Employee theft and fraud is unquestionably one of the most significant problems facing small businesses in the U.S. The U.S. Department of Commerce has advised that nearly one-third of business failures are correlated with employee theft or fraud.

Every year, companies are losing millions of dollars to employee theft and fraud which can occur in many forms -  like something as little as “forgetting” to swipe small dollar transactions to directing tens of thousands of dollars into personal accounts.

Common forms of employee theft:

• Skimming (diverting business funds to personal accounts)

• Larceny (outright theft)

• Embezzlement of raw materials and/or inventory

• Fraudulent disbursements (inflated expense reports, billing schemes, check tampering)

• Stealing business opportunities (misappropriation of customer lists or other trade secrets)

What can be done to stop it?

Listed below are three ways that can help you prevent internal theft. All three can and should be used in conjunction with one another for the highest chance of success.  

1. Understand Employee Theft

Employee Theft Methods

Employee theft can be difficult to spot since the offender is an insider and familiar with the internal workings of the system. Additionally, these employees can have access to the “keys of the kingdom” due to their positions and reputation as reliable team players.

Here are a few of the methods most commonly used to steal from the business.

Finance and accounting personnel can redirect checks received into personal accounts, and since they keep the ledgers, they can cover it up by altering the entries.

With access to corporate checking accounts, employees could write checks for fabricated payments that are then diverted to personal accounts.

Theft of cash requires more planning since cashiers will have to balance their cash drawer at the end of their shift. They often skim cash by intentionally undercounting change to customers and pocketing the difference.

Theft of merchandise is done by using garbage bins and recycling system, or even personal bags to sneak the items out of the store. In retail specifically, the merchandise return process provides many opportunities to steal with or without the help of a third party.

Theft of supplies seems petty, but it can add up quickly as employees become bolder about taking office supplies for personal use.

Payroll theft is when an employee claims unearned time or reimbursement for non-business expenses.

Recognizing the Motivations for Employee Theft

In many companies, employees will undergo a rigorous screening process, including employment history, background and credit checks. The process, designed to exclude incompatible individuals from the pool of applicants, makes it safe to assume that employees who passed the pre-employment hurdles are dependable, qualified, and trustworthy.

Unfortunately, it is often the case that the culprits are long-trusted employees who convert from hardworking, employee-of-the-month sorts to devious thieves who create careful plans to redirect funds into their own accounts. What could have possibly motivated these people to risk their careers and potentially their freedom to make a few thousand dollars?

Drastic negative life changes: The loss of a loved one from death, divorce, and separation can be devastating for anyone. This can decrease the employee's income stream while increasing expenses. Confronted with mounting bills and debt, the employee might seize the opportunity to reduce their financial stress by taking small amounts of money, often with the belief that they will pay it back before getting caught.

Living beyond their means: The largest thefts can usually be attributed to embezzlers living beyond their means. They wish to live the good life but can’t afford the luxuries on their own. Stolen funds are often used to purchase extravagant cars, homes, and other luxury goods. The employee may go on expensive vacations and participate in activities that cost considerably more than what they could otherwise afford.

Opportunity: Employees often start by stealing petty amounts simply because the opportunity is there to do so. Customers may walk away without claiming their change or bookkeepers may discover a chance to “fudge” the books. Exploiting these opportunities may become a habit and can often get out of control.

Addictions: Many people dealing with compulsive behaviors that cost money are poor candidates for jobs that involve accounting or handling cash. Addictions can overpower even the best intentions, and employees can end up dipping into business funds to feed their addiction to drugs, gambling, etc.

Greed: Simple greed can drive a trusted employee to take advantage of opportunities to appropriate for themselves what was entrusted for business use.

Bad apples who made it through the screening process: The screening process typically weeds out applicants with a criminal record, but sometimes some will make it past the vetting due to insufficient background research or a glitch in records processing.

Revenge: Perceived slights can motivate employees to pursue retribution by stealing from a company. Being passed over for a promotion or refused a lateral transfer to a preferred location or even a negative assessment taken too personally can make someone feel they are only claiming what has been wrongfully denied to them when stealing from the business.

2. Defensive Strategies to Minimize Employee Theft

Often the best defense is a strong offense. By that, I mean taking a proactive approach to the issue of employee theft. Many security experts will suggest that business leaders should assume it is happening already or that it will happen when the opportunity presents itself. This is not to say that you should view all employees with suspicion as that can quickly sink morale. This strategy requires a comprehensive review of your current systems to identify any loopholes in your administrative and operational procedures.

Bolster the pre-employment screening process to identify any red flags. All positions which have access to accounting or financial records should have higher-level background checks which cover credit history and all interactions with the criminal justice system. Cash-handling positions should be given to established and trusted employees instead of a new hire.

Having a system of checks and balances in place for employees with access to cash or other financial accounts. Use a buddy system that always requires at least two employees working together. Procedures for voiding sales or issuing refunds should require personal authorization by a supervisor. Ledgers in the accounting department should be maintained by a team rather than entrusting a single person with the books. Financial records should be subject to unannounced audits by a third-party professional.

A video surveillance system can be installed as a deterrent. Most people are less likely to risk deceitful behavior when they are on camera. Cameras can discourage risky behavior, but real-time monitoring is useful in high-risk, high-value areas like stockrooms or distribution centers.

Building trust goes both ways. Get to know your employees. Build relationships and establish a rapport. If people are happy and care about their career, they are less likely to risk dishonest behavior.

Have an anonymous employee tip line. Employees who are loyal can help reduce loss from fraud and theft by reporting their suspicions without threat of retribution. Ensure confidentiality and investigate each report carefully before acting.

3. Use a Private Investigation Service

Business leaders frequently consider hiring a private investigator as there are many unique advantages an experienced private investigation service can offer that internal employees and departments, or even local police cannot.

Though the police can aid in investigating cases after the crime is committed, there are numerous benefits to being proactive to catch a problem early or even prevent the theft before it occurs. Private investigators can perform surveillance, forensic accounting, computer forensics, background checks, hidden asset investigations, interviews, and various other services that ensure the truth is unveiled.

Using a private investigation service saves money, time and the hassle of having to request police assistance, especially for private companies. In addition, private investigators have access to advanced investigative techniques and state-of-the-art technology to conduct expert surveillance, undercover investigations, and interviews in order to provide objective evidence of the wrongdoing that will be admissible in court.