From a recent scam reported in the Sacramento Business Journal in which three employees stole $18 million from a local casino to an employee taking an unapproved long lunch, workplace theft is a growing and varied problem of which all employers should be aware. The Association of Certified Fraud Examiners (ACFE) released a report in 2010 estimating that the median loss caused by employee fraud was about $160,000 and that a total of 6% of annual revenue is lost to theft throughout the country each year.

In most cases, the employee who defrauds your company will be the one you least expect.  And, as an employer, you will feel angry and betrayed as the person who stole from the company will likely be a trusted employee.  The ACFE found that a quarter of the employees who committed fraud were with their companies more than ten years, often in managerial positions, and that the theft took place over an average of 18 months before being detected. Frequently, it is the employee who makes the biggest show about his or her virtuousness and who works the most diligently who has something to hide. Generally, employees involved in theft exhibit three factors: (1) need; (2) opportunity; and (3) rationalization/justification.

Since there is a wide range in the types of behaviors that qualify as employee theft, it is likely that nearly all employers will deal with one of these issues at some point. Sometimes, it will be a large-scale fraud in which an employee creates fake vendors or adds fake employees to the payroll in order to collect on the checks written for payments, enabling the gradual skimming of large amounts of money off the company’s books without detection. In certain situations, an employee’s use of copyrighted material owned by the employer in an unapproved manner can constitute theft.  In other cases, it’s an employee taking materials or supplies from the company in order to conduct freelance work. Even such behaviors as over-reporting time worked, including failing to note a long lunch and claiming those extra minutes as paid time on a time card, are considered “time theft” and have financial repercussions to the employer.

Small companies are especially susceptible to employee theft as they often have fewer safeguards to prevent such behaviors and typically have fewer resources with which to absorb losses. In nearly every case, it is much more effective to implement procedures to prevent employee theft than to recover from the damages after an incident has already occurred. Unfortunately, with such varied methods employees can use to defraud their employers it can be difficult to detect and prevent all instances of workplace theft. However, there are a number of steps you can take to safeguard your business as well as to prosecute or pursue restitution if a theft does occur.

One of the easiest and most effective methods to prevent large-scale employee theft is to divide responsibility for any financial transactions between multiple employees.  Dividing responsibility will aid in eliminating the opportunity to commit theft.  If one person is responsible for issuing checks to vendors or handling payroll, then another employee should be the one balancing the books and signing the checks. If a single person is given full responsibility for maintaining the accounts of the company, it is far easier for him or her to disguise theft as a valid transaction.

Additionally, unscheduled and frequent external audits should be conducted on the financials of your business so that an indifferent party can detect any abnormalities or suspicious activities on the company’s books. An unapologetic lack of a predictable routine in conducting analyses of your business’s finances can prevent employees from knowing when to cover their tracks. It is the guilty employee who will be offended by his or her employer’s insistence on reviewing the books.

Another important method to safeguard against fraud is to get to know your employees and watch their behaviors. An employer who knows their employees will better understand their employees’ needs.  Thus, the employer will be able to identify employees who are in a financial crisis or may have a drug or alcohol problem and thus are more likely to steal from the company.

In addition, employers should take note of employees who refuse to take vacations, as they may be concerned that someone else will notice discrepancies in the financial records in their absence.  As such, it can be helpful to mandate regular vacations for employees who have access to financial records. An employer should take note if there are unexplained declines in profits, inventory shortages, or even rumors about employee behaviors. For example, an employee with a new and expensive medical problem may be prone to theft if he or she sees it as an easy way to secure new income to finance medical bills.

It may present a moral issue to an employer who wants to “help out” with an employee who is down on his or her luck, but it is important to ensure that such employees are not presented opportunities to defraud the company. Turning a blind eye to even minor theft can set a precedent to other employees who may see that there are limited repercussions to their actions if they steal from the company.

Also, employers should be on the look-out for employees who believe that they are solely responsible for the company’s success or maintain an entitlement mentality.  Employees who strongly exhibit these traits justify and/or rationalize their theft.  Often in investigations, we find that employees who were caught stealing from their employer did so because, in their mind, they deserved the money.  Employee reasons for deserving the stolen loot range from making the big sale or landing the big account to simply their years of “loyal” service.  In other words, the employee believes they are so important to the company, they deserve the money.

If you have reason to suspect that an employee is in some way defrauding your company, your first step should be to remove that person’s access and control over any financial matters. However, it is important not to jump to conclusions or directly accuse an employee as a false accusation can open an employer up to severe civil liability, along with alienating people who may in reality be loyal employees. Your next step should be to gather your evidence and present it to police or to your lawyer, who can help you to further investigate and assess what recourse is best in your particular situation. In some cases, particularly with minor theft, it can be enough to terminate the employee and seek restitution of stolen funds. In other cases, it is important to prosecute the employee and pursue criminal charges, both to recover the stolen money as well as to set an example to other employees that fraud will not be tolerated.

One problem many employers face is that they do not read or understand their general commercial liability insurance policies until after they have already been damaged by theft. Many of these policies do offer coverage for employee theft and the limits to this coverage may be lower than you think. Some companies offer separate employee dishonesty insurance, which can be a good safeguard for some employers as it can help to recover your business’s sound financial footing if a large scale employee theft does occur. If you have insurance coverage for such losses and you have any suspicion that an employee theft has occurred, it is imperative to notify your insurance agents immediately so that they can begin processing a claim.

In any case, it is important not to feel that you are alone. Employee theft is a problem most business owners face at some point, and accordingly, there are numerous avenues of support in dealing with these problems. At Radoslovich | Krogh, PC Attorneys, we have assisted dozens of clients in cases involving employee theft with outstanding results. Whether prosecution or restitution is the ideal recourse for your individual situation, we can help to ensure that your business and your assets are protected.

Categories: Uncategorized
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: