Clamping down on worker crime

Nation's Business, April, 1997 by Robert T. Gray

Small firms are especially susceptible to theft and fraud by employees, but there are defenses that can lessen the problem.

One of the most serious problems facing small businesses today is fraud and theft by employees. In fact, losses to U.S. companies from employee theft each year exceed losses from fire, according to insurance-industry estimates. And the extent and variety of such crimes can be illustrated with just a small sampling of cases:

* The work-site superintendent of a company that repairs fire-damaged buildings established his own business with his employer's resources.

* A loan manager at a small bank was keeping proceeds of collateral sold to pay delinquent debts and was writing off the loans as losses to the bank.

* The owner of a small business considered a clerk "dike family" at the same time the employee was stealing items from large shipments. The clerk sold the items, and the company unwittingly made good when customers complained that their orders were incomplete.

* An equipment manufacturer delegated broad authority, and some workers sold company-made equipment on their own and kept the proceeds.

Such crimes exemplify not only the venality of some workers but also the employer-created environments, such as undue trust or remoteness, that are conducive to this type of abuse.

Small businesses are particularly vulnerable, experts say, because owners generally don't have effective systems to monitor key workers who are given major responsibilities.

A report based on experiences of members of the Association of Certified Fraud Examiners, based in Austin, Texas, says the costliest abuses took place in companies with fewer than 100 employees. The association, whose members help companies avoid employee crime, also found that:

* Fraud and other employee crimes cost employers more than $400 billion a year, or an average of $9 per day per worker.

* Men, who account for about 54 percent of those employed, commit three-fourths of such abuses.

* Losses caused by managers are four times costlier than those by employees.

Joseph T. Wells, founder and chairman of the fraud-examiners association, warns business people against uncritically accepting the notion that most people are immune to the temptation to commit fraud. This is "probably the biggest myth of all about financial crimes," he says. "Fraud perpetrators come from all walks of life, all economic circumstances, and all social classes."

The Surety Association of America, an, organization of 650 insurance companies offering fidelity insurance, says, "Every employee is in a position to steal from his or her employer."

Susan Drake, senior vice president of Travelers Bond, a unit of Travelers-Aetna Property Casualty Corp., says, "Employee dishonesty is just like a fire, storm, or other natural disaster--it's an unexpected loss that can cause a company or business to collapse."

What triggers theft by an employee?

Some common instigators, says workplace-crime expert Jane Y. Kusic, are a crisis in personal finances, a drug or gambling habit, revenge against an employer, a nonfinancial personal crisis, and acceptance of employment with intention to steal. Kusic is owner and president of White Collar Crime 101, a McLean, Va., firm that advises businesses on ways to avoid becoming victims of employee fraud and theft. The first thing to remember, she says, is that "no employee is above suspicion."

A business owner's defenses against employee theft fall into a few general categories. One is employee screening, particularly at the hiring stage. Another category consists of internal controls, especially regarding financial matters, inventory, and cash disbursement. A third type of defense is prevention of computer-related theft--whether it's of hardware or software. Following are some details.

Employee Screening

Companies that specialize in pre-employment screening, including tests designed to assess applicants' honesty, can be a major aid. Drug testing can help head off many problems, including eventual thievery to support a habit, experts say. If you go it alone, Kusic says, remember that fraud on job applications and resumes is widespread. A thorough background check with previous employers and other sources is critical. Kusic advises employers to have applicants sign release forms authorizing background checks.

Although it should be obvious, Kusic says, many employers don't recognize that "one of the most effective ways of lowering the risk of employee theft and embezzlement is by truing honest people."

Internal Controls

A critical element here, experts say, is division of authority Don't let the person who orders goods approve vouchers for payment; don't let receiving clerks maintain inventory records. An employee should not both issue checks and reconcile bank statements. Physical safeguards should limit employees' access to checks and petty cash.

Owners should frequently review the books; looking for clues such as missing documents, unexplained past-due entries, excessive voiding of entries, duplicate payments, and questionable transactions.