Onsite theft: bilked, betrayed and bewildered: tales of sticky-fingered employees: at one company, a maintenance technician used his employer's credit card to finance an underground supply company. At another, a courtesy officer cashed altered rent checks. Employee theft is an age-old problem. Apartment owners who experienced it first-hand share ways to identify and deter it.

Unblemished. That described the performance of the courtesy officer, a resident who patrolled one of McSha Properties' sites. There was no doubt about his honor. After all, he was a security officer, presumably investigated by his employer, the contractor McSha hired, and found to be clean as a whistle. What were the odds he'd abscond with the receipts?

Alas. His sticky fingers were caught in the night drop box from which he took money orders, altered them and used his wife's maiden name to cash them.

"The problem is that people don't know that money orders are traceable, said McSha Senior Vice President and Vice President of the Oklahoma Multi Housing Association Laura Moody.

Traceable, yes. But in this case, the officer was caught because of a serendipitous event--his personnel file was open for an unrelated reason and Moody noticed that the signatures matched. It was a fluke, Moody said, but nonetheless, the beginning of the restitution process.

Moody said McSha already had measures in place to protect against theft. It accepts only checks and money orders for rent payments--which avoids the problem of available cash onsite--employees must pledge their trustworthiness by signing a document attesting to their promise and the company engraves tools to avoid theft. Nevertheless, she said, they are vulnerable.

Moody, who has been with McSha since 1991 and watched the company grow from 300 units to more than 6,000, said she would like to say she's seen it all, but employees of any size company find new ways to get their hands in the till.

"It's usually the ones you would least suspect who are smarter than you think," Moody said, concurring with the widespread opinion that there are many employees who fake stupidity about accounting and administrative practices and hoodwink unsuspecting owners.

A Widespread Problem

Today's news is rife with stories of corporate chicanery. In one recent story, the former WorldCom Inc. chairman was convicted of orchestrating an $11 billion fraud. Corporate scandals are so prevalent that legislation, the Sarbanes-Oxley Law, was enacted to protect against malfeasance that has so far cost investors billions and employees their jobs.

While corporate theft at the behemoth level is grabbing the news, employee theft is nothing new--it's just not newsworthy.

Ask any apartment owner, especially independent rental owners, who may have been victimized by a property manager, maintenance technician, janitorial staff member or any other employee and you will get an earful. If it's not their own story, they'll likely retell someone else's that is financially devastating, surprising, embarrassing or any combination of these.

According to several interviews conducted with independent rental owners, their employees have absconded with entire rent rolls, duped residents into giving them money, dipped into the rent box, cooked the books, used the company credit card for personal gain and altered legal tender. Dishonest employees too often avoid criminal prosecution because of an owner's lack of a paper trail or lack of priority by police or the local district attorney who does not think the loss was egregious or provable.

Don Werner, Chairman of NAA's Independent Rental Owner's Committee (IROC) and Owner of Performance Real Estate Management LLC, Denver, a 112-unit community he manages single handedly, said independent businesses are particularly vulnerable.

Werner said he estimates that half of NAA's independent rental owners have full-time jobs outside of property management. He said many independent rental firms are a one-person show and that person serves as manager, administrative staff, maintenance worker and leasing agent. As such, the resources are not available to hire qualified employees or put internal controls in place as a safeguard.

"That usually means that we have no crew and do most of the work ourselves," Werner said. "As independent owners acquire more units, they tend to rely on employees, contractors and even residents to help with the day-to-day operation of the property. One problem the apartment industry faces is the lack of public discussion or acknowledgment that we're being had by employees."

Implementating Safeguards

Since realizing her problem with the sticky-fingered security officer, Moody said independent owners should always adopt a "no cash" policy, though even that is not fail-safe. She warned of property managers who are residents as well, who have elaborate schemes that reward residents for renewing and post payments to their personal account.

"We have managers sign an agreement that they are responsible for any losses," Moody said. "We think an agreement helps. We didn't used to do it, but the problem became rampant among managers and service technicians. We also rely on a software system. When you manage a rent roll by hand, there's more room for problems."

Safeguards are important because prosecution isn't always an option, she said. "Twice we were up against a district attorney who wouldn't prosecute," Moody said. "Then you have to weigh the amount of the loss with the time it will take you to go through what could be hundreds of records, especially when you don't have an audit staff. So you cut your losses."

Moody recommended unscheduled audits, signed agreements with employees and having tools inscribed with the company name and phone number because they often land in the local pawn shop. Onsite, they keep records of serial numbers.

"Many of the policies we have now we learned from our own mistakes," Moody said.

Cleaning House

Carrie Gillis manages 700 units at six communities for New Colony Ltd., a commercial and residential property company headed by a single individual. Each apartment community has six or fewer employees, a situation that makes it difficult for one person to monitor all the site activity, Gillis said.

Gillis said it was a fluke that she discovered thievery by one of her maintenance workers.

"We inspect all apartments twice a year and I noticed tubes of caulking stacked up by a closet," she said. "I opened the closet, which is out of the ordinary for me when checking an apartment, and I found a complete maintenance shop.

"I went through our records for any peculiarities, like a stepped-up qualify for normal replacements. I found that the maintenance worker spent [an estimated $7,000] on our company credit card to buy supplies for an after-hours maintenance company. I wouldn't have noticed it because he had use of the company credit card."

When confronted, Gillis said, the employee owned up, but never made restitution. Gillis fired the employee, but, unable to document the actual cost of the loss, her company took no further action. Gillis, like many other independent rental owners, found it was not cost effective to pursue reimbursement because the legal cost would exceed the amount of the loss.

"As a single manager, I'd have to [spend company time] and go through a potentially lengthy deposition and trial, which would take me away from my job," Gillis said. "Instead, we just try to cut our losses." While a $7,000 loss may not seem like a great loss, she said, for an independent rental owner renting during a soft market, it is a big one.

Today, Gillis' company helps protect itself from theft by bonding all its leasing, maintenance and housekeeping staff. Gillis said the cost of bonding employees amounts to an additional $1 an hour to an employee's salary. "For peace of mind, it's worth it," she said.

Calling on Human Resources 

A rarely published list of sex offenders in the local newspaper alerted Gillis that one of the grounds maintenance workers, hired as a summer temp through an agency, was a convicted pedophile.

"[Independent rental owners] just don't have the resources to staff a human resources department whose sole focus is to hire qualified employees," she said. "We had no way of knowing. And then there's the trust factor. At a small property, you develop relationships with people and the longer you know them, the more you trust them. A small owner relies on himself and other immediate sources that may not be professionally reliable to conduct a background check."

Since then, New Colony switched to a temporary agency that checks employment, criminal, worker's compensation claims and reference histories of prospective workers, and they personally review the background, criminal and drug screening of each one. Only after they've worked 90 days, met the company's expectations and passed the agency's background check is a worker invited to become a permanent employee, she said. Why check on any worker's compensation claims? "Because there are people who go from place to place and file a claim for a bogus injury," Gillis said.

Protecting Against Loss

Sure, residents knew not to pay their rent in cash, but one of Werner's resident managers offered a deal too good to pass up. Pay rent to her in cash on the first of the month and receive a $100 discount on that month's rent. In a day, Werner's entire rent roll disappeared. By the third of the month, he confronted a few residents, only to find that they paid the manager, who he found also had altered residents' rent checks, making them payable to her.

Werner said he did a background check when this employee rented a unit, but did not do a criminal or employment check. Since the incident, Werner appealed to the local district attorney, who agreed to prosecute based on the forged checks. The paper trail Werner created--with the help of residents--was enough to put her behind bars, but he concedes that he is unlikely to recover any of the lost money.

Insurance companies strongly recommend that owners prosecute an employee who is caught stealing. The insurance companies believe that restitution and an apology fail to deter future theft.

Werner said he now knows the value of using an outside company to screen his employees, including multi-state criminal research and credit checks. He also added a rider to his property, casualty and business owner's insurance policy, which some insurance company's call Employee Dishonesty coverage. While it won't prevent theft, it will protect him against a variety of employee crimes up to a maximum loss of $50,000 per claim. Werner's policy rider costs him $110 a year, a reasonable amount considering the cost of a loss, he said.

According to Brent Friesth, whose company, American Family Insurance, represents many independent rental owners, at least one month's rent should be covered by insurance, and the rates it charges are typically based on the number of employees.

Friesth acknowledged that many independent rental owners rely on resident employees, but whether or not they receive a salary or work in lieu of paying rent, they are still considered employees. Some thefts occur over an extended period of time and the value of loss is very difficult to establish; insurance policies typically have provisions for establishing loss that may be difficult or impossible to meet. Some policies contain prosecution clauses that require extensive legal pursuit of the employee as a condition of recovery. He said it is worth discussing this issue with the insurer.

Besides having insurance coverage for employee dishonesty, another benefit of carrying the coverage is that the insurance company will initiate the process of prosecuting the guilty party and gaining restitution. "This takes the burden of time and money off the apartment owner," Friesth said.

Whether insurance is purchased or not, he added, there is no substitute for careful controls. "To mitigate a loss, have insurance, have a good bookkeeping system and make sure your insurance agent understands your company, particularly how you compensate your workers, whether in salary or free rent," Friesth said.

Creative Recordkeeping

Melanie Kibble, Regional Director of Property Operations for Mercy Housing and NAA Region 8 Vice President, has been in business for 23 years and has experienced many employee theft issues. "For the small owner, the best advice is 'don't trust anyone, regardless of how much you like them,'" Kibble said. "When we trust employees too much, and we don't have safeguards and checks and balances in place, we make it too easy for people to steal."

At several companies where Kibble worked before joining Mercy, property managers misapplied rent and security deposits to their personal accounts, gave units to contractors in lieu of payment, falsified move-in and move-out dates and insisted they received cash for rent payment. She warns of leaving bookkeeping in the hands of a single individual.

"Onsite managers have tremendous authority as far as purchasing," Kibble recalled. "I had one manager purchase appliances on the company's account and resell them. Years ago, I had a maintenance worker charge the purchase of garbage disposals to the company account and then return them and keep the cash." Caution and diligence are smart safeguards.

Employee theft is professionally embarrassing, Werner said. "Who wants to say they've been taken advantage of by an employee, but I know few who haven't been," he said.

An Ounce of Prevention

Small businesses are more vulnerable to employee theft than large ones, and the most trusted employee should not be trusted, according to IROC members who've been victimized.

Here are a few sensible safeguards for apartment owners, particularly independent rental owners who often do not have the time to thoroughly investigate who they hire, computerize their accounting system or otherwise protect themselves against pilfering employees:

* Accept the fact that you are vulnerable to unsavory employees.

* Have strong internal controls and change them periodically.

* Buy fidelity bond or other insurance for all accounting and key employees to indemnify against theft and embezzlement.

* Require your employee(s) to take a vacation--it prevents embezzlement as it prevents one employee from having an extended, exclusive look at the books.

* Computerize the bookkeeping system and conduct periodic audits to create an audit trail. If you don't have time, hire an accountant. Surprise audits are preventive maintenance.

* Find a reputable company to conduct background searches; check past employment, criminal history, education and references of your employees. Doing it yourself may not be fail-safe.

* Have a written policy outlining employee responsibilities, standards of honesty, general security procedures and the consequences of infractions, and have your employees sign it, even as a condition of employment.

* Watch out for suspicious behavior. Changes in an employee's lifestyle or office routine are red flags.

* Compare financial statements with preceding ones and study the change in accounts over time.

* Report internal theft to your local law enforcement agency.

* Listen for resident comments about potentially unusual relations with property management staff.

* Trust no one.

* Raise consciousness about employee theft--talk about it with fellow apartment owners.--B.K.

Fraught by Fraud? Chances are Likely

Sticky-fingered property managers, maintenance workers and others employed in the apartment industry are counted among these statistics.

* 30 percent to 80 percent of all resumes and job applications contain lies and exaggerations (Security Management magazine)

* 5 percent of professional hires have criminal records (HR Logic)

* 75 percent of internal theft is undetected ("How to Identify Dishonesty Within Your Business," Business Security Publications)

* $60 billion to $80 billion annually is the estimated cost of employee theft to U.S. businesses (various studies)

* One-third of all employees steal from their employers (U.S. Department of Commerce)

* 31) percent of business failures are due to poor hiring practices (U.S. Department of Commerce)

* $75 billion is the annual cost resulting from poor hires, absenteeism, drug abuse and theft (U.S. Department of Commerce)

B. Kreisler, ImPrint LLC, is a consultant to the multifamily housing industry. She can be reached at [e-mail] or by calling 703/366-2861.