The majority of employee thefts are occurring in organizations with 500 employees or less and the median loss is $357,650, according to a report by Hiscox, a specialty insurer.
The main types of theft are outright theft of cash and check fraud, with rogue employees writing checks to acquaintances and trying to cover their tracks in the firm’s accounting system.
According to the Hiscox Embezzlement Watchlist:
- 79% of cases included more than one perpetrator. The average number of people involved was three.
- 85% of cases were perpetrated by someone at the manager level or above.
- 70% of cases lasted more than a year.
- 31% of crimes went on for three years or longer.
- 39% of those who experienced embezzlement saw more than one case in their career.
- 33% of perpetrators worked in the accounting or finance department.
- 39% of embezzled funds were recovered on average, through settlements, restitution or insurance.
- Nearly 75% of total losses included direct theft of cash or misuse of bank deposits or transfers.
Rotten gatekeeper
In some cases, the fraud starts where the buck stops: the chief financial officer. In one such action in New Jersey, the accused CFO was suspected of diverting more than $6 million from the company to pay a host of personal expenses such as real estate taxes, motor vehicle costs and credit card bills.
For a full seven years, the CFO designated his own business as a company vendor, cutting checks for services that were never performed, which he deposited into his personal bank accounts. He was asked for copies of the invoices, prosecutors said, but he informed colleagues he kept them in his office.
Prime suspects
According to Hiscox, there are some typical traits that an embezzler may exhibit that you should be on the lookout for:
- An employee having a financial crisis.
- An employee whose lifestyle is out of proportion to their salary, such as fancy clothes or an expensive car.
- An inquisitive employee who wants to learn how everything in the company works, even if it doesn’t relate to their job.
- An employee arrives first every day and is last to leave. They may also not even take vacations. This could mean they are trying to ensure nobody goes through their files when they are not there.
- People who take risks in other parts of their lives.
- A disgruntled employee who may have been passed over for a promotion or feel underappreciated.
What to do
For small business owners, Hiscox recommends:
- Sending bank statements directly to your home for a review to ensure they can’t be falsified prior to reconciling accounts;
- Periodically reviewing payroll reports to look for anomalies; and
- Signing all of the checks yourself or keeping the signature stamp under lock and key.
For all organizations, the insurer recommends:
- Establishing best practices in accounting. Businesses should mandate dual signatures or dual review on disbursements (checks and wires). It is also important to create separation in key business processes.
For instance, separate the money from record-keeping so that no single employee can control a process from beginning to end, and don’t let the accounts payable person reconcile bank accounts. - Bringing fraud deterrence into the light. Provide a short training session for all employees to illustrate the damaging impact of fraud and abuse and provide practical advice on how to spot fraud.
- Setting the ‘tone at the top’. Have everyone from management, audit and the leadership team talk about fraud prevention. Be sure employees are aware of internal controls and ask them if they know of any weaknesses in the controls and how to improve them.
Hotlines are an excellent way to promote reporting of misconduct and reflect a culture of integrity. - Conducting comprehensive audits that specifically look for fraud. Surprise audits are particularly effective because fraudsters will not have time to alter, destroy or misplace records and other evidence.
The insurance solution
If you don’t have it already, your firm should seriously consider buying employee theft insurance, or employee dishonesty coverage. Employee theft coverage applies to loss or damage to money, securities or other property that results from theft committed by an employee.
Coverage applies whether or not you can identify the specific employee that committed the act, and whether the individual perpetrated the theft alone or in collusion with other people.
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