How to Reduce the Risk of Employee Theft

A man stealing data in a small business server room


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Security and surveillance strategies have improved tremendously in recent years because of advances in technology. Multi-use surveillance equipment and less conspicuous trend-tracking apps are more effective at identifying possible loopholes in the security system. These loopholes provide opportunities for thieves or embezzlers to gain unauthorized access to company coffers and inventory. 

Employee Theft Is on the Rise

According to data from the U.S. Chamber of Commerce, 75 percent of employees have admitted stealing from their employers at least once, and 38 percent admit to stealing from employers at least twice. The FBI refers to employee theft as the fastest growing crime in the U.S., costing businesses about seven percent of their expected margins. The problem becomes so dire for some businesses hit with employee theft that about 33 percent are pushed into bankruptcy due to losses from theft or fraud.

Reports collated by Statistic Brain indicate that more than 28 percent of business losses ranged from $100,000 to $499,000, and 25 percent of losses exceeded $1 million. These figures are disturbing because they demonstrate that business losses due to employee theft are not trivial. The median value of cash or goods stolen was placed at $75,000.

In 2014 alone, more than 1.2 million shoplifters and wayward employees were caught in the act, according to a study conducted by Jack L. Hayes, a loss prevention and inventory shrinkage control consulting firm. More significantly, these numbers were generated from 25 big retailers, suggesting that the problem is more widespread and the losses more substantial if small to medium retailers were included in the mix. According to several studies, losses from employee theft outpaced losses from shoplifting.

Employee Theft Methods

Employee theft may be difficult to detect because the perpetrator is an insider familiar with the system. Additionally, these employees have access to the keys of the kingdom because of their positions and their reputation as dependable team players. These are a few of the methods commonly used to steal from the company.

  • Accounting and finance personnel can redirect checks received to personal accounts. Since they maintain the ledgers, they can cover-up the theft by altering entries.
  • With access to the corporate checking account, employees can write checks for fictitious payments that are diverted to personal accounts.
  • Theft of cash requires planning since cashiers have to balance their cash box at shift closing. They can skim cash by deliberately undercounting change to customers and keeping the difference. For non-scan businesses, employees can quote a higher price for untagged merchandise and pocket the balance.
  • Theft of merchandise is carried out through surreptitious use of garbage bins, recycling system, or personal bags to sneak out business goods. In retail, the return and refund process yields many chances to steal from the company with or without the help of a third party.
  • Theft of supplies may seem petty, but the amount adds up quickly when employees become more brazen with taking office supplies for personal use.
  • Payroll theft refers to payment for unearned time and reimbursement for non-business expenses.

Understanding the Motivations Behind Employee Theft

In most companies, employees undergo a stringent screening process, including background checks, employment history, and credit checks. The process is designed to exclude unsuitable individuals from the pool of applicants. It is safe to assume that employees who pass the pre-employment hurdles are qualified, dependable, and trustworthy.

In many cases, the perpetrators are long-time trusted employees who change from hardworking, employee-of-the-month types to sneaky thieves who create meticulous plans to redirect funds to their own accounts or help themselves to inventory. What could possibly motivate these individuals to risk their career and livelihood to make a few thousand dollars?

  1. Drastic life changes: Loss of a loved one through death, divorce, or separation is a devastating development for anyone. This could reduce the employee's income stream and increase expenses. Faced with mounting bills, the employee seizes the opportunity to take small amounts of money. Often, they believe that they can pay it back without getting caught.
  2. Living beyond their pay scale: The largest losses are typically due to embezzlers seeking to live beyond their means. They seek to live the good life but are unable to afford the goods and amenities on their own. Stolen funds are used to acquire pricey cars, homes, and luxury goods. The employee may take expensive vacations and engage in activities that cost more than what they can afford.
  3. Opportunity: Employees may start out pilfering petty amounts because the opportunity presents itself. Customers may forget to claim their change or bookkeepers may find an opportunity to adjust the books without being noticed. Taking advantage of these opportunities may become habit-forming and soon spiral out of control.
  4. Addictions: Individuals dealing with compulsive behavior that costs money are not good candidates for jobs that involve cash handling or accounting. Compulsions can overcome even the best intentions, and employees end up funneling business funds to feed gambling, drug, and other addictions.
  5. Greed: Good old-fashioned greed drives trusted employees to exploit opportunities to take for themselves what has been entrusted for business purposes. Theft can take the form of funds diversion or appropriating equipment and other goods for their own use.
  6. Bad apples who passed the screening process: The employment screening process should weed out candidates with criminal records, but sometimes a few will pass the vetting due to inadequate background research or glitches in records processing. Placed in a position of trust, these individuals may be plotting their scheme to steal from the company even at the outset.
  7. Revenge: Perceived slights can drive employees to seek retribution by stealing from the company. An individual who is passed over for a promotion or lateral transfer to a preferred location or someone who takes a negative assessment too personally may feel that they are claiming what has been denied to them by stealing from the company.

Defensive Strategies to Minimize Employee Theft

The best defense is a proactive approach to the problem of employee theft. Security experts suggest that business owners and managers should assume that it is happening or that it will happen when the opportunity arises. This does not mean treating all employees with suspicion because that is the quickest way to sink morale. The strategy calls for a comprehensive systems review to identify the loopholes in administrative and operational procedures. 

  • Strengthen the pre-employment screening process to identify red flags. Positions that provide access to accounting and financial records should be subject to high-level background checks, covering credit history and all encounters with the criminal justice system. Cash-handling assignments should be given to established employees instead of new hires. Be wary of inconsistencies in the resume or blatant lies because this may be an indication of questionable character.
  • Establish a system of checks and balances especially for employees in sensitive positions with access to cash and other financial accounts. Implement a buddy system that involves at least two employees working together at all times. Procedures that call for voiding sales and issuing customer refunds should require approval by a supervisor or manager. In the bookkeeping and accounting department, ledgers should be maintained by a team of employees instead of entrusting only one person with the books. Under no circumstances should one person be entrusted with control of all financial records, which should be subject to unannounced audits by a third-party professional.
  • Use an outside accountant to examine key financial records. Bank statements, checks issued and checks received, and the ledgers for accounts payable and accounts receivable should be verified by a third party. Make sure that payees are verifiable and signatures on your corporate checks are legitimate. 
  • Install a video surveillance system as a deterrent. People are less likely to engage in dishonest behavior if they know that they are on camera. The cameras are there to discourage risky behavior before it happens. Real-time video monitoring may be helpful in high-risk and high-value areas such as stockrooms and the sales floor of luxury goods. 
  • Establish trash removal routines. Eliminate all chances of using the disposal and recycling system to steal merchandise for personal use or for reselling elsewhere. The process may include disassembling and flattening all boxes and crates, using clear garbage bags only, and ensuring one-way access to the dumpsters for employees.
  • Improve employee morale. Building trust is a two-way street. Get to know the employees, establish rapport, and build relationships because people may be less likely to give in to temptation if they are happy at work and care about their career.
  • Open an employee tip line. In relation to the previous suggestion, employees who are loyal to the company can help limit losses due to fraud and theft by reporting their suspicions anonymously. Ensure confidentiality of all reports, and investigate each report thoroughly before taking action. 

To Prosecute or Not to Prosecute

Small to medium-size businesses are disproportionately victimized by embezzlers and fraudsters. Sixty-four percent of small businesses report that they have been victims of employee theft, yet only 16 percent report it based on a study conducted by a doctoral student in criminal justice at the University of Cincinnati. Often, small business owners do no more than fire the employee because pursuing litigation is costly with no assurance that stolen funds will be paid back. Other companies refrain from suing to avoid scrutiny of their confidential records.

When it comes to employee theft, prevention is the best defense. Review your systems and procedures to identify vulnerable areas, and make the changes as needed. It may help to work with a neutral party with a fresh perspective to find the red flags. When incidents of fraud and employee theft are found, act quickly, decisively, and firmly. Follow a zero-tolerance policy to protect your company from incurring substantial losses due to employee theft.