Some friends have offered their thoughts on the two-part embezzlement series.  I want to share one particularly acute set of observations, offered by a retired CEO and principal shareholder of a local manufacturer, whom I will call “Steve.”  Steve’s company employed (and still employs) several hundred people; and, over the course of several decades, he developed a keen understanding of the relationship between owners and employees.

In Steve’s view, my series neglected the principal protagonist in a private company, the business owner and his or her role in discouraging fraud.  The buck starts and stops at the top of every business.  A business owner must lead by example, demonstrating his own steadfast commitment to business virtue.  Steve insisted on keeping accurate books.  He never took a free meal or a postage stamp.  Company money was company money and not an extension of Steve’s personal bank account.  He always submitted scrupulously honest expense vouchers. He never allowed the company to pay for his personal meals or vacations.  He respected his company’s autonomy; and acted as an honest steward of his staff and his company’s well being.  He made sure his staff knew how he behaved.

Steve set the tone.  Senior managers noticed his commitment to business ethics.  They patterned their own behavior accordingly.  Middle managers followed the lead of their seniors and so on throughout the entire staff.

Steve never tried to live like a monk.  If he could justify paying himself a bonus, he followed company protocol.  He asked his board of directors to approve it and the company paid him the bonus net of taxes.  Simple.

Steve offered a related observation.  Don’t underpay your staff.  An owner should want his staff to know that they are being fairly compensated.  Owners who squeeze salaries to line their own pockets cannot hide that fact.  An infamous episode of baseball history will illustrate the point.  The Chicago “Black Sox” pocketed gamblers’ bribes to throw the 1919 World Series.  Eight players were banned for life; and they all bitterly complained that they were entitled to their own payday because their boss, the White Sox owner, Charlie Comisky, was a notorious cheapskate, who never paid them a fair salary.  Miserly pay grinds away at staff morale and encourages those with larcenous hearts to even the score.  More broadly, one cannot build a successful business if the owner chronically underpays her staff.

Owners who cook their books, who cheat the government, who charge their companies for personal expenses, or who squeeze their employees tempt employee fraud.  Every employee engages in bits of dishonesty, if it is only to take a pad of paper; and it is only a tiny fraction of employees that will cross the line to outright thievery.  The owner, whether he knows it or not, is coaxing the incipient crooks among his staff to stay clean–or not, by how he behaves.

The crooked owner opens the way for his employees to steal without fear of punishment.  I know of one instance where an underhanded business owner discovered forged checks, totaling several hundred thousand dollars.  He confronted his bookkeeper, who coolly told him that if he called the police, they would both go to jail.  The owner fired the employee, but never reported the crime.

I have no data to support this, but I would not be shocked to learn that 15% of business owners engage in doubtful or illicit practices–practices that encourage employee embezzlement and lead to under-prosecution.

Aside from encouraging embezzlement, an owner’s indiscretions will inevitably boil over and create other expensive messes.  Consider:  How should a tax cheat terminate his malingering employee?  How much severance should he pay?  Does he know that the employee probably knows that the IRS pays bounties to whistle blowers?  Does he know that the IRS has a hot line?  What if the employee later sues for wrongful termination, claiming that he was fired, not because of poor performance, but because he was a whistle blower?