Beware of the model employee," says George Welch, president of Matchless Manufacturing Co., a Harrisburg, Pa.-based manufacturer of disposable paper products. (Because of possible legal repercussions, we are not using the real name of the company, its owner, or the location.) "That gung-ho person who never wants to take vacations and never calls in sick may be stealing from you."

Welch, whose company has 35 employees, is speaking from experience. It was a badly timed bout of ill health that finally tripped up MM's model bookkeeper and alerted the company to a pattern of theft stretching back over 26 months. The woman became ill near the end of the fiscal year, when she normally would have prepared the company books for examination by MM's independent accounting firm. A fast look at the raw data was all the accountant needed. "Within two hours we knew that there had been a theft," says Welch.

Four years have elapsed since MM uncovered the first evidence that roughly $70,000 had been pilfered; setting things right proved a lengthy battle. The bookkeeper was prosecuted and found guilty, a process that took about eight months. The sentencing, which occurred a full year after the trial, offered scant consolation to the company for either its initial loss or the $25,000 in legal and accounting fees it incurred in bringing the case to trial. The bookkeeper's punishment was two years on probation and an order to repay MM $1,000, deliverable within two years. Her $1,000 check arrived on the last day of the second year.

"The whole thing has been a very negative experience," says Welch. "I guess you could say that, as far as the company is concerned, it is rather embarrassing."

Welch's reaction is not unusual. Embarrassment keeps many victims of employee theft from talking about their experiences; consequently there is very little awareness of the extent to which internal dishonesty has become a fact of business life.

Lewis Scheinman, president of the Pittsburgh-based Scheinman-Neaman Co., an industrial supplier of textile products with annual revenues of under $5 million, discovered last year that one of his employees had been stealing. Scheinman did not prosecute; he was covered by bonding insurance, a type of policy that reimburses the holder for losses due to employee dishonesty (see "Types of Bonding Insurance"). But he did start talking to others about what had happened.

The subject first came up at a small-business luncheon meeting. Seven people were sitting at the table with Scheinman that day. Three told stories of losses far worse than his, and three others contributed anecdotes about close friends.

"I've probably talked to 500 other businesspeople since then," says Scheinman, "and I can tell you that the odds of employee theft happening to anyone who runs a business are better than even."

The odds may even be skewed against small business, according to August Bequai, a Washington, D.C., attorney, who has written four books on the subject of employee-perpetrated theft. Not only do small companies lack money for extensive security systems, he says, they also lack the resources to fund legal actions, which can run into hundreds of thousands of dollars.

There are four factors contributing to most instances of employee theft, according to Mick Moritz, director of security for United Telephone Systems in Carlisle, Pa. These are: need or desire; a rationalization for the act; opportunity; and the perception that there is a low probability of being caught. A business owner has limited control over the motives or morals of his workers. What can be controlled, says Moritz, are opportunity and the perception of risk.

Awareness of the possibility of theft can, in itself, do much to minimize risk. "Other small businesspeople aren't going to like to hear me say this," says Lewis Scheinman, "but part of the problem has to do with the entrepreneurial personality. When one of my employees stole, part of the fault was mine. I wasn't aware enough of the need for controls and didn't want to be bothered with details."

In the absence of clearly stated guidelines, workers may simply decide they are entitled to take a little something extra as a sort of self-bestowed reward for hard work. When this happens, says Robert Allen of the Human Resources Institute in Morristown, N.J., it is often because employees have not really been made aware of the cost of their actions, or because they have been led to believe that such behavior is the norm within the company.

According to Allen, employees take their cues about what is and what is not acceptable from what their bosses do. If the owner breaks his own security rules, workers may soon conclude that honesty doesn't count.

Besides setting an example, employers should have a clear policy about the consequences of dishonesty and make sure their workers are aware that controls exist.

"Many times the workplace becomes a school for crime," says Mick Moritz. "We hire honest people and then we tempt them." The temptation can take many forms. Allowing one person to handle both company books and the company checkbook can create an irresistible opportunity. Other inducements include unchecked inventory, unlocked storage areas, unlimited access to equipment, and unmonitored gas credit cards or travel expense accounts.

In Moritz's firm receipts for gas purchases on company cars are routinely checked against mileage records. In one instance this check turned up a company car that appeared to be guzzling fuel at a prodigious rate, getting an average of 3.7 miles per gallon. Investigation revealed that the employee was not only topping off the tank in his family auto, but filling up the car he reserved for weekend drag racing.

What can tip an owner off to theft? According to Bequai, employees who continually duck questions or give ambiguous responses are good warning signals. Other prime indicators are:

* unusual sensitivity to routine inquiries

* records that have been altered, misplaced, or destroyed

* signatures that appear forged

* chronic inventory shortages

* improper dating of paperwork

* excessive overtime (indicating the employee may want to be on the premises when fewer people are around)

* complaints from customers about undelivered orders or bills for unordered goods

* partly empty cartons of stock (especially when left somewhere other than the normal storage location).

Pay attention to even minor discrepancies; petty pilferage may be part of a much larger pattern of theft. After Welch's bookkeeper left, for example, the company's soda vending machine, which had been consistently in the red, began to turn a regular profit.

Employers who suspect theft should conduct a thorough investigation before calling the employee in for an accounting. Look for physical evidence to support your suspicions, and try to find other workers who may have been witnesses to the wrongdoing. Try not to become overzealous, though. If you pop the lock to an employee's desk drawer, you could find yourself the defendant in a countersuit.

The more facts you have in your possession, the more productive an interview with the employee will be (see "How to Interview an Employee Suspected of Theft," page 98). And without an admission of guilt from the employee, your chances of recovering any damages are minimal.

Once you have proof that an employee has committed a theft, there are a number of options available. Your course of action will be influenced by a number of factors, including the size of the loss, the motive for the theft, the extent to which you believe that punishment will serve as a deterrent to other employees, the likelihood of bringing the case to court, and the quality of your evidence.

For some companies, prosecution is standard. Moritz says his firm usually fires and prosecutes anyone found guilty of stealing. "That way," he says, "everyone understands that we expect honesty." Bequai believes that more companies should prosecute, although he admits there is little support from law enforcement officials. "In some jurisdictions," says Bequai, "prosecutors won't touch a case unless it involves at least $100,000."

Matchless Manufacturing Co. was, to a certain extent, forced into its decision to prosecute. The pressure, however, came from the suspect, not the local authorities.

Initially, the company hoped that the bookkeeper, after failing a lie detector test, would make some offer of voluntary restitution. When she didn't, MM decided to present its case to the county magistrate to decide whether the facts warranted a formal trial.

The magistrate ruled in the company's favor, but the county had no funds for investigation. "It was up to us to pay to have an outside accounting firm come in to document the theft," says Welch. "And, at that point, we really had no choice on whether or not to proceed, because the woman's attorney had told us that, unless we took the case to trial and got a conviction, they would slap us with a countersuit. I guess you could say we were halfway up the stream without a paddle."

If Welch takes any consolation from having lost $70,000 to employee theft and then investing another $25,000 in a largely futile prosecution, it is, he says, that "my business is a lot more profitable in a lot of areas, now that that person is gone."