Employee Theft on the Rise:

What You Can Do To Protect Your Bottom Line

U.S. businesses could fund the entire proposed economic stimulus plan with the projected employee theft losses from 2008 alone.  That’s staggering.

The Association of Certified Fraud Examiners in its 2008 Annual Report estimates American businesses lost approximately $994 billion to employee fraud last year, with the median loss about $175,000.  More than one-quarter of the cases likely reached $1 million or more.

In a recessionary economy, those are losses companies cannot weather.  Yet, the same sour economy likely will spark a cottage industry of employees who steal from their workplaces.  Some because they feel they must in order to survive; others simply because they can. 

Chances are, managers and owners won’t learn about the thefts for two years and they’ll be surprised by the thieves’ identity.  Many of those caught in fraud schemes are highly valued, trusted employees.  Often, it’s that blind trust that costs a business.

While not every trusted employee turns rogue, every smart boss will ensure safeguards are in place to help deter temptation.  Fraud occurs when no strong system of internal control has been instituted.  It’s impossible here to provide a complete primer for combating embezzlement and fraud, however, as Certified Fraud Examiners at Carr, Riggs & Ingram, we offer some simple precautions that can help protect one’s bottom line.

The workplace is a reflection of our culture.  People will follow the lead of those around them.  If the executive office sets a tone of strong ethics and a company’s hiring practices diligently weed out unethical applicants, the likelihood of trouble won’t disappear, but it is lessened.  Conversely, the boss who skirts ethics to play the angles fosters similar mores among the troops.

Use background and credit checks.  Just because a headhunter sends you an applicant, it doesn’t mean it has run background or credit checks.  When using these firms, make sure the contract includes background, criminal and credit checks – then confirm they actually were performed.  If hiring in-house, identify and use a reputable firm to conduct all three checks; it could save a lot of money in the long run.

Institute a system of checks and balances.  Workers cannot be trusted 100%; there must be a separation of duties.  The person who keeps the books, for example, should not also sign checks.  Restrict those who deposit funds or are account liaisons from writing counter checks during bank visits.  Have all bank statements delivered unopened to you and take the time to review them for anomalies.  Collusion is more prevalent than most managers believe; keep your eyes open!

Pay attention to employee habits.  We’re not suggesting a Big Brother approach, but be observant in the workplace.  Pay attention to indications of stress and attitude changes among workers.  Know whether they’ve had unexpected medical crises or spousal job loss, or if bill collectors are calling at work.  These could be warning signs a generally honest employee is facing heavy pressure to become dishonest.

Paperless transactions could invite fraud.  More business than ever is conducted electronically.  As a result, new controls may be needed to compensate.  Visit branch sites occasionally to pass out payroll checks…and require IDs.  You’ll get to know your workers and prevent payments to phantom employees.  Randomly visit vendors to ensure they’re real and not dummy offices.  Review online orders and cross check payments against bank statements for anything unusual.

Utilize technology instead of having it used against you.  Invest in recognition technology and have it installed on your systems.  It can uncover fraud by identifying unusual vendor payments, series of checks written just under maximum payment levels, people getting unusual numbers of payments, and so on.  With it, you can certify all financial information is coming from the right sources.

Purchase employee theft insurance.  Read the policy carefully and understand its liability limits and your carrier’s definition of fraud.  Learn what constitutes a single fraud versus an ongoing case of “one” theft.  Review the policy each year to ensure the language and limits have not changed.  Insurance may not completely cover a fraud, but it can mitigate your loss.

As organizations become larger and more complex, it potentially is easier to initiate and implement fraud.  That said, small businesses – even family owned ones – are not impervious to fraud.  People who defraud workplaces typically are smart and highly motivated.  They understand how companies work, recognize their weaknesses, and then exploit them.

When a weakness is found, thieves often make a small “mistake” to see if anyone notices…then progressively larger ones.  If these forays go unchallenged, the real theft begins.  That’s why it is critical to be vigilant about all fraud, no matter how small.  And when fraud is uncovered, the offender must be terminated – no exceptions.  If not, others will feel they won’t be fired if they, too, steal.

The object is not to stop all theft; that’s impossible.  However, knowing the boss and fellow employees follow strong ethical guidelines and are diligently monitoring company operations can be a major deterrent.

These articles are published for the use of our clients, advisors and friends. The technical information they contain is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. For additional information, please contact our firm.