Last Updated: Nov 30, 2016
employee theft is not uncommon in today’s workplaces, and it’s often the employee you least suspect that is the culprit. Here are tips on spotting and eliminating employee theft in your small business.
Open up your daily newspaper on just about any given day and there’s a very good chance you will see an article about one or more employees caught stealing in some form from their place of employment.
Two such cases were reported within a four-day span in one New York newspaper: a woman who allegedly claimed her ailing boyfriend as her husband in order for him to receive medical treatments (it cost her employer over $100,000 in out-of-pocket costs); and, two employees at a retail establishment who supposedly stole and sold store merchandise for profit on eBay. The stolen merchandise was valued at over $50,000.
employee theft — pilfering, larceny and embezzlement to name a few — comes under the umbrella of what is considered fraud. However defined, the end result is the same: businesses suffer a loss because an employee unlawfully takes something from an employer. On average, it takes 18 months for an employer to catch an employee who is stealing. Most employee theft comes to the attention of the employer either by another employee or is revealed by accident.
Every year billions of dollars are lost by businesses nationwide to employee fraud and theft and the number of incidents are rising. If your business is small, you’re especially vulnerable to occupational fraud and less able to absorb a loss than a larger business; in fact, it is not unusual for a small business to be bankrupted by the theft of a single employee. In their 2016 Report to the Nation on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) reports that small businesses suffer a median loss of $180,000.
In “How to Prevent Small Business Fraud: A Manual for Business Professionals,” CFE cites two key factors that contribute to the large losses suffered by small companies — lack of bASIc accounting controls and a greater degree of misplaced trust. More often than not it is the long-trusted employee — typically the small business’s one-person accounting department — who is found to be the thief. In other words, the person you least suspect is usually the one who commits the crime.
Why and which employees steal from their employers
According to the ACFE report, 54% of fraudsters are between the ages of 31 and 45. Older workers who steal tend to take much more than their younger counterparts. Managers and executives are the usual culprits for the worst cases of fraud. It’s typically not the new-kid-on-the-block, but the long-term and trusted employee who ends up being the company crook. Often, it is someone who’s been with a company for more than three years. employees at private companies cause more losses than those at public or non-profit establishments.
There’s an old saying that’s long been accepted in fraud prevention circles called the 10-10-80 rule: 10 percent of people will never steal no matter what, 10 percent of people will steal at any opportunity, and the other 80 percent of employees will go either way depending on how they rationalize a particular opportunity. The good news is that there is much a business can do to sway this 80 percent to their side.
Another widely accepted theory is that of the late Dr. Donald R. Cressey called the “Fraud Triangle.” According to this theory, there are three factors — each a leg of a triangle — that, when combined, lead people to commit fraud.
One leg is an individual’s financial problem or need that they perceive is nonsharable; i.e., a gambling debt. The second leg is this individual’s perception that there exists at the place of business an opportunity to resolve the financial problem without getting caught. The third leg is the individual’s ability to rationalize or justify the intended ilLegal action (“After all I did for my company, they mistreated me. I was entitled to that money.”). In shorter terMS, PRESSURE plus PERCEIVED OPPORTUNITY plus RATIONALIZATION equals FRAUD.
Some key ways to prevent employee theft
Consider running a credit check on prospective employees, as people with financial difficulties are more prone to fraud. In order to do this, you are Legally required to notify the job applicant in writing that a credit report may be requested. You also need to receive the applicant’s written consent.
Be clear with employees that your company has zero tolerance for employee theft of any sort. This includes not only outright stealing, but also things such as taking a long lunch break without approval, using sick leave when not sick, doing slow or sloppy work, or coming to work late or leaving early.
Write and distribute a company policy that outlines exactly what constitutes stealing. Contact your local police department if you do discover an incident of employee theft so you send a message to your employees that stealing will not be tolerated.
Some resources for the small business owner
Mastering Internal Controls and Fraud Prevention
In 2005, the American Institute of Professional Bookkeepers (AIPB) made available for the first time to non-members this self-study course. It focuses on “how to prevent — or spot — credit card, check and vendor fraud, as well as employee theft and embezzlement.”
Steve Sahlein, Co-President of AIPB, recently shared some fraud prevention tips: “Small businesses don’t always have the needed internal controls; for example, the employee who signs the checks should not be the same employee who perforMS the bank reconciliation, and the employee who takes the orders should not be the same person who handles the shipping.” Once a business owner knows what to look for, claiMS Sahlein, those red-flag employees capable of theft and fraud will be easy to spot.
Small Business Fraud Prevention Manual
Available from the Association of Certified Fraud Examiners (ACFE), this manual “provides information on the most common internal and external fraud schemes committed by customers, employees and vendors against small businesses as well as tips on how to prevent these schemes from happening to you.” To order this manual, click here.
Many of the dollars lost to small businesses might have been saved had business owners made the prevention of employee theft one of their top priorities. The simple truth to remember is that most employees will not commit fraud if they believe their company will detect it; that they will get “caught.” By establishing internal controls and letting employees know that you are vigilantly looking out for fraud, you can indeed deter many of your employees from attempting to steal in the first place. Considering the fact that the average median loss from small business employee theft is $147,000, prevention will always be cheaper than the cure.
Related: Employee Theft – The Insider Threat