliver a readable, practical resource geared specifically to help very busy small business owners implement key controls and procedures to better protect themselves from employee theft and embezzlement. This book is designed to allow busy small business owners to read one chapter at a time and, using the checklists at the end of each chapter, begin to implement within their business the applicable measures provided, just as Jeff did, as told in the introduction.
Following a schedule of reading one chapter at a time and implementing associated changes within your business, a complete implementation covering all the financial areas would be limited only by the pace at which you read each chapter. If you complete one chapter each night—a realistic goal for many small business owners—you could accomplish a total evaluation of the financial policies and procedures within your business in less than two weeks. Regardless of the pace you follow, as long as you continue through each chapter and apply the information to your business, you will be better able to prevent and detect employee thefts and embezzlements.
Once completed, this book should serve as a guide to monitoring the financial policies and procedures within your business going forward. The discussions contained in the chapters are specific to small business settings yet general enough to be applicable in most contexts. In some cases more detailed and specific controls, policies, and procedures would likely be warranted. For this reason, this book and the information provided within it should not be held as absolute but rather used as a general guide.
Acknowledgments
To my family, who watched with eagerness as I completed writing this book—my third in less than a year—anxiously awaiting the return to normalcy in my evening and weekend schedules while patiently and quietly listing all the things I now need to address that I have neglected for the past year due mainly to my writing.
To all my friends, colleagues, and trusted advisors, who continue to stand by me, offering me invaluable insight and advice to allow me to make informed decisions. I value the relationships I have built with each of you and look forward to a long and successful journey enjoying our successes.
To Helen Koven, my friend, publicist, and literary agent, who thought getting a book published was a really good idea, having two books published in a year was a great idea, and completing three books in the same year meant we were just out of our minds. Thank you for all your help and support—clearly there is no way I could have done any of this without your guidance, experience, and expertise.
To Timothy Burgard, Andy Wheeler, Stacey Rivera, Todd Tedesco, Laura Cherkas, and all the folks at John Wiley & Sons, who extended me the opportunity to write three books within a year. I look forward to growing our relationship with future endeavors.
To the Association of Certified Fraud Examiners, the leading international organization on fraud that pioneered credentialing and training opportunities for fraud prevention and investigation professionals worldwide.
And to all the fraud professionals around the globe, preventing and investigating financial crimes of one kind or another. Although we may come from different backgrounds and work within different contexts, I believe we all share the same goals and commitments to promoting ethical and honest behavior with the guarantee of realistic consequences for crossing the line—even once.
Introduction
A colleague called to let me know he had provided my name and contact information to someone who might need my help.
A week later I received the call. It was a Tuesday morning in December, and I was working in my office. It was the first time I had been at my desk in over a week. Things had been busy in the world of fraud, and much of my time was spent out in the field putting cases together. From an embezzlement perspective, things were definitely good for my business. As for the victims, it was just another sign of the sad state of our society. The holidays can cause an increase in people stealing, and that certainly was the case for the current year.
The caller, whom I will refer to as Jeff (not his real name), said he was given my name by his accountant, a colleague of mine. He said he thought he had a problem within his business and wanted to meet as soon as possible. I asked him how urgent our meeting needed to be, and he asked me what I was doing that morning. Sensing the anxiety in his voice, I asked him if he had his morning coffee. He said he had a cup earlier but could use another. I offered to meet him and listen while he told me a little about what was happening.
I asked him where he wanted to meet, and he said somewhere where the meeting would not look suspicious. I told him I was dressed casually that day and that meeting me at a coffee shop could look pretty innocent. He said he had many customers in town and is recognized by someone almost everywhere he goes. He suggested we meet at a doughnut shop just outside the center of town. I agreed and asked how I would recognize him. He said he would be driving a commercial van with the name of his business on the sides, and provided me with the business name. I told him I was on my way; it was a 10-minute drive for me at best. I told him the make and color of my car and where I would be parked in the lot.
I arrived first and backed into a spot, watching for a commercial van to pull in. Within a minute or so the van arrived. I watched as the driver spotted my car and drove over to park next to me. He waved and rolled down his window. I asked him if we were going to meet inside, and he said he would prefer to meet in his van to avoid being recognized. I grabbed my pad and pen, and put them on the passenger seat of his van. I asked him if he wanted a coffee, and he said he was all set. I told him I wanted to get something and walked into the shop. I bought an apple juice and a chocolate doughnut, then headed back to the van.
As I took the cap off my juice, I asked Jeff to tell me what was happening and why we needed to meet.
He started by telling me that he owned a local service company, and had owned it for the past ten years or so. He had a partner who owned a small piece of the business; Jeff owned the majority of the company. Both he and his partner were employees of the business; he ran the service end of things while his partner was responsible for the finances. Jeff said that recently, as he reviewed financial records and documents, he noticed activity and transactions that were not authorized. One example was his partner charging gas on the company’s credit cards. Another example was his partner providing himself with an increase in compensation. Jeff said neither of these actions were approved or authorized by him. He said the worst thing he had discovered was that there were undeposited customer checks sitting in his partner’s desk waiting to be processed. While that may not be a bad thing by itself, his partner was complaining there was insufficient cash in the business to purchase new equipment that Jeff wanted in the service area. He said he had begun looking further into the finances but knew nothing about finances, let alone the accounting and bookkeeping for the business. His partner handled all aspects of those areas, including maintaining the computer systems and files.
It didn’t take me long to eat the doughnut, and by then I was ready to start asking some questions and taking some notes. Starting mainly with background information, I began to get a picture of the business environment. I asked if he thought his partner was aware that Jeff was looking into financial areas of the business, something that he had never done before. He said he didn’t think his partner was aware of anything and that he had been very careful to put things back exactly where he had found them and to leave as much undisturbed as possible. His partner hadn’t mentioned anything to him about his actions. He also said everyone was acting as they always did—business as usual. I asked him how much he found in undeposited checks; he replied that the customer checks he found totaled over $100,000.
I asked if he ever ran an accounts receivable report or had any sense of how much customers owed to the business. He said that too was an interesting question. He said his partner was always late in invoicing customers after work was completed, sometimes months later, and in some cases he thought the work was never invoiced. He also said he saw one accounts receivable report that included large balances well over 120 days old. In his line of business, his customers typically get invoiced once the service has been completed and pay within 30 days. He had no explanation why the billing to certain customers took so long and why their balances were so old.
As I listened to Jeff’s story, I pretty much figured his partner was committing some type of cash receipts fraud, quite possibly lapping (where customer payments are diverted by the employee and later payments from other customers are used to cover the diverted payments). This could explain the large outstanding balances and the undeposited payments sitting in Jeff’s partner’s drawer. However, the increase in pay and the charged fuel purchases made me believe there was a lot more happening within the business and that the customer payments were only part of the scheme.
Jeff said his main concern was the continuity of his business and that if a theft was occurring, any investigation within the company could not interrupt the servicing of his customers. I asked him to describe all the areas of responsibilities of his partner and any assistants in any financial areas of the business. Jeff described just what I had expected: His partner was in charge of all the financial areas of the business, beginning to end, with no internal controls and no segregation of duties. Jeff also described a newly created position, an assistant to his partner, a position his partner adamantly tried to prevent being created. He said the individual currently working in that position had been there only a few months.
I asked Jeff to describe any financial roles he had in the business, and as I expected, he had few to none. Jeff confessed that he was great in the service area, working with his service employees and with customers, and was also responsible for completing bids for new work. However, when it came to the finances, he didn’t have much time left over, and although he owned the majority of the business, he left the finances to his partner to manage.
Jeff also stated he wouldn’t even know where to start with establishing internal controls or understanding the finances of the business, and would look to someone like me to help him identify what things he should be doing as the majority owner of his company.
Over the next hour or so we hashed out a plan on how to approach the issues, conscious of his primary goal of business continuity, and I provided him with the names of a few attorneys I thought he should consider getting involved for legal guidance.
Within a week we met again at the law office of the attorney he contacted and reviewed the issues and the plan to ensure all legal aspects were covered.
Two weeks later the plan was executed. In the course of a few short days, Jeff had taken control of both his company and the situation, and business continuity was unaffected.
It was during the first day at the company that I told Jeff he would need to make some immediate changes within his business and implement procedural changes to begin establishing internal controls over the financial aspects of the company. Jeff handed me a pad and pen, and told me to create a checklist of all the things I thought he needed to do. I told him I could type them up and bring them in the morning, but he insisted that I simply write them out so he could start implementing them as early as that night.
He said he had a business to run and his area of expertise was strictly in the service field. He said that I clearly knew what was needed to turn things around quickly to provide him the necessary control, and that he would execute whatever I wrote on my list. He said he simply didn’t have time in his day to have meetings or read memos, but if provided a list with specific steps to implement, he could get those done.
I wrote out three pages of things he needed to change or implement. After I had completed it in the early evening hours of that first day, Jeff made a copy and kept the originals. He then took out a highlighter and asked me which measures he needed to implement immediately, meaning first thing tomorrow morning. I went through the list and pointed them out. He said once he had all the service staff out on their assignments for the day, he would work down the list and get as many done as practical by the end of the day.
By the end of day two Jeff reported back that he had completed all but one item on the list; the work had taken most of his day. He said he was added to the bank accounts, his partner was removed from all the bank accounts, the customer remittance address was changed to ensure he had sole control over all future customer payments, and so on.
In this case I was able to use my experience and expertise to have an immediate and direct impact on Jeff’s business, as I have with many other businesses. While I enjoy these projects and interactions with business owners, I find myself drawing on my experience and creativity for each and every engagement, with no documented guide applicable to a typical small business environment. Such guidance would help me ensure that I cover all aspects of each business every time in a consistent manner and would provide me with documentation I could leave with business owners at the end of an engagement to allow them to monitor and modify their policies and procedures in response to changes in their businesses.
From implementing prudent hiring policies and practices through collecting receipts, making deposits, writing checks, paying employees, and evaluating the adequacy of insurance coverage, this book covers the major financial areas commonly found in most small businesses and provides the owners with practical information and recommendations applicable to their business environments to prevent and detect instances of employee theft and embezzlement.
It all starts with hiring the right people, which is what follows in Chapter 1.
CHAPTER 1
Hiring the Right Employees
Disclaimer
As I begin discussing the importance of sound hiring practices, I want to highlight that I am not an attorney and by no means am I providing you with legal advice. In my opinion nothing replaces the advice of counsel based on their experience and expertise. The discussions that follow are based solely on my personal experiences during my more than 22 years of working with clients and counsel to prevent and resolve a wide range of employment-related issues, many of which stem from some type of theft or embezzlement of assets, money, proprietary information, or a combination of all three.
Where Do You Start?
The first line of defense against employee fraud and embezzlement is to hire the most qualified and most trustworthy individuals to work in your business, especially those employees who will have access to your company’s finances. The problem is, in this day and age, that is easier said than done. There are so many laws and rules geared toward protecting potential employees from improper hiring practices that even when you perform proper due diligence with your candidates, you will be limited in what you can ask, where you can gain information, and how you can use the information you do obtain in your hiring decision. Contacting past employers will likely yield you no more than the individual’s date of hire, date of termination, and whether the individual is eligible for rehire. In my experience, as much as the past employer would love to tell the next potential employer more of the details, especially if the individual was terminated for something like stealing, the past employer was advised by counsel to limit responses in order to minimize potential litigation brought by the terminated individual. Furthermore, if by chance the past employer did provide such details, the terminated individual likely has a right to know what information was provided and would be allowed an opportunity to provide a response. As with any other information obtained, you may find yourself defending a claim by a candidate and be forced to show how the information you received impacted your hiring decision. In my opinion, the deck is stacked against small business owners trying to create job opportunities while also trying to ensure that they don’t hire someone who could negatively impact their business.
Often small business owners rely on referrals and references from colleagues and other known business associates. While these referrals should carry much weight, you would be wise to still perform an independent due diligence on the referred individual to ensure that the potential employee is qualified and trustworthy. Here’s why. In one of my recent cases, it was discovered that the business manager was stealing from the business. This man had been strongly recommended by a vendor close to the business owners, who hired him, relying mainly on that recommendation. The same vendor was also serving other competing businesses within the same industry, and once the business manager was terminated from the company for stealing, he landed his next job at one of the competitors not far away. It is believed the business manager landed that next position due to the vendor’s recommendations to the next company. No reference calls were received from the competing business prior to hiring the business manager.
Advice of Counsel
As I mentioned earlier, nothing replaces the advice of counsel. This is what I recommend to every client I meet: If you envision having employees in your business, you should establish a relationship with an attorney who specializes in labor laws right from the inception of the business. Counsel’s insight into how policies and procedures should be established will prove invaluable. If an attorney is involved in the design and implementation of your employment policies and procedures, he or she will be prepared to defend any labor actions brought against you and your company. The initial and ongoing investment you make with counsel will pay dividends should you ever find yourself defending a pre-employment or employment claim.
The caveat is that once the policies and procedures have been established and implemented, they need to be followed every time. The best defense regarding many labor issues is strict adherence to established policies and procedures and detailed documentation. The better a file is documented, the better a claim against you can be defended. I cannot overemphasize the need for adequate documentation.
Application Policy
Your company, regardless of its size, should have, at minimum, basic written policies and procedures regarding hiring and maintaining employees. You should have an established set of information you require from each candidate when filling job openings. The application you require every candidate to complete should be comprehensive and, as stated, should be reviewed by counsel to ensure completeness and adherence to hiring laws. All applications should be retained for a period of time, even after a successful hire, so in the event a candidate who didn’t get hired brings about a claim for improper hiring practices, you have retained the details in your files for your defense.
In addition, clearly stated somewhere on the application should be your policy regarding a candidate providing false, incomplete, or misleading information, or omitting information that would identify a problem in the candidate’s background, along with your company’s consequences should such false, incomplete, misleading, or omitted information be identified, whether the candidate is still in the hiring process or has already been hired. I talk more on the subject of false information later in the chapter.
Depending on the position being filled, your policies should require additional information from each candidate, such as:
• Resume
• Letters of reference
• Military records
• Copies of diplomas or degrees
• Copies of transcripts
While these may not be required for filling basic-level positions, they are highly recommended when hiring someone at a management level, such as a business manager, office manager, and controller.
I also recommend that somewhere in the application process, whether it is on the application form itself or on a separate form, you seek the candidate’s permission to perform a credit check, especially for positions that require access to your company’s finances or assets. A credit report cannot be lawfully obtained without the individual’s permission, and due to the frequency of identify thefts, individuals will receive notice if inquiries are made into their credit. Therefore, by incorporating candidates’ authorization to access their credit report within the application process, you will have their permission and they will receive proper notice if you ultimately access it. I am not suggesting that you obtain a credit report for every candidate for every position you need to fill; I do suggest it be obtained at a minimum for those candidates who become finalists for a position involving access to company finances and assets.
I am also not suggesting that every candidate who has poor credit, who has filed bankruptcy in the past, or who has other negative marks on a credit report should be precluded automatically from your hiring decision. I am simply saying that it is better to know these things exist in a person’s background, to allow you to consider them along with all of the candidate’s information when making your hiring decision. As discussed earlier, information you receive about a potential employee must be maintained and preserved, and how the information affected your hiring decision could be scrutinized somewhere down the road.
Due Diligence
Once you have candidates complete your application form and provide you with copies of the other documents you require, what should you do next in the hiring process to better protect yourself and your business? The answer is an easy one: due diligence. You need to objectively verify the information they provided to ensure that it is complete and accurate. Candidates often lie or omit details on their applications. According to hiring professionals, during difficult economic times with high unemployment rates, the frequency of lying or embellishing increases as competition for scarce jobs increases.1 Although providing anything less than complete and accurate information is considered resume fraud, I found through searches on the Internet many terms to describe this growing problem, terms such as embellishing, reaching, exaggerating, tailoring, fudging, shading, and tuning. Reaching, shading, and tuning are all terms that simply mean stretching the truth. I discovered web sites devoted strictly to resume fraud, such as www.fakeresume.com. In some cases the web sites assist potential employers to better screen applicants; other sites are designed to aid candidates in perpetrating these practices.
In what areas can a candidate be less than complete or truthful? Virtually any of the provided information can be false, starting with information relating to a person’s identity. In one case I am familiar with, the suspect working in a medical office was terminated from her employment and prosecuted, and her arrest landed her in the local newspapers. An investigative reporter tracked her down while she was pending trial and discovered she was working again, this time in a preschool setting. Further digging by the reporter revealed that the woman had used her maiden name on her application, something the preschool failed to verify. When questioned about why she used her maiden name (as she was still married), she said she had made a mistake on her application. She referred to her error as an oversight. I, however, am sure she didn’t use her married name as she had just been in the media for being arrested for stealing from her employer.
In another case, I received a call from a colleague whose client had hired a new finance person. The client told my colleague that the company was aware the man had recently been released from prison but the matter he was sentenced for was a minor theft from his employer. They hired him despite the fact that he had admitted serving time in prison for stealing, and they didn’t do any due diligence because he was up-front about what he had done and they considered him rehabilitated. What they failed to identify was that he had served over four years for stealing close to $1.5 million from his employer. Had they dug a bit deeper, they could have learned he had stolen from employers even before the theft he was sentenced for. This man had downplayed what had actually happened, and the client failed to verify his story.
According to a recent 2008 Careerbuilder.com survey, while only 8 percent of respondents admitted to some type of misinformation, 50 percent of hiring managers reported identifying lies on resumes they received.
2 The most common areas of lying and embellishing found through that survey were:
• Job responsibilities: 38 percent
• Skill sets: 18 percent
• Employment start and end dates: 12 percent
• Academic degrees: 10 percent
• Companies/previous employment: 7 percent
• Job titles: 5 percent
Misrepresenting or omitting information on an application or resume is not a new phenomenon, but the frequency of occurrences has likely increased in the past 10 years. A similar survey conducted in 2002 by the American Management Association revealed that 31 percent of resumes contained material misrepresentations about an individual’s background.3
You need to verify the information provided by candidates applying for any positions.
Personal Information
Start with personal information. Perform a search on the Internet on a candidate’s name and address. Using Internet-based resources like Google Earth and Google Satellite, enter the candidate’s address to see what actually exists at the address. As simple as it sounds, your search, which will take less than a minute, could be the only means of determining if a house or building actually exists at the address provided. Alternatively, you could drive by the address to see what is there, but searching addresses right from your desk through the Internet will likely be more efficient.
Once you make a hiring decision, the candidate will be required to complete a series of required forms, such as a Form W-4 and a Form I-9. The W-4 will be used to determine the federal taxes to be withheld from the candidate’s payroll, and the I-9 will be used to verify that the candidate is in the country legally and eligible for employment. Form I-9 requires you to obtain verification of the candidate’s identity and to obtain copies of the verification forms provided. Doing this gives you another opportunity to ensure that the personal information (name, address, date of birth, and Social Security number) match between the application, I-9, verification forms, and any other information provided by the candidate. Take a moment to compare the information before actual employment begins.
Past Employment
As with the candidate’s address, perform Internet-based searches of the identified prior employers and their addresses to ensure that they actually exist. I recommend searching the Internet for the business names provided, looking for an address. If I find an address, I search for the address and use the satellite features to see what is located there (i.e., does it look like a commercial building, a house in a residential area, a wooded area, or a big open undeveloped lot?). Candidates do not expect potential employers to drive out and verify that a business actually exists at the address provided, but with these search engines, this verification is relatively easy to perform.
Once you are satisfied that it appears a business does exist at the location provided, contact each past employer to verify employment information supplied. I don’t rely on the phone numbers candidates provide. Often if a candidate doesn’t want to have a past employer contacted, or worse, wants to ensure that the employer is not contacted due to what he or she could say about the candidate, the contact information provided may be inaccurate or directed toward someone at the company who is not authorized to provide such details but could cover for the candidate.
I rely only on phone numbers publicly listed for the business, found through a search using the Internet, directory assistance, or the old-fashioned phone books. I call the number listed for the business, listen to how the phone is answered, and then ask to be directed to the most appropriate person for my verification. What I am trying to determine is that the information provided is legitimate and reliable, something I will determine by using only phone numbers and information obtained independently of the candidate.
You should want to know as much as possible about the candidate to help you with your hiring decision, but you should expect nothing more than date of hire, date of termination, and whether the individual is eligible for rehiring. As mentioned, most employers have been advised by counsel to provide nothing beyond those items. Once you obtain the dates, compare them with the dates provided by the candidate.
Education
Obtaining copies of diplomas, degrees, and transcripts from candidates is not sufficient to verify that they did in fact earn them by attending the identified schools. Authentic-looking documents can be purchased through web sites for as little as $200, along with corresponding transcripts. For each diploma and degree identified by a candidate, start by verifying that the schools listed actually exist. Once again, Internet-based searches can be performed to help verify their existence.
Once you know that they exist, you need to determine how credible each school is and whether it is accredited. Credential mills do exist, as do correspondence schools whose sole existence is limited to a web site and an 800 number.
Diplomas and degrees can be confirmed with the schools. Based on the position being filled, you should consider verifying that the candidate actually attended, graduated, and was awarded the diploma or degree. It is not uncommon for a candidate to list attendance at a school with no mention of any degree awarded. It is up to you and your verification process to identify when a candidate does this and to ask if he or she graduated and was awarded a degree.
Case Study 1.1 University of Nonexistence
In one of my cases, the controller had stolen funds and was terminated prior to my involvement. When I asked to review the controller’s personnel file, I found a copy of his MBA degree along with his MBA transcript—a 4.0 student. Since I had never met the individual, I asked the client if the controller appeared to be a 4.0 MBA graduate. The client’s description was consistent with what I expected—someone much less than competent to have performed in that position. I asked the human resources director to contact the school from which he obtained his MBA, and she found the school didn’t exist except on paper. There was no known physical address for the school, and a call to the listed 800 number led to an answering system. My question for the client: Why wasn’t this information verified prior to hiring the controller?
References
As with all the other information, you should independently verify that the references listed are valid. Search the addresses provided to determine what actually exists at each address. Contact each reference provided, but be aware that it is not uncommon for candidates to list friends and family members as references. Ask each reference how he or she knows the candidate. By asking each reference questions about the candidate, you can learn whether the individual is a legitimate business reference. Ask questions the references would not expect, and listen to their reaction as well as their response. I always like to ask references, since they know the candidate well enough to provide a recommendation, to identify the candidate’s greatest strengths and weaknesses.
Ask them for the make and color of the car the candidate drives, or where he or she went to school. (Doing this also helps to corroborate the educational information provided by the candidate.) If the reference cannot answer your non- business-related inquiries about the candidate, you should ask yourself whether the reference is legitimate and how well he or she really knows the candidate.
Criminal and Civil History Checks
Depending on the position you are filling, you should consider running a criminal background check on the final candidates. However, don’t be complacent with results that turn up nothing. Here is a word of caution regarding the results of these searches: Individuals could have a criminal history and not appear on the search results for at least three reasons.
1. The individual may have committed the crimes as a juvenile. In that case, records prior to turning 18 years old would not be available for disclosure.
2. The individual could have been involved in criminal activity in the past, but for a number of reasons, the crime might not have been prosecuted and/or the charges might have been subsequently dropped. The criminal history will reveal criminal convictions only, if anything at all.
3. The individual could have received a special sentence, such as accelerated rehabilitation available for first-time offenders. His or her criminal record would be erased as part of that program after three years with no further criminal activity and therefore would not be reported in the search results.
A good resource to search for prior criminal activity is in newspapers around the country. By using a commercial database service, such as LexisNexis, or simply searching online through Google News, you may locate an article involving the individual in a local news story. Here, too, it is important not to place sole reliance on the fact that nothing was found, particularly in the case of embezzlements, because statistically, only one in nine cases ever appears in the public eye.
You should be able to access an individual’s civil history relatively easily. You can access most states’ judicial system records via web sites. Once you find the judicial site, you can search the person’s history based on last and first names. In my home state of Connecticut, the web site is at www.jud.state.ct.us/jud2.htm. Select the venue (civil, family, motor vehicles, small claims) and enter the individual’s name into the fields provided to conduct your search.
The mere fact that an individual has a prior criminal and/or civil history doesn’t necessarily make him or her a bad person or a poor choice for employment. However, if you are seriously considering the candidate for a position, consider discussing his or her past to ensure that you have all the information to make an informed decision. Also, review the candidate’s history in light of the job responsibilities he or she will have once hired. Although an individual may be ideal for a position, a history of stealing from employers may make the person less than desirable in a position that gives him or her access to your company’s finances or other assets.
As mentioned earlier, be prudent about how you use the results of these searches in your hiring decisions. You should discuss this issue with counsel to ensure that a candidate doesn’t make some type of complaint or take action against you because you excluded him or her from consideration due to information you discovered.
Credit Checks
Another important consideration in your hiring process is whether you run a credit report on the finalists being considered for a position. Here, too, you should proceed with advice of counsel, as many laws protect an individual’s personal credit and identity information. The most important thing to remember, as mentioned earlier, is that you cannot run a person’s credit report without his or her permission, and in response to new laws, the individual will receive notice if his or her credit is run. Therefore, as part of your hiring process, you need to obtain candidates’ permission to run their credit report. I believe all applicants should provide permission to access their credit history on every job application. It may not make sense and would be costly to obtain every applicant’s credit history, but you can identify and screen out candidates who are not willing to have their credit history obtained early in the process.
As with the criminal and civil histories, the mere fact that an individual has less-than-stellar credit history does not in and of itself make him or her a bad person or poor hire. However, it would be better to know during the screening process if a candidate has poor credit and a history of bankruptcies, especially if the successful hire will have access to your business’s finances. It goes without saying that you need to be prudent in how you use the credit information you obtain. You should discuss this issue with counsel as well to avoid unwanted legal issues.
Hiring Time
Once you have narrowed down the candidates, verified their information, and made your hiring decision, you need to continue thinking about protecting your business. Consider establishing a policy outlining confidentiality and information proprietary to your business, such as customer lists, sales and product information, and trade secrets. The policy should indicate that all information provided within employment at the business is the property of the business. Upon termination of employment, all property of the company is to be immediately returned to the business, including any electronic records.
Theft of company information happens all the time. Your confidentiality and proprietary information policies should also state that your company has a zero tolerance policy. Any instances of theft or fraud of any company assets, finances, or information will be subject to disciplinary action up to and including termination of employment, and the individual will be held criminally and/or civilly responsible if it is shown that his or her actions caused any harm or damage to the business. During their orientation, all new employees should be provided with a copy of the policy and be required to sign it. The signed forms should be maintained in their personnel files to provide proof that they were made aware of the policies.
Such policies establish the strict ethical tone of your company at the inception of a new employee’s employment and should also act as a deterrent. Consider having your attorney draft such policies for your use and distribution to all existing employees and every new hire.
Case Study 1.2 “My” Clients Go Wherever I Go
An accountant left his position with a large accounting firm after many years of employment, having reached the level of senior manager. As part of his employment, the accountant had signed a written agreement that the client lists and staff belonged to the firm. The accountant was prohibited from poaching clients or staff of the firm for a two-year period after terminating employment. Within weeks of starting with a smaller firm, the accountant began contacting clients he had serviced through his old firm. In addition, the new firm sent out a mailing specifically targeting clients of the former firm.
