Employee Theft – It Could Happen to You

By Christopher Didio, CPA, CFE

Employee theft is not uncommon in today’s workplaces and, often, the employee you least suspect is the culprit.  We, as Certified Fraud Examiners (CFEs), have a common saying: “Trust, but verify.” The truth is, with so many pressures people face these days, the only way to really protect yourself and your company is to have controls in place to limit the opportunities for theft to occur.

Open up your daily newspaper on any given day, there’s a very good chance you will see an article about one or more employees caught in some form of theft from their place of employment.

So, the question we are most commonly asked is, “How can I tell which employee may be the one to commit fraud?” While it is impossible to identify the employees most likely to commit fraud 100% of the time, there are warning signs that, if you are alert to them, may help signal to an employee more at risk.

The first step is to review your hiring practices. Future employee thefts can’t begin unless you hire them.  Are you aware of what you can ask in an interview? Have you determined if you’re allowed to ask a potential candidate if they had any criminal convictions? Rules regarding these “Ban the Box” questions are changing, and consulting with your attorney is always recommended.

When hiring new employees, always verify references and perform background checks including: employment, credit, licensing and criminal history. The benefit of performing these checks far outweighs any additional cost. For example, a business owner should be wary of hiring a bookkeeper with bad credit because the weight of crippling financial obligations could turn an otherwise honest person into a thief.

Should you also verify educational degrees? As we all know, you can get anything on the internet these days, and those include sites dedicated to providing fake diplomas and college transcripts.

Now that you’ve performed adequate background checks to find your new employee you should be safe from employee fraud – or are you? Did you know that 5% of your company’s revenues are lost to fraud each year? Assuming your revenues are $30 million a year, the annual loss to your company could be as much as $1.5 million from fraud.  For this reason, companies need to be constantly thinking about “who is stealing” and what can be done to prevent it.

When reviewing the risk of fraud, CFEs often refer to the “Fraud Triangle,” first identified by sociologist Donald Cressey. The “points” of the Fraud Triangle are made up of three factors which must be present for fraud to occur: pressure, rationalization and opportunity.

Employee embezzlement will almost always start with some kind of “pressure.” Examples of these pressures include:

• The employee’s spouse has lost a job.

• The employee is divorced and has expensive child or spousal support payments.

• The employee or his spouse or child is involved in civil or criminal proceedings.

• The employee has a drug, alcohol or gambling problem.

• The employee purchased a new home with an accelerating variable rate mortgage.

As these pressures become more intense, employees may feel no other way to alleviate the pressure without “borrowing” some money from the company.  The fraudster needs to rationalize that what they are doing is acceptable behavior.  Some of these rationalizations may include:

• The excuse,”I’m just borrowing the money,” tops the list. At times, the employee committing fraud has the best of intentions to replace the stolen funds. However, there’s a snowball effect, and the longer an employee gets away with the fraud, the more casual he may become about committing further fraud. The fraud usually escalates to the point where the employee is unable to pay back the stolen money.

• “They’ve done me wrong.” Some event, such as being passed over for a promotion, leads the employee to feel taking home company assets is his right.

• “There’s no other way to manage my problems.” The employee believes he’ll lose everything dear to him, including his home and family, unless he steals the money.

However, the employee still needs to have the opportunity to commit the fraud. Some of the following are typical ways a fraudster has the opportunity:

• Weak internal controls: strong internal controls are a business’s first line of defense.

• No separation of duties: this occurs when one employee handles many different related tasks. For example, the same employee opens the mail, logs in payments, prepares and takes the deposit to the bank.

• Indifferent management: this occurs when management doesn’t enforce the internal controls set in place.

• Ineffective monitoring of management: this takes place when the company is small and has few managers.

• Finally, the employee usually has been a long-term employee that is well trusted by the owners or management.

As frauds become more and more common in the workplace, companies need to be more vigilant in their policies. The company should be reviewing its bank statements online at least daily to identify the validity of all transactions. Management should question everything that looks unusual or out of the ordinary course of business. Rules vary by institution, but the company typically has 48 hours to report the fraud before they run the risk that the financial institution will not be required to reimburse them. (Note: You will only have 60 days on personal bank accounts.)

To help deter fraud, it is important to set clear standards from the beginning. This includes setting an appropriate example and ethical tone, starting from the top down. An employee manual can be an effective tool in establishing the principles and values to guide your organization. In a small organization, an employee manual levels the playing field and ensures that the rules apply to everyone. If someone is dismissed and you find yourself in court, the manual can be a valuable reference which documents the expectations of all employees and what actions warrant employee misconduct, and thus dismissal.

If you recognize some of the red flags identified in this article, speak with a qualified CFE. They are trained to look beyond the recorded transactions to expose the fraud and verify the amounts involved.

If you would like any additional information on our forensic accounting services, please contact Christopher Didio, CPA, CFE at (315) 472-9127 or via email at cdidio@dmcpas.com.