The majority of employee thefts are occurring in organizations with 500 employees or less and the median loss is $280,000, according to a new report.
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 “2015 Hiscox Embezzlement Watchlist” by the specialty insurer Hiscox.
More than half of employee thefts were perpetrated by individuals in senior positions in the company, and the median age of perpetrators was 50, the report states.
Hiscox based the findings of its report on employee theft cases active in U.S. federal courts in 2014. Among its findings in the latest report:
- More than 60% of employee theft involved women.
- The median age of employees who committed theft was 50.
- Employees not in the finance or accounting sections of the company committed over half of the tallied thefts.
- Retail and health care companies sustained the largest average losses – at $606,012 and $446,000, respectively.
- 21% of employee theft in companies with fewer than 500 employees took place in the financial services industry – banks, credit unions and insurance companies. Financial services organizations dealt with average employee theft losses of $271,000.
- Non-profits dealt with average employee theft losses of $202,775.
- Nearly 75% of total losses included direct theft of cash or misuse of bank deposits or transfers.
In some cases, the fraud starts where the buck stops: the CFO. 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 the invoices in his office.
What you can do
“Although risk mitigation strategies such as background checks will add a layer of protection, no organization can completely insulate itself from employee theft. Organizations can, however, take proactive measures to minimize the likelihood of theft and the impact of losses,” Doug Karpp, national underwriting leader for Crime & Fidelity at Hiscox, said in a prepared statement.
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, Hiscox recommends:
- Establishing best accounting 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. According to the Association of Certified Fraud Examiners, more than 40% of all cases were detected by a tip, nearly half of which came from employees.
- 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 employee perpetrated the theft alone or in collusion with other people.