Reduce Your Vulnerability to Employee Crimes and Fraud

Posted February 19, 2019

As a leader within your organization, you want to be able to trust your employees and colleagues. The idea that your business would be the victim of insider crimes and employee fraud might seem a vague threat, more likely to hit some other person’s company than your own.

The harsh reality is that more businesses are being victimized by fraud and theft, and the businesses hit hardest are those who aren’t prepared. In fact, according to the Association of Certified Fraud Examiners (ACFE), organizations around the world lose approximately 5 percent of their annual revenue to illegal activity and fraud. What’s worse, it takes an average of 18 months for an organization to uncover the fraud, which – in many cases – extends the length of time the illegal activity can continue, increasing damages.

Even “Little” Crimes Are A Big Deal

According to the American Management Association, as many as 20 percent of business failures may be the result of employee dishonesty, including theft. The US Chamber of Commerce bumps that number to 30 percent.

Real businesses are going under due to internal crimes. Some of the more common business thefts include the following:

Charging inactive accounts
Paying bonuses to those who should not receive them
Increasing amounts on checks and invoices after they have been paid
Reducing the amounts of outgoing invoices in the books, then paying the reduced amount in cash and appropriating the customer’s check
Giving “discounts” for paying in cash
Padding payroll and cash expenditures
Not crediting cash payments
Invoicing materials below sale price and receiving the undercharge from the customer
Issuing checks for goods that were not returned
“Losing,” taking, or destroying merchandise or supplies while they are in transit
Taking finished products or raw materials and re-selling without authorization

Small And Mid-Sized Businesses Are Particularly Vulnerable

News of employees embezzling company funds or committing expenses fraud is expected to increase. While examples from major companies are more likely to garner attention, small and mid-size companies may actually be more vulnerable to employee theft. These companies tend to have fewer resources to invest in or pay employees, so employees might rationalize the fraud based on performance, lower pay, or on how they are treated at work.

Smaller companies – such as dental practices, small medical offices, or mom-and-pop shops – tend to have fewer anti-fraud measures in place compared to larger companies, leaving them more exposed to internal crimes. According to the ACFE’s 2018 report, small businesses lost almost twice as much per case to fraud.

Red Flags Are Difficult To Spot

It’s not always the disgruntled employee who causes revenue loss. In a depressing statistic from Awareness Technologies, nearly 80% of the workforce admit they would steal, or would consider stealing, from their employers. Reasons for committing fraud range from vindictiveness to greed, overspending, sudden financial struggles, control issues, or family problems. Sometimes employees commit fraud simply because they have the opportunity, rather than feeling pressure or incentive. This makes employee monitoring measures difficult to manage effectively.

Opportunities To Prevent And Uncover Employee Theft

Theft can be a sensitive issue: as a company leader, you want to strike a balance between being seen as too tolerant or too distrustful. It is imperative that you take the necessary measures to protect your business and assets, and to communicate these measures clearly to your employees. Some simple safeguards business leaders can put into place immediately include the following:

Secure raw materials, semi-finished goods, and finished goods in walled, fenced or locked areas on your premises
Limit and control employee access to storage areas
Inspect merchandise and goods thoroughly when they are received as shipments
Ensure that there is more than one employee inspecting outgoing and incoming shipments
Conduct periodic inventory counts, and compare that information to your current records
Establish a line of authority at your organization and ensure responsible behavior
Separate your accounting and operating functions
Create a paper trail for each transaction
Screen new employees to weed out applicants that are potential liabilities
Continually train employees concerning how to detect and report theft or fraud
Enforce rules consistently and constantly
Require mandatory vacations for personnel handling payments

For companies with greater resources, data monitoring and analysis and surprise audits contribute to faster fraud detection and lower losses. Tips are also useful resources for ending employee theft: the ACFE’s 2018 report declared that of 2,690 corruption cases, 50% of them were detected by a tip. Consider creating a system where employees and outsiders can provide information safely for early fraud detection.

Determine Your Crime And Fraud Exposure: Download Exposure Scorecard

Protect Against Catastrophic Losses

While safeguard measures are a company’s best defense against internal crimes, businesses still fall victim to fraud at an alarming rate. Once the fraud is discovered, there is no guarantee you will be able to recover your losses.

While standard property and inland marine insurance policies provide some protection from criminal acts, they often do not cover losses resulting from employee dishonesty. Crime Insurance is designed to deal with the limitations of other policies and extend protection to include the fraudulent activities of employees.

Companies turn to crime insurance for the following benefits:

Coverage for the misuse of funds
Extortion safeguards
Reimbursement for computer fraud
Insurance for goods in transit
Coverage for forgery and alteration

Crime coverage can protect against employee theft of goods or money, fraud conducted via computer, counterfeit currency or money orders, or other fraudulent acts conducted by employees acting alone or in collusion with others. Crime insurance also safeguards against the actions of non-employees.

To help you begin assessing the level of Crime Insurance your business needs for adequate protection, we have developed a starting point: Crime And Fraud Exposure Scorecard. Answer all of the questions to the best of your ability, add up your score, and determine your organization’s level of risk.

For a more in-depth look at Crime Insurance, contact Dave King at dking@horstinsurance.com or 717-581-9880.