Here’s a scenario that you’d likely not want to see happen at your company: The owner of a motorcycle dealership is suing its former office manager for allegedly stealing nearly $100,000 during the course of her employment.
Crescent City Partners, which runs the Harley-Davidson dealership, filed suit against Valerie Norment in the 24th Judicial District Court of Louisiana on April 28 after it discovered the extent of the alleged misappropriation of funds.
According to the complaint, the dealership’s general sales manager noticed that a cash payment of $4,000 was missing and questioned the defendant about where it was.
First she said she’d given it to the finance and insurance manager, but later changed her story, saying that she’d left it in an unlocked desk drawer over the weekend, states the complaint.
After conducting a forensic accounting, Crescent City Partners says it discovered that the employee was responsible for the missing cash and that $97,770.75 had gone missing from the dealership since she had begun working there.
An isolated incident? Not according to statistics.
Organizations around the world lose an estimated 5% of their annual revenues to occupational fraud, according to a survey by the Association of Certified Fraud Examiners that looked at cases between January 2012 and December 2013.
The association estimates that U.S. businesses lose some $50 billion a year to employee theft, and that 75% of employees have stolen at least once from their employer – and 37% have stolen at least twice. It also estimates that about 33% of business bankruptcies are in part due to employee theft.
Moreover, small businesses usually take the brunt of the damage. The smallest organizations in the ACFE study suffered a median loss of $154,000 – higher than the overall median loss for fraud cases in the study ($145,000). The reason for this is likely that small businesses typically don’t have the same resources to combat internal theft.
So, what can you do to avoid falling victim to employee theft? The U.S. Small Business Administration and the ACFE recommends that companies:
Use pre-employment background checks – Making the right hiring decision can greatly reduce the risk of future heartache. Basic pre-employment background checks are a good business practice for any employer, especially for employees who will be handling cash, high-value merchandise, or having access to sensitive customer or financial data.
But be aware that laws on background checks vary from state to state and if you go too far in your check, you may be in breach of the law and risk being sued. Recently the U.S. Equal Employment Opportunity Commission has raised concerns that criminal background checks may disproportionately discriminate against some racial groups.
Check candidate references – It’s surprising how few employers check candidates’ references. But make a practice of calling all references, particularly if they are former employers or supervisors. If your candidate has a history of fraudulent behavior, then you’ll want to know about it before you hand them a job offer. While some former employers may be loath to tell you anything bad, they will often give you cues in the conversation that the employee may have had some problems.
Implement a fraud hotline – Occupational fraud is far more likely to be detected by a tip than by any other method. More than 40% of all cases were detected by a tip – with the majority of them coming from employees of the victim organization. There are several providers of hotline services that can help implement an anonymous tip-reporting system for businesses of all sizes and industries.
Conduct regular audits – Regular audits can help you detect theft and fraud, and can be a significant deterrent to fraud or criminal activity because many perpetrators of workplace fraud seize opportunity where weak internal controls exist.
You should identify high-risk areas for your business and audit for violations on a six- to12-month basis. Items to look at include business expense reports, cash and sales reconciliation, vacation and sick day reports, and violations of e-mail/social media or Web-use policies.
Recognize the signs – Studies show that perpetrators of workplace crime or fraud do so because they are either under pressure, feel underappreciated, or perceive that management behavior is unethical or unfair. They rationalize their behavior based on the fact that they feel they are owed something or deserve it.
Some of the potential red flags to look out for include:
- Not taking vacations. Many violations are discovered while the perpetrator is on vacation.
- Being overly protective or exclusive about their workspace.
- Employees that prefer to be unsupervised by working after hours or taking work home.
- Financial records sometimes disappearing.
- Unexplained debt.
- An employee living beyond their means.
Set the right management tone – One of the best techniques for preventing and combating employee theft or fraud is to create and communicate a business climate that shows that you take it seriously. You may want to consider:
- Reconciling statements on a regular basis to check for fraudulent activity
- Holding regular one-on-one review meetings with employees
- Offering to assist employees who are experiencing stress or difficult times
- Having an open-door policy that gives employees the opportunity to speak freely and share their concerns about potential violations
- Creating strong internal controls
- Requiring employees to take vacations
You should also treat unusual transactions with suspicion and trust your instincts.
Secure employee theft insurance
Employee dishonesty insurance coverage – sometimes referred to as fidelity bond, crime coverage or crime fidelity insurance – protects a small business employer from a financial loss as a result of fraudulent acts by employees.
The financial loss can be caused by an employee’s theft of property, money or securities owned by the small business.