Employee Theft: Identify & Prevent Fraud Embezzlement & Pilfering

Employee theft is not uncommon in today’s workplaces, and it’s often the employee you least suspect who is stealing money from the company. According to one report, internal theft costs U.S. businesses $50 billion a year.

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.

Detecting Employee Fraud

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. The most common way employee fraud is detected is through tips, with half of the tips coming from employees. 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 is 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 2022 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 $150,000.

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.

Which employees steal from their employers – and why

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 non-sharable; 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

The first step to preventing employee theft is to screen job applicants thoroughly before hiring them in the first place. Background checks should be performed and should include a check on criminal history, civil history, driver license violations, as well as verification of education, past employment (including reasons for leaving), and references.
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.
Studies show that the more employees believe they will be caught, the less likely they are to steal.
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.
Business owners and senior management must themselves be role models of honesty and integrity, or they may risk setting up a work environment that justifies illegal and criminal activity.
Avoid at all costs allowing the finances of a business to be handled and controlled by a single individual. Separation of duties is critical, and no employee should be responsible for both recording and processing a transaction; i.e., Don’t allow the same person who sends out bills to collect the mail and prepare bank deposits.
Run irregularly scheduled surprise audits or have a third party audit your books once a year. Also insist that your bookkeeper or any employee who has access to monies take a yearly vacation so you can examine their records.
Make sure all checks, purchase orders, and invoices are numbered consecutively, and regularly check for missing documents.
Use a “for deposit only” stamp on all incoming checks to prevent an employee from cashing them.
Personally look into customer complaints that they have not received credit for payments.
Most incidents of employee theft are revealed by coworkers, but many still are hesitant to report these incidents to their employers. Set up a system whereby employees may report employee theft anonymously. You may also want to consider offering rewards for informants while keeping their identity confidential.
Unopened bank statements and canceled checks should be received by the business owner or outside accountant each month and they should carefully examine for any red-flag items such as missing check numbers. They should also look at the checks that have been issued to see if the payees are legitimate and make sure that the signatures are not forgeries.
Require all checks above a nominal amount to have two signatures. Never sign a blank check. Sign every payroll check personally. Avoid using a signature stamp.
Get an insurance policy that covers outside crime, employee theft, and computer fraud. It will be there as a safety net in case your fraud prevention tactics don’t work.
Small business owners should take the time to review accounts payable by checking cash disbursements and payments. A very common scheme to look out for is billing-scheme fraud where an employee sets up fictitious “phantom” vendors.
Be alert to disgruntled or stressed employees, or those who have indicated that they are having financial difficulties. Also, look for any unexplained significant rises in an employee’s living standards.
A positive work environment has been shown to deter employee fraud and theft. Open lines of communication, positive employee recognition, and fair employment practices will assist in the reduction of occupational fraud.

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.