Employee theft is white-collar crime. It’s categorized by the FBI as deceit, concealment or violation of trust but not involving the application or threat of physical force or violence. These acts are committed to obtain money, property, or services; to avoid the payment or loss of money or services; or to secure a personal or business advantage.

Studies show that on-the-job theft is widespread and growing.

According to the 2003 National Retail Security Survey (NRSS), no other form of larceny costs American citizens more money than employee theft. U.S. retailers alone lost $15.8 billion in 2003 to employee theft. That’s not shoplifting, which is theft by customers and resulted in an estimated loss of $10.7 billion in 2003.

The U.S. Chamber of Commerce estimates that U.S. employers lose $20 billion to $40 billion a year due to employee theft. Shockingly, the U.S. Chamber of Commerce states that 30% of all business failures are caused by employee theft, citing a report by David J. Shaffer and Ronald A. Schmidt.

“Occupational fraud and abuse is a tremendous problem, one that affects practically every organization,” says the Association of Certified Fraud Examiners (ACFE). In their 2004 Report to the Nation on Occupational Fraud and Abuse, they published the results of their study of 508 occupational fraud cases. In total, these cases caused $761 million in losses. Here are some of their other findings:

• U.S. organizations lose 6% of their annual revenues to fraud.
• Frauds committed by owners and executives caused a median loss of $900,000-six times higher than losses caused by managers and 14 times higher than losses caused by employees.
• Most occupational fraudsters are first-time offenders. Only 12% had a previous conviction for a fraud-related offense.
• Criminal background checks can help but will not weed out all fraudsters. Most frauds are committed by otherwise “honest” employees.
• Recover of losses is very low. The median recovery is 20% of the original loss. 40% of victims recover nothing.
• Confidential reporting mechanisms reduce fraud losses. The median loss among organizations that had anonymous reporting mechanisms was $56,500 compared to $120,000 for organizations that did not.
• Among cases detected by a tip, 60% of tips came from employees, 20% from customers, 16% from vendors and 13% from anonymous sources.
• Frauds detected by internal controls tended to be relatively small, with a median loss of $40,000.

Apparently, some experts weren’t surprised by the ACFE’s finding. “Family-owned businesses are more vulnerable to embezzlement ... because they’re more trusting,” says Detective Steve Beck in an interview with Family Business Magazine. Beck is a white-collar crime investigator with the West Chester Township Police in Ohio.

Fraud prevention expert Christopher Eiben says that to reduce the chance of fraud, businesses should at the very least “separate the money from the record keeping.” That means:

• Don’t let the same person who receives and records receipts also book sales, generate invoices and reconcile receivables.
  
• Don’t let the same person who approves purchases also pay for them (and the person who pays for purchases should be able to make a payment only when it is accompanied by appropriate approval documentation).
  

Here are more ideas for reducing your risk of employee theft:

• Higher authority for higher check amounts: If you don’t personally sign all checks, require that you sign all checks over a certain amount. Make sure all employees, vendors and your banker know the policy and threshold amount.
• Get preprinted checks with preprinted check numbers: Keep track of each check by number and reconcile bank statements immediately on receipt.
• Thorough employee screening: Conduct thorough background checks, including personality profiles, on all employment candidates ... especially those that will hold senior positions or work in accounting or finance.
• Annual review of credit report: Check to make sure no unauthorized person has taken out a credit card in your company’s name.
• Insurance: Consider purchasing bonding insurance, i.e., insurance against employee theft and fraud.
• Use a payroll service. Doing so will substantially reduce risk for theft of payroll tax funds.
• Run a journal entry report every month: The person who runs the report should not be the person who makes the entries. Go over any adjustments with the people who made them.
• Investigate and approve all new vendors: The owner should personally visit with the vendor or its representative. Make sure the vendor is legitimate and not set up by an employee or someone in cahoots with an employee.
• Watch for an increase in bad debts: Similarly, watch for lengthening of the age of receivables. Personally investigate accounts that slow-pay or don’t pay.
• Mandatory vacations: Require all employees (especially finance, accounting and management) to take at least a full week off per year. More important, don’t allow paperwork to pile up during the break. Have someone else perform ALL of the regular duties of the vacationing employee.
• Educate employees about the prevalence of employee fraud: Make sure they’re aware of the risk that employee fraud poses to the organization and internal controls that are necessary and prudent. Finally, educate them on the warning signs (see accompanying article “Warnings Signs of Fraud”).
• Rotate jobs: Periodically, have employees change jobs. Preferably, unannounced. This will substantially reduce the risk of fraud and also can raise employee satisfaction, uncover inefficiencies and dampen the hurt caused by unexpected turnover.
• Periodic checks and surprise audits: If employees know that their work will be checked randomly, they’re much less likely to attempt to steal.
• Promote and sustain an ethical culture: Draft and ratify, as an organization, an ethics policy that clearly declares an expectation of ethical behavior at all levels of the organization ... and compliance with all applicable laws and regulations. Fraud prevention expert Christopher Eiben says, “Companies that countenance thievery will eventually be victimized by it.”
• Don’t tolerate abuse: Persons who have addictions to drugs, alcohol or gambling have much higher incidences of deviance. Similarly, don’t tolerate other forms of abuse at work such as verbal or sexual.
• Create a confidential reporting mechanism. Install a message box and encourage comments. Better yet, hire a service that will take calls and allow you to offer your employees an 800 number (“hotline”).

Separation of duties is the most fundamental, effective fraud prevention measure. No single employee should have complete control over an entire transaction, from writing checks to making deposits and reconciling statements. Ideally, a different person should handle each function.