Theft In The Workplace

Theft in the workplace is a “growth industry.” Between the years 2002 and 2004, the cost of occupational fraud grew by 65 percent from $400 billion to $660 billion, with the majority of employee theft occurring in private businesses. The vast majority of the frauds were performed by a single employee with no prior criminal record.

According to the Association of Fraud Examiners, the average business loses 6 percent of its revenue to employee theft and fraud, and it is estimated that 75 percent of all employee theft goes unnoticed. One reason for this is because the person in your organization that you trust the most is the individual that has the greatest opportunity to steal from you.

The reason that most business owners don’t feel the magnitude of these losses is because they are on the finance side of the business that is skimming the cash or has created a billing or payroll scheme, setting up fictitious suppliers and kickbacks for paying inflated prices, writing off receivables and stealing the cash received on the accounts written off.

Fraud often starts small and gets bigger and bigger. Usually three factors must be present before someone commits fraud or embezzles: opportunity, motivation and rationalization—otherwise known as the “fraud triangle.”

Opportunity is the perception that the person will not be caught. Usually weak or non-existant controls or a breakdown in the organization’s process provides the opportunity. Again, typically the most trusted people in the business are the ones that have the opportunity to steal. Remember, trust is a feeling, not a control. Inadequate separation of duties, the absence of mandatory vacations, an organization constantly in crisis mode, and rapid turnover of employees are all examples of when opportunities exist to commit fraud.

Motivation is the second ingredient that must exist before someone commits fraud. People with financial problems as well as those with drug, alcohol, gambling or marital problems are more likely to steal. It is important to screen applicants and perform background and credit checks (after proper disclosure to the candidate). You should also check traffic violations. People that have a tendency to break rules typically are not good employees.

Rationalization is the mental process that justifies the illegal act. For example, if an employee feels unappreciated or underpaid he or she may rationalize why it is OK to take from the business. If they think they are doing all of the work and the business owner is keeping all of the profit, stealing is a way for the employee to even the score. Other examples of rationalization include “I am only borrowing the money and will pay it back”; “nobody will get hurt”; and “it’s for a good purpose.” Also, if an employee sees the business owner behaving unethically, such as not reporting all of the company’s income, he may conclude that illegal behavior is part of the corporate culture. Remember, ethical behavior starts at the top of an organization.

How do you know if your company could be a victim of employee theft? A few fraud indicators include:

• Lack of written corporate policies and procedures
• Disorganized operations (bookkeeping, purchasing, receiving and warehousing)
• Alterations and photocopied documents
• Employees with lifestyles beyond their means
• Employees in close relationships with suppliers
• Unexplained differences between physical and perpetual inventory records
• Bank accounts not reconciled timely

How does a business owner break the fraud triangle? The best defense is a good defense. You may want to engage a professional experienced in fraud deterrence to assist in evaluating the controls and processes in your company and identify areas for improvement. A fraud deterrence analysis evaluates risks and related controls and makes recommendations to enhance controls. The thought process must be “if I were going to steal, how could I do it and not get caught.” Also, engage your employees in the process. Often, they know where many breakdowns exist. Often a by-product of fraud deterrence evaluations is the identification of cost-saving opportunities and opportunities to streamline processes resulting in greater profits. Remember the most cost-effective way to deal with fraud is to prevent it.