Employee theft is often associated with images of a retail clerk with their hand in the till or an office worker who helps themselves to office supplies and petty cash. Embezzlement, on the other hand, conjures up scenarios of more complex schemes perpetrated by shady figures who end up behind bars.
No matter how sophisticated the method, the reality is that employee theft is more common and far costlier than many believe. The 2018 Hiscox Embezzlement Study: An Insider’s View surveyed CFOs, controllers and accountants who have worked in companies where embezzlement has occurred. Their responses shed light on the crime, including the warning signs and how dramatically a business can be impacted in terms of both financial and reputational damage.
To detect an embezzlement scheme, it is important to understand the reality behind some common myths:
Myth #1: Theft is carried out by a single, quiet employee.
Reality: The Hiscox study found that more than one person was involved in an embezzlement scheme in nearly four out of five cases (79%) with an average of three perpetrators per scheme. Some may believe working as a group would pose a greater risk of getting caught, but embezzlers often work together, covering up for one another.
Myth #2: The typical embezzler is a new, low-level employee who came to the company to steal.
Reality: In 85% of cases, embezzlement was committed by someone at the manager level or above, and the average embezzler had eight years of tenure at the company. Embezzlers typically do not come to a company intending to steal. They may become familiar with the company’s processes, so they know how to cover their tracks. Then, when faced with a personal crisis, they may think that helping themselves to some extra cash is the way out. When they do not get caught right away, it can quickly become a habit.
Myth #3: Embezzlers do not get away with much money.
Reality: Embezzlers can significantly hurt a business’s bottom line. The average loss to a business was $357,650, of which, on average, only 39% was recovered through settlements, restitution or insurance claims. Employee theft has other costs as well: 29% of companies had to lay off employees, 26% lost customers and 22% experienced a negative impact to their reputation. Over a quarter of companies increased their spending on auditing, added security or audit requirements, and spent more time discussing security with staff.
Myth #4: Thieves are caught quickly.
Reality: The majority of embezzlement schemes (70%) lasted for more than a year before the perpetrators were caught, and nearly a third (31%) continued for three years or more. This is what allows embezzlers to get away with so much money. The long duration of these schemes indicates that businesses are not being sufficiently diligent or active in their oversight.
Myth #5: When an embezzler is caught, they will pay for their crime.
Reality: Charges are only brought in 45% of embezzlement cases, and of those cases, just over half (58%) resulted in conviction. Companies may hesitate to bring charges against an embezzler, especially if it is someone high up in the organization, or they may fear negative publicity from a trial.
Myth #6: Embezzlement is rare.
Reality: Unfortunately, this is simply not true. While many cases go unreported, 39% of the survey respondents had experienced more than one case in their career.
How Businesses Can Protect Themselves
A three-step approach is the best way to avoid employee theft: 1) prevent theft with internal controls, 2) detect losses as early as possible, and 3) mitigate the impact on the company’s reputation and bottom line.
Prevent embezzlement by instituting a system of checks and balances in the accounting department. No single individual should have end-to-end responsibility for accounts payable or payroll. Companies should require that someone other than an authorized signatory review all statements and cancelled checks. If possible, corporate bank statements should be delivered to the business owner’s home address rather than the business. Finally, a company should perform background checks on employees to the fullest extent allowed by law, especially on those who will have access to corporate funds.
Detect fraud early to keep losses to a minimum by watching for key characteristics, such as employees who live lavish lifestyles that seem out of proportion to their salary. A small group of employees who stick closely together and exclude others can also be a red flag, as can employees who come in early, stay late and never take vacation. They may be ambitious—or they may fear being discovered and getting caught. Make sure all employees know that you have a zero-tolerance policy for theft and that, if they see something suspicious, they should speak up. In 65% of embezzlement cases, someone in the company reported suspicious behavior that led to the scheme being uncovered.
If you find an employee may be stealing, do not rush to judgment. You do not want to falsely accuse someone, and you want to take the time to build your case. When you do confront the suspected thief, do not do so alone. Get your human resources department, legal counsel and local law enforcement involved if you need help.
Mitigate the impact of theft on the company’s bottom line and remember that corporate reputation and culture can also be negatively impacted. A company should press charges against an employee who steals, no matter who they are. This will send a message that theft is not tolerated and decrease the chances that the offending employee will take advantage of their next employer.
Every business should be insured against embezzlement. Many businesses think their general or professional liability policy will protect them in cases of employee theft, but these policies typically do not respond to this kind of loss—the company also needs a crime or fidelity policy.
A crime or fidelity policy protects against embezzlement and may include coverage for theft, robbery and technology fraud causing the loss of money and property. Some policies will also cover employee theft of an executive’s property, extortion, fraud committed against customers’ accounts, accidental or intentional erroneous transfers of funds, and cyber deception (or social engineering).
Employee theft is a risk for every business, of every size, in every industry. It puts the company’s finances at risk and affects its morale and reputation. By being on the lookout for the warning signs and taking steps to mitigate the likelihood of theft, risk managers can help keep a company safe from embezzlement.