Question: How does an announcement that your business experienced its 27th straight record earnings year become a negative?

Answer: When it is accompanied by an announcement that a former employee allegedly stole $6.7 million.

That was the position National Penn Bank, based in Boyertown with 19 branches in Chester County, found itself in last February (2005).

In what bank President and CEO Glenn E. Moyer called an "abuse of a position of trust," the former employee, who had yet to be identified or charged, allegedly used "a sophisticated pyramid-style fraud scheme involving ID theft in various loan accounts."

Two days after making the announcement, Moyer said he was confident the bank was heading the right way in resolving the matter. The bank "pro-actively managed" the situation, drawing on internal resources as well as bringing in outside attorneys and forensic accountants.

"If you take those steps, you're off to a good start," Moyer said. "You have to stay focused on the core business. I think we've done a very good job cutting through a sophisticated scheme of ID theft."

While corporate scandals such as Enron and Tyco have made crime seem more commonplace on the business pages, it is still relatively rare to hear of such a large-scale fraud on the local front.

Indeed, looking back through past issues of the Daily Local News, it is far more likely that small, privately owned companies will become victims of employee fraud than their larger, public counterparts.

Because of that, the extent of the problem may be underestimated, according to those with experience in the field.

"Unfortunately, over the last five years I've represented in excess of 10 companies with similar issues," said Harry DiDonato, a partner with the law firm of MacElree Harvey Ltd. "I can certainly appreciate the position(National Penn) is in. Often you can do everything right and sometimes they figure out a way to beat the system.

"They will always get caught eventually, though."

For small- and medium-sized companies, the key to preventing employee embezzlement is to have a policy of internal controls in place, said DiDonato, who has no involvement in the National Penn case.

No one employee should have sole access to the company's finances. If there's a bookkeeper, owners should closely look at banking statements each month, DiDonato advised. "And they should have the bookkeeper know they're being looked over."

DiDonato said he represented one company in which an employee who was stealing money had left their previous firm under similar circumstances. The previous employer did not pursue criminal charges because the money was reimbursed. However, no one from the second company checked with the former company even though it was listed on the employee's resume.

"Background checks should include criminal histories, bankruptcies and talking to references," DiDonato said.

Another suggestion: Require dual signatures for checks over a certain amount. At MacElree Harvey, the amount is $3,000, DiDonato said.

Those who become victims should contact authorities right away. "These are not easy cases, there's a lot of paperwork involved," DiDonato said.

David Richter, of the West Chester private investigations firm Cloud, Feehery and Richter, suggested companies take DiDonato's advice a step further and conduct background checks on employees who handle money every five years.

"Credit can be checked so you can see if a person is living well beyond his means," said Richter, who also has no involvement in the National Penn case. "People don't like to do this, but if it becomes policy, it's a good standard operating procedure."

Conversely, trouble could be at hand if a person making a good living is in financial difficulty, the private investigator said. "If there's a person who has access to the money jar and they're strapped, that may be a problem in the making," Richter noted.

At National Penn, meanwhile, Moyer said the February announcement seemed to have allayed the fears of customers and investors.

When the company announced in January it was delaying its results because some "irregularities" had appeared in loan and deposit accounts, the bank received inquiries and concerns because National Penn couldn't quantify the amount of the loss, Moyer said.

Since the announcement, the reaction has been "praise for the manner in which we handled this," Moyer added.

Moyer believes the fact that the bank's share price has remained stable in the $26 range since the January announcement is proof that the company is handling the situation – the first in its 130-year history – the right way.

In doing so, the bank hopes to turn a negative into a positive.

This story originally appeared in the Daily Local News.

Update 11/02/05.