From falsified bank statements to fictitious vendors and cash skimming, dishonest employees can find countless ways to steal from their employers. Brian Bean, executive claims consultant at R&R Insurance Services, says employee theft affects businesses of all sizes and industries.

“Rule No. 1 is any employee can steal — new, long-term, a trusted friend who was an employee. I’ve talked to people who said, ‘This guy was a friend of mine, and he stole from me,’” Bean says. Even family-owned businesses aren’t immune to employee theft.

“Family steals from you just like everybody else,” Bean says. “Essentially, it could be anyone that’s stealing from you, and you just have to stay alert and keep your eyes open.”

Red flags

Every business has weak spots that dishonest employees can exploit. Typically, employee theft starts small and flies under the radar. 

“They start ramping things up once they see how they can get away with it,” Bean says. Employee embezzlement can go on for years, costing organizations thousands or millions of dollars. To protect themselves, organizations need to watch for red flags.

One of the red flags is an employee with too much control over the finances. The employee might be the only person who opens the mail, writes the checks, reviews the bank statements and handles financial audits. 

Another red flag is an employee who never wants to take a week off. 

“A lot of accounting positions, especially in accounting firms, will force people to take a week or two weeks off at a time,” Bean says. “The reason is because when you’re doing these accounting scams, it’s hard to control them or they start to break down very, very quickly if you’re not there to constantly monitor them.”

Employers also should be wary of employees’ strong reactions to a change in computer systems, financial procedures or inventory-tracking processes. 

“That might indicate a bigger problem of what’s going on because the second you upset the apple cart, they’re not going to be able to steal anymore,” Bean says.

How to avoid

Protecting your organization from employee theft begins with recruiting, screening and hiring workers. Bean recommends performing background checks and checking references, especially for key positions in finance. He also suggests getting to know employees. Watch for employees whose lifestyle is well beyond their means. Also, watch for employees or their loved ones who struggle with drug or alcohol abuse, a gambling addiction, medical debt, or some other trouble. These are sad situations, but sometimes sad situations may cause an employee to do something they normally wouldn’t out of desperation.

To prevent employee theft, you need to be vigilant. “You have to be on your toes at all times,” Bean says. Additionally, it’s important to understand your company’s computer systems and operating procedures. Be aware of any weaknesses that employees might try to exploit. 

“One thing is restricting access to computer programs, terminals and records,” Bean says. “You need to restrict access to only the people that need to have access.” 

Organizations also should segregate duties instead of entrusting all of the responsibilities to one person. “Checks and balances are absolutely a must. Even if you’re a small organization, you need to keep things separate,” Bean says. 

You also need to closely supervise employees. “Lax supervision really opens a door for dishonest people. It doesn’t necessarily mean you have to micromanage, but just check up and let them know that you’re checking up,” Bean says. 

He also advises organizations to create an environment where whistleblowing is encouraged. A tip from an employee, customer or vendor often is what organizations need to catch a dishonest employee. 

Plan accordingly

To safeguard against employee theft, every organization should have money-handling processes in place — and take them seriously. 

“Even when you have checks and balances in place, if you don’t follow them, you got problems,” Bean says. The checks and balances include audits, both formal and informal. 

“Do unannounced internal audits and yearly audits performed by outside firms,” Bean says. “Simply knowing that you’re being audited all the time makes a big difference.” Yes, this does take extra time that is hard to come by when running a business, but a few hours could save you big in the long run.

He also suggests asking follow-up questions when something looks amiss. Sometimes a quick review of a bank statement or credit card statement shows charges that make no sense for the business and should be questioned.

“The nature of things is that everyone’s busy running their businesses. Just doing the day-to-day things usually takes up everybody’s time, and it’s hard to watch it,” Bean says. “We trust people to do their work, but any one of us, any business, can be the victim of employee dishonesty. No one’s above it.”

How to react

When an organization suspects employee theft, it’s important to proceed with caution, Bean says. 

“Just because you see red flags does not mean there’s theft going on, and you want to be very careful of false accusations which can result in a lawsuit against you,” he says. He advises companies to investigate and verify their suspicions before taking action. 

“These are incredibly stressful situations, but there’s also some privacy issues that need to be addressed, so proceed with a lot of caution,” Bean says.

Once an organization verifies a theft occurred, terminating the employee is the next logical step. After that, the path is less certain.  

“You’ve got to consider whether you’re going to take legal action against them and criminal prosecution as well,” Bean says.

For large losses or complex scenarios, Bean recommends seeking legal counsel. Organizations also should consider hiring forensic accountants or other specialized investigators. Many businesses call the police, and depending on the circumstances, the FBI, IRS or SEC may become involved also. Typically, businesses are reluctant to go to law enforcement because of the bad publicity that might follow. Once the news gets out, customers, vendors and creditors might become concerned.

“Banks could call in lines of credit very quickly, and so businesses are kind of reluctant to say, ‘Hey. We’re having all kinds of problems over here,’” Bean says. “But again, be careful, because if you have a contractual duty to inform a creditor or somebody else of your situation, you have to do that. That’s why these situations get awfully complex very quickly.”

Some companies sue their former employees in civil court, trying to get a judgment and collect restitution. But legal proceedings are expensive, so companies should consider the cost versus the potential payback. 

“If you do get some recovery, it’s like cents on the dollar,” Bean says. 

Insurance

To gain a bit of control over employee dishonesty, companies can purchase claims insurance policies which cover the costs of defending or making a legal claim. Additionally, employers can invest in crime coverage to protect against financial losses from fraud, theft and other criminal acts. 

Bean recommends checking the coverage limit before investing in insurance. Sometimes, an insurance carrier will offer minimal limits such as $5,000, $10,000 or $25,000, but for most businesses, these limits are insufficient. Much higher limits can be purchased, such as $1 million or more for crime coverage.

Insurance coverage may be a smart option, but internal controls and employee supervision are also important safeguards against employee dishonesty. It really comes down to running a tight ship. 

“Hopefully, you never have to deal with it,” Bean says.

For more information, contact R&R Insurance.