How to Stop Employee Theft

Employee theft is a serious and growing problem for many small businesses in the U.S.  According to the National Federation of Independent Business (NFIB), an employee is 15 times more likely than a non-employee to steal from an employer, and employees account for 44 percent of theft losses at stores – more than shoplifting and vendor fraud combined. And the U.S. Department of Commerce reports that more than 30 percent of business failures are directly related to employee theft or fraud.

For business owners, those are scary statistics. NFIB’s Small Business Legal Center says these are the top ways employees steal: larceny (outright theft), skimming (diverting business funds), fraudulent disbursements (billing schemes, inflated expense reports, check tampering), embezzlement of raw materials or inventory, and stealing business opportunities (misappropriation of customer lists or other trade secrets).

Companies that insure small businesses against fraud have become alarmed by the losses.  “Employee theft and fraud can be financially devastating for small businesses so we encourage owners to become even more vigilant,” says Bruce Petersen, senior VP of Commercial Insurance at Fireman’s Fund.

Employees who steal typically have worked at a business for several years before starting to steal and continue for an average of three years before they get caught. That’s a lot of time to produce losses for the business.  Employee theft occurs for three main reasons: 1) an employee’s economic need; 2) a feeling that it is justified; and 3) the opportunity is there.  Here are some things you can do:

Know your employees. Be alert to key indicators of potential theft:

  • Sudden, apparent devotion to work and working late.
  • Lifestyles well above salary levels.
  • Strong objections to procedural changes related to financial, inventory or supply matters.
  • Drugs and alcohol abuse.
  • Moonlighting with materials available at the business.
  • Evidence of compulsive gambling, persistent borrowing or bad check writing.

NFIB recommends that small business employers perform background checks on potential hires.

Use purchase orders. The payment, receipt and preparation of purchase orders should be separate functions and handled by different individuals. Use serially pre-numbered purchase orders and always verify incoming orders.

Control cash receipts. Use serially pre-numbered sales slips and conduct weekly audits. Balancing of sales slips and register receipts should be done by someone other than the sales clerk.

Use informal audits. Make unannounced internal audits and have a yearly audit performed by an outside firm.

Install computer security measures. Understand your computer systems and software, and how they might be used to divert money or inventory. Restrict access to computer terminals and records. Periodically change entry codes and check regularly to ensure that security procedures are in effect and include computer records in audits.

Track your business checks. Always use pre-numbered checks, with amounts and payees typed or written in permanent ink. Producing all checks from financial software such as QuickBooks is highly recommended. Lock blank checks and a signature machine, if you have one, in a secure place.

Manage inventory. Separate receiving, storekeeping and shipping functions. Physical inventories should be done annually by individuals who are not responsible for inventory records.

Beware of accounts receivable. Make mail-opening and posting separate functions. Record checks and cash in appropriate registers and stamp checks for deposit only.

If you suspect a problem, attorneys at the Small Business Legal Center offer this advice:

  • Be extremely careful about making accusations and conducting investigations – a false accusation can result in a lawsuit against you.
  • Verify suspicions by investigation, and determine the extent of fraud and methods used.  If you can identify the responsible employee, then terminate their employment and consider further legal action.
  • If it is a large or complex issue, consider involving legal counsel who can assist with finding additional experts such as forensic accountants or investigators.
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Filed Under: ManagingSmart

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About the Author:

Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.

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