Matters Of Trust

When an employee embezzles from you, it's no laughing matter.
Magazine Contributor
13 min read

This story appears in the March 1998 issue of Entrepreneur. Subscribe »

Like many entrepreneurs, Mike Lacey struggled during the recent recession. As founder of the Hermosa Beach, California, Comedy & Magic Club, the 44-year-old Lacey rode the popularity wave of stand-up comedy in the late 1970s and '80s, only to face dwindling crowds once the economic tide turned against Southern California. But he persevered--thanks in no small part to performing regulars like Jay Leno and a dedicated team of employees working behind the scenes.

"They were really here [for us] during the recession," raves Lacey of his 50 employees. "They pitched in for all the right reasons."

But everything wasn't completely right at the club. "In 1995, we started seeing more bodies come through the door, but we didn't see the money in the bank," says Lacey. "We kept saying, 'We're getting a lot more people, but we don't have the funds to show for it.' "

What was wrong? One of Lacey's trusted employees--a woman who'd been promoted to bookkeeper--was embezzling. "We all did everything we could to keep costs down, and lo and behold, it wasn't that our costs had gone up . . . it was that somebody was embezzling $8,000 to $10,000 a month--sometimes as much as $12,000 or $13,000," says Lacey.

Not that the embezzlement was immediately apparent. "We just started seeing things that didn't make sense," says Lacey. "The explanations for why there wasn't any cash in the bank kept getting stranger. We [knew] something was wrong, so we brought in an accountant [to look at the books]."

Eventually, Lacey's bookkeeper confessed her crime--although, says Lacey, she initially confessed to stealing just $27,700--a sum much lower than the more than $175,000 she has subsequently been convicted of stealing.

"This woman married her high school sweetheart, had three children, went to church every Sunday--she didn't look the part," says Lacey. "And everybody who called me after this happened said the same thing: 'It's almost always the person you'd say would never do it.' "

Case Closed?

You might think that's the end of the story--employee caught, confessed, convicted. But for Lacey, whose embezzlement episode became known throughout the community, the saga was just beginning. There was still the matter of surviving the employee theft--both professionally and personally.

"It isn't so much the [money] she stole," says Lacey. "It's that she was able to [betray] all these employees who had worked incredibly long hours."

Would all their hard work not be enough to get the club through this crisis? Would Lacey himself lose faith in people in general--and those working for him, in particular? In a word, no.

"There are always more good people than bad," says Lacey. "People do care; they want to help. I am the most thankful guy on the planet."

Thankful because once word got out about what had happened, big-name comedians called to say they'd come in to do shows. Customers lined up outside the doors; they even offered to donate money and answer phones. And Lacey's other employees--stunned and upset by the embezzlement--asked their boss how they, too, could help.

"It was much like 'It's a Wonderful Life,' " recalls Lacey. "Every comic and all the variety acts were saying 'We're not going to let anything happen to the club. We're all coming down.' "

And they did. So what started as a cautionary tale evolved into, well, a story with more than a few Capra-esque elements. Lacey says now, "We're fine--and we're going to do great."


Although he professes to have always been careful in overseeing his business, Lacey says he's now instituted even more safeguards against employee embezzlement--including having more people look over his financial records. And he's switched banks because of the lack of scrutiny he felt his former bank gave his company's check processing during the time of the embezzlement. "This never would have happened if it wasn't for the fact I was naive enough to think that if somebody forged my name on checks, the bank would [catch it]," Lacey claims. "If they had called me once when the checks came in looking terrible, it never would've happened."

As for what has happened to his former bookkeeper, Lacey feels only sadness. "No one wants to see a mother of three go to prison for four years," he says. "You just wish you could change the whole thing--but you can't."

Play It Safe

There's no sure-fire way to prevent employee theft. But Read Hayes, president of Winter Park, Florida-based Loss Prevention Specialists, offers these steps to safeguard your business:

1. Maintain a culture of honesty. "Define what's out of bounds and what's not," says Hayes.

2. Carefully screen employee applicants. "Past behavior is the most powerful [indicator] of future behavior," stresses Hayes.

3. Institute procedural controls that limit the opportunity for theft.

4. Make use of available surveillance technology.

5. Follow up on the safeguards you use. Hayes notes, "If nobody looks at [loss-prevention] reports, you're not going to have deterrence."

On The Take

Ever wonder what goes through an embezzler's mind? In this exclusive disclosure, one ex-embezzler reveals why she stole from a former employer:

"The funny thing about it was I had never done anything like this before. I'd seen other people steal while I was working at other places and thought, `No, this isn't right.' I once managed a video store for two years for only $4.25 an hour--and I never took anything. I was so honest.

"So what happened? I was working as a sales clerk at a retail store in Phoenix, Arizona. I didn't know anybody was stealing from the register until one day somebody made a comment like `Oh, I've given myself a raise.' I said, `What are you talking about?' Turns out, everybody was stealing.

"What set me off, though, was when a new computer system failed to record free memberships that we were authorized to give to customers. I got a call from the accountant saying I was $50 short--and that money was docked from my paycheck. The manager eventually agreed there was a computer glitch--but I never got my money back.

"Anyway, one day a customer came in, bought a whole bunch of stuff, handed me a $50 bill and said he didn't need a receipt. He walked away, and I'm holding the cash, and all of a sudden the devil said `You know what? Here's your $50.' And I stuck it in my pocket and voided the sale.

"I eventually stole more than $3,000. What prompted me to do it was all the broken promises. I didn't get a raise I'd been promised. The health insurance we were supposed to get never materialized. Even a promotion I'd received was taken back after I had to spend a month in the hospital.

"I was never caught. I just got fed up with the way things were. The way I see it, the owner was robbing the employees. No matter what he promised, he never, ever delivered. I'm glad it's over."

The Cost Of Fraud

  • Organizations lose 6 percent of their annual revenue to fraud and abuse.
  • The average organization loses more than $9 a day per employee to fraud and abuse.

Source: Association of Certified Fraud Examiners

Join The Club

Just don't forget your reading glasses.

By G. David Doran

Although most entrepreneurs read business books to keep up with the latest ideas, many are joining reading groups to gain a better understanding of what they've read.

On that note, a number of publishers and authors--including Amacom, Berrett-Koehler Publishers Inc. and Bard Press--have teamed up to form The Consortium for Business Literacy. The Consortium is encouraging the formation of business reading groups where concepts written about in business books can be critiqued and, ultimately, brought into the workplace by readers.

"Businesspeople are being asked to do three or four tasks at the same time, and they want to increase their skill levels accordingly," says Charles Decker, director of the Newbridge Communications business book club in New York City.

Maria Hernandez, a Union City, California, management consultant, uses reading groups to get clients up to speed on the latest management techniques. "[Business owners] don't have time for night school," says Hernandez. "A reading group is an effective way to get this vital information across."

The Consortium publishes a free brochure that outlines the program and offers tips on how to get involved in a reading group.

Here's A Tip

Beware of advice offered over cocktails.

By Debra Phillips

Die-hard "Seinfeld" fans may recall an early episode in which perennial underachiever George Costanza gives comedian Jerry Seinfeld a "hot" stock tip. With reservations, Seinfeld invests in the stock and watches with horror as its value plummets. The moral of the story? Unsolicited advice is unlikely to leave you laughing all the way to the bank.

Nowhere, perhaps, is the potential for bad advice more prevalent than at that most elbow-rubbing of gatherings--the cocktail party. "Cocktail parties make people more vocal about `I'm doing great; I don't have any down stocks,' " observes Chris Flanagan, senior vice president of Boston-based Mellon Private Asset Management. "It might make somebody who's on the listening end of this more courageous."

You might get other types of advice--say, tips on where to open a second location of your business. But given a healthy economy and a nationwide fixation on the stock market, it's clear that investment leads set the most tongues a-wagging.

So . . . want a hot tip on how to deal with all those Warren Buffett wanna-bes? Always keep this in mind, says Flanagan: "Your investment objectives aren't necessarily the same as those of the person giving advice." What's more, think twice before opening your mouth.

Heard On The Streets

  • He's B-A-A-A-C-K! Perennial presidential candidate Ross Perot has resurfaced--this time, to voice strong opposition to recent attempts to rewrite the nation's patent laws. Certainly, the ever-feisty Perot possesses the financial wherewithal to generate attention--not to mention some pretty nifty-looking charts.
  • If a forest of technology firms falls in a nameless region, does anyone hear it? Apparently not, judging by the rumblings of high-tech folks in Southern California who are a little irked with all the media ink raining down on the Silicon Valley. Efforts to dub the burgeoning SoCal tech scene have yet to meet with success--but that isn't keeping the sun-soaked from dreaming up names like "Technology Coast."
  • Take a reading of civic pride in the nation, and you might find that Jackson, Mississippi, residents score off the charts. It's no wonder why: The recently announced multibillion-dollar merger between Jackson's own WorldCom Inc. and MCI Communications Corp. is the biggest thing to hit the Southern city since, well, who knows what. Reportedly, the much-ballyhooed global telecommunications deal is equal to the entire state budget of Mississippi--gulp!--three times over. Local entrepreneurs should get quite a charge out of this.
  • The escalating demand for toll-free phone numbers seems to be taking its toll on businesses scrambling to avoid getting lost in the numerical mix. With the introduction of the 877 prefix in April, there are concerns that customers will dial incorrect vanity numbers at a cost that would rival the phone bills of even the most talkative of teens.

A New Contract

Anti-bundling and HUBZone provisions give small businesses an edge in a recently signed bill.

By Stephen Barlas

For those of you hoping to sink your teeth into a federal contract, there's good news. A few key measures were included in the SBA Reauthorization Act of 1997 signed by President Clinton December 2.

Two provisions of note: one dealing with incentives to discourage federal contract "bundling" and another dealing with HUBZones (areas that are smaller than counties and have high poverty rates). The anti-bundling provision attempts to keep for small businesses federal contracts thathave historically gone to the small and medium guys. More and more, bite-sized federal contracts have been grouped together foradministrative reasons so that only a Fortune 1000 company could get its jaws around the bid.

For the first time, federal procurement officials will award extra "points" to a large contractor whose bid for a federal government contract, be it from the DOD, NASA or any other agency, includes small companies that would get some of the work, especially the portions of a "bundled" contract that had in the past gone to smaller companies.

The anti-bundling provision doesn't have very sharp teeth. It simply creates an incentive, which may or may not turn out to be worth anything. This uncertainty was reflected in a lukewarm endorsement from Jere Glover, chief counsel in the SBA Office of Advocacy, who calls the provision "a step toward addressing some small-businessconcerns."

But Felix Martinez, director of procurement programs for the American Consulting Engineers Council, 85 percent of whose members are small-business owners, calls the provision a "good compromise."

As for the HUBZone measure, call it a Gold Rush for entrepreneurs, who will be stampeding to HUBZones in the months to come. Starting October 1, 1 percent of all federal contracts will be reserved for small HUBZonebusinesses for a total of about $2 billion. The percentage increases bit by bit, but only until it hits 3 percent in 2003.

To bid for a part of that pot, a small business must be located in acensus tract where at least half the households have an income of less than 60 percent of the Area Median Gross Income. The business must also hireat least 35 percent of its employees from that or surrounding HUBZones.

Wondering if you'll qualify? You'll have to sit tight for now. While there are some estimates for certain states on the number of tracts that will qualify, there is no national count yet.

Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.

Closing Remarks

A literary look at the art of selling.

By Debra Phillips

Maybe selling is the true American pastime--it seems everybody does it. Certainly, it's part and parcel of the entrepreneurial life.

As a result, small-business owners might be interested in the recent anthology Closers: Great American Writers on the Art of Selling (St. Martin's Press, $23.95 cloth).

Edited by Mike Tronnes, Closers lives up to its billing by featuring works from such literary lions as John Updike, Eudora Welty and Sinclair Lewis. Not surprisingly, an excerpt from Arthur Miller's classic "Death of a Salesman" is also included.

If selections such as Miller's seem inevitable, however, other selections are far more eclectic. Take, for instance, Flannery O'Connor's funny--yet eerie--tale of a door-to-door Bible salesman who walks off with a woman's artificial leg. Then, too, there's the stark desperation of a burned-out salesman in David Mamet's "Glengarry Glen Ross," who matches Willy Loman pathos for pathos.

In Tronnes' estimation, no fewer than 3,000 sales messages are thrown our way every day. The stories in Closers reveal the people behind the pitches--in all their glory (or lack thereof). True American pastime or not, selling makes for compelling fiction.

Contact Sources

American Consulting Engineers Council, (202) 347-7474,

Berrett-Koehler Publishers Inc.,

Cavern Supply Co., P.O. Drawer Y, Carlsbad, NM 88220

The Church Brew Works, 3525 Liberty Ave., Pittsburgh, PA 15201, (412) 688-8200

Comedy & Magic Club, 1018 Hermosa Ave., Hermosa Beach, CA 90254, (310) 372-1193

Maria Hernandez, 2454 Cameron Dr., Union City, CA 94587, (510) 487-2776

Loss Prevention Specialists, (407) 671-8226,

Mellon Private Asset Management, 1 Boston Pl., Boston, MA 02108

Newbridge Communications,

Stuart Raven Barter & Associates, (213) 931-2177,

U.S. Senate Committee on Small Business, (202) 224-8584

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