Not enough employers conduct background checks, even for employees who will have control over company money and assets. Those companies open themselves up to fraud or embezzlement. In many cases, a background check of references and public records before the employee is hired can reveal prior acts of dishonesty that would have prevented the decision to hire in the first place.

One of our clients called for advice when it discovered evidence that its controller embezzled from the company. We advised our client to conduct an immediate internal investigation, to gather witness statements and documentary evidence to support this serious charge, and to keep this investigation confidential on a “need to know” basis. Even if the controller had stolen, the company had to be in a position to make a good faith and fair business decision that the improper conduct occurred before a decision to terminate could be made. All key information was collected within 24 hours and the employee was fired. At the time of the exit interview, the controller was agitated and threw a punch at the owner of the company. Fortunately, no one was seriously injured. The company made appropriate reports to the police and hired additional security personnel to protect its premises and personnel. This all probably could have been avoided at the hiring stage.

As is often the case, the company found out about the embezzlement by accident. The company received a notice from the California tax authorities to garnish the wages of the controller for his failure to pay back taxes. The controller had been with the company for less than a year. When the owner of the company informed the controller (who had a relatively common name), he said that the State was looking for someone else. The controller pointed to the company payroll records to show that his social security number (SSN) was different from the SSN on the garnishment. Not convinced, the owner checked the controller’s personnel file and discovered a copy of the social security card given to the company at the time of hire to verify citizenship, which had the same SSN as on the garnishment notice. The owner then determined that the controller had not only falsified company payroll records regarding his SSN, but had also given himself a significant pay raise that the company failed to detect for about 6 months.

When we were contacted by the client, we had our investigator do a basic background check. We found that the controller not only had a relevant criminal history, but that the SSN he was currently using belonged to someone else. He had been using several different SSNs for various purposes in recent years, and had maxed out “his” credit using the various SSNs. All of this information could have been lawfully obtained before the controller was hired for a nominal cost.

For nominal cost at the recruiting and hiring stage, our client could have avoided embezzlement and placing its employees and property at risk of injury. Fortunately, the controller was caught and fired before he could steal more and before anyone was seriously hurt. Background checks can also be useful in screening out managers or supervisors who have a history of sexual harassment, workplace violence, or other misconduct.

Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

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