Stealing company funds?

My employee was to collect $1800 for a fundraiser that she initiated (unknown to me at the time of purchse - by credit - in MY BUSINESS NAME). $900 to be credited to our students & $900 to pay for the items. Of the $1800 only $638 was turned into me from her (parents gave her the $ not the business for reasons unknown to me). Over the last 3 months I withheld $373.76 from her paychecks. Leaving a total of $788.24 owed to our students or fundraiser company. The employee quit last week. She was to be "fired" once all $ was paid back by withholding $ from her checks. She agreed to directly pay the fundraiser company the remaining $317.24 owed to them. However she "lost" 471 of the items each costing $1. She doesn't feel she needs to repay $471 which could've been sold by our students had the items not been lost by her. Is this embezzlement/larceny? My business is incorporated. She pocketed 1262 of the profit she has since paid back 473.76.
Parents adore her but don't know what she did.I am a little hesitant to file charges. We live in a small town where everyone grew up together. Bad people (that steal per se) have a way of weasling their way into the hearts of the public with their "sob" stories. She actually lost her other job around the time she started collecting money for our fundraiser. I just have a feeling that I will end up looking like the bad guy if I file charges...oh... which could really damage by sports business since the students / parents choose to attend my facility. She was the teacher for most all my classes and the kids / parents adored her... so did I (before this happened) and now the fundraiser company is threatening to sue my business if we don't pay all the debt she racked up (without my consent or knowledge).she asked me via email to withhold a specific amount of funds from her bi-weekly paycheck in order to pay back her debt.
She had absolutely NO authority to make ANY purchases on behalf of my business. Actually, her contract states that any and all fundraiser may only be initiated by the business owner. Also, it states that employess are NEVER under any circumstances allowed to accept any monies from students or their parents.

As she "owes" you the money, I would begin with sending a letter stating this and the date it is due (Say you give 2 weeks). Make the letter to the point but polite. Let her know that you can work out a payment plan that will suit both of you. Send it by registered post so she cannot say she did not receive the letter.
After the date, and if she hasn't sent, send another letter the same way. Make it a little sterner and give her another 2 weeks and still offer the payment plan.
Finally after this date, if she hasn't sent you the money, write a final letter (Stating this is the final letter) and ask that the whole amount be paid within 2 weeks or you have no choice in taking the matter further.
* Make sure you keep hard copies (Photocopy is okay).
* Make sure all dates are clearly seen.
* Make sure you leave your contact details on the letter - even better to use a business letter head.
* State everything you want in bullet form so it is easy to read.

If needed send her a copy of her contract and highlight the areas that she breached. (This should really be in the final letter as you really want her to pay and not have to take it further!)

I worked with a company and I unwittingly became the "debt" collector and this was the tactic they used. (3 strikes and your out.)
I also did the same thing to my former employer when they failed to pay me. With this evidence of contact I had a case when I took it further. (And won!!)

I Would NOT let this die down just because of public opinion. I would follow the advice given by pettab and then if there is no resolution, file a claim in a small claims court. if you have all the documentation to support your case then you have every right to proceed to take legal action.

I do understand your being between a rock and a hard place but you have two choices, proceed or drop it and find a way to get past it all. This is a very hard pill to swallow and I feel for you.
~jennifer