Handling Employee Theft Claims

May 5, 2017

Most health care professionals must trust their employees to handle the financial aspects of their practices and in almost all cases this trust is well-placed. However, there can be a bad apple in the barrel. What steps should you take when you discover that an employee is stealing from your practice? This article reviews the steps necessary to protect you and your practice and receive restitution for losses.

What Is An Employee Theft?

An employee theft is any intentional misappropriation of employer property, e.g., inventory, fixed assets, currency, checks, or trade secrets. It can include fraud (intentionally misleading the employer), embezzlement (theft of corporate funds) or forgery (altered negotiable instruments). It can be as straightforward as a theft of petty cash or as complex as a misappropriation scheme detectable only in an audit. It can be the isolated act of a single low-level employee or a complex scheme involving a trusted senior employee. An employee theft may range from a minor incident to an institutional crisis. Its impact on your practice will depend upon the size and complexity of the theft, the status of the person who committed the theft, whether the investigation was handled correctly and whether all avenues for recovery were explored.

In dealing successfully with any employee theft, there are five basic steps:

  1. Conduct a fair and accurate investigation;
  2. Discipline or terminate the employee;
  3. File a claim under the fidelity bond or employee dishonesty policy;
  4. Recover any loss against third parties; and
  5. Obtain restitution through the criminal justice system.

As obvious as this sounds, it is worth mentioning: When facing a substantial or difficult employee theft claim, the employer should always seek the advice of legal counsel.

Conducting a Fair and Accurate Investigation

When a theft is detected, you must move quickly to investigate and discipline the employee. If an employee is caught by direct observation, the “investigation” should be straightforward. However, more often than not, an employee theft is suspected based upon indirect or circumstantial evidence, such as another employee report or in the results of an audit. In such cases, an investigation is necessary. However, do not unnecessarily delay the investigation, since criminal and civil statutes of limitation will begin upon discovery of the loss.

An investigation should follow certain guidelines:

  1. It should be done by a management employee other than the supervisor who first noticed or reported the theft.
  2. Determine whether the employee should be immediately suspended or whether the theft would be best confirmed by monitoring the employee’s continued actions.
  3. Maintain strict confidentiality to avoid exposure to defamation or alerting any accomplices.
  4. If the theft is complex and substantial, retain an expert to assist you in the investigation, such as a CPA.
  5. Do not seize an employee’s property without consent.
  6. Interview all witnesses individually and for current employees, make a clear warning about their duty to maintain confidentiality.
  7. Document all interviews and obtain the signatures of the persons interviewed.
  8. Interview the employee suspected of the theft at the last stage of the investigation and have a witness present. Do not insist on a confession and do not make any promises. If the employee offers to return the stolen corporate property or make full or partial restitution for the loss, accept it but with no promises as to whether the practice or healthcare provider will pursue further remedy or take further action. It may be that the practice will drop the matter in a minor incident, but partial restitution may not lead to full voluntary restitution and you will want to think through the appropriate level of discipline before making any promises. Remember, it’s the practice’s property and you shouldn’t have to bargain to get it back.
  9. At the conclusion of the investigation, determine whether the practice has evidence that the theft occurred and that it is attributable to the employee. If you do, determine the appropriate level of discipline. Often termination is the only alternative.

Recovering Your Loss

Once you have determined that an employee theft has occurred, you should immediately contact the practice’s insurance agent to determine its rights under any fiduciary bond or employee dishonesty policy that the practice may have. If the practice does not have such a policy, think about talking to an agent about obtaining such protection for future losses. Usually, these premiums are not very high.

It is a good idea to retain legal counsel to assist in reviewing the employer’s rights under the insurance policy if it is a large or complicated loss. Essentially, you need to determine whether the theft is a covered loss under the policy and what are the policy’s exclusions and deductibles. You need to review the policy procedures and deadlines for filing a claim. A Notice of Claim will usually have to be filed within a set period after discovery of the loss. This is followed by a Proof of Claim, which is a calculation of the loss and a description of how it occurred–it is the most important part of the claim procedure and must be carefully done.

The proof of claim should provide a clear, chronological narrative of how the theft occurred with all supporting documentation organized and made available to the insurer. The insurer will then investigate and determine whether payment of the claim is appropriate. There should be appeal rights within the policy if the claim is denied.

During this process, it is critical to do nothing that would compromise the insurer’s rights against third parties, including the employee who committed the theft. The insurance company will have “subrogation” rights; i.e., it will have the right to proceed against any third parties for recovery of its benefits paid to you. The insurer, in other words, “steps into the practice’s shoes” and has all the rights that it has to pursue restitution for your loss. If you compromise your rights with any of these persons, the practice’s ability to recover under the insurance policy may be compromised as well.

Recovering a Loss by a Civil Suit or Through the Criminal Justice System

When insurance coverage is insufficient or non-existent, you should explore the possibility of recovering the practice’s loss by civil action against the employee for theft or misappropriation. In cases in which the theft is small or below the policy deductible, you could pursue this directly in conciliation (small claims) court without the assistance of counsel. However, if the loss is larger and the practice does do not have insurance to rely upon, you will have to weigh in the balance whether the chances of recovery merit the costs of litigating.

You will need to also review with legal counsel whether there are any third parties who could bear some liability for the loss. For example, a bank that paid on the forged instruments may be liable to the practice. There may be accomplices who benefited from the theft who would have the assets sufficient to merit a civil action.

In many cases, the most cost-effective method for obtaining restitution is through the criminal justice system. Moreover, a criminal investigation can locate assets not accessible to the employer in the standard civil action. Of course, the practice is not required by law to report a theft and it will be public record if charges are filed (the media seems to have a penchant for major employee theft stories). Any report is made to the police or sheriff’s department. An investigator will take down the facts and turn the matter over to the county attorney’s office for prosecution.

If the prosecutor files charges, there will be pretrial procedures during which the practice will have the opportunity to discuss settlement. If there is a strong case, the employee’s attorney will attempt to negotiate a lighter sentence with a term of probation being full restitution to the practice of the loss, perhaps over time. If there is a trial and conviction, restitution will be part of the sentence. There is a distinct advantage to a restitution order over a civil judgment – if the employee fails to pay the restitution order, he or she can get more jail time. This is a “sword over the head” available to enforce a criminal restitution order that is not available in a civil action.

Final Thoughts

An employee theft is difficult for all persons involved. There is a significant emotional component, especially in a smaller business such as a health care practice where the person perpetrating the theft could well be a trusted long-time employee. Finally, there also may be a financial crisis, especially if there is insufficient insurance coverage and the funds have been squandered by the employee with no hope of restitution. There is the distraction caused by the investigation of the theft and pursuing recovery. Hopefully, this overview provides some basic guidance in dealing with these crises. However, you should consult with legal counsel before beginning the process to assure that you (or your client) are addressing your particular situation appropriately.

Reed Tinsley, CPA is a Houston-based CPA, Certified Valuation Analyst, and Certified Healthcare Business Consultant. He works closely with physicians, medical groups, and other healthcare entities with managed care contracting issues, operational and financial management, strategic planning, and growth strategies. His entire practice is concentrated in the health care industry. Please visit www.rtacpa.com

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