This month we thought you might find an article about employee theft from the perspective of the crime insurer, Hiscox Insurance.
If you were to ask a group of business owners about the biggest risks they face, you’d probably get a lot of different answers. Some might say external risks, like competitive challenges or economic uncertainty. Others might say physical risks like damage to their building or a computer system failure. But there’s one risk that no one is likely to mention — one that’s very real and that every business is vulnerable to: embezzlement.
Business owners often think of their employees like family, and would never suspect them of committing crimes like embezzlement or employee theft. Yet theft is far more common — and results in far larger losses — than many business owners realize.
The 2018 Hiscox Embezzlement Study: An Insider’s View of Employee Theft surveyed CFOs, controllers and accounting managers who worked at companies where embezzlement had occurred. The survey shows that the average cost of a single embezzlement scheme is $357,650, involves multiple perpetrators at all levels of the organization, and could last for years.
The Financial Cost of Employee Theft
Of the more than $350,000 that is embezzled in the average scheme, just 39 percent of funds are recovered when the thief is caught. Recovery can come from restitution, legal settlements and insurance payments, but it doesn’t come close to replacing all that was stolen.
The cost of embezzlement goes far beyond the amount of money stolen from the company. Twenty-nine percent of survey respondents said their company had to lay off employees because of embezzlement. More than a quarter of respondents said their company lost customers and had to increase their spending on security and auditing.
It’s More Than Just a Hand in the Till
In 79 percent of embezzlement cases, more than one person was involved in the theft. The average number of people involved in a single scheme was three.
Most schemes went on for over a year. In 31 percent of cases, employees were stealing from their employer for three years or more before the theft was discovered. The average embezzler was employed at the company for eight years before they were caught.
One indication of the prevalence of embezzlement is that, of the executives surveyed, 39 percent had seen more than one case of embezzlement during their career.
Who Are the Embezzlers?
Anyone can be an embezzler, regardless of age, gender, department or position in the company. Even owners and directors have stolen from their companies. More embezzlers work in the accounting or finance department (33 percent) than any other, but every department is at risk.
More telling than their position at the company are some common character traits that make people more likely to steal. These include:
- Intelligence and curiosity. These people pick things up quickly and ask a lot of questions about how things are done. Then they exploit the process for their own gain.
- Embezzlers often lead a lifestyle that is out of proportion to their salary. Part of the thrill they get from stealing is the ability to show off to others.
- A propensity to take risks. An embezzler may be a rule-breaker in other areas of their life, too. They may over-use sick time or get a lot of speeding tickets, for example.
- Ambition and diligence. Embezzlers often have the appearance of being hard workers – coming in early, staying late, and not taking vacations. What they actually have is the fear of being caught.
- In some cases, embezzlers are taking out their dissatisfaction with the company by stealing. They may feel they are ‘entitled’ to more money than they’re making, so they decide to help themselves.
How Do They Do It?
There are many different ways employees can steal, some complex and others shockingly simple. Billing fraud, which includes creating fictitious vendors and overstating payments made, is the most common. Also popular are theft of cash and company property, check tampering, payroll fraud and skimming of credit cards.
Why Good Employees Go Bad
The path from trustworthy employee to thief can vary, but generally three characteristics are common to every crime: means, motive and opportunity. In many cases, the scenario looks something like this: An employee is hired and starts to learn the processes of the company. They may work for the company for several years without incident.
Next, the employee may have a financial crisis of some kind. They may be overwhelmed with bills or their spouse or partner loses their job. They convince themselves that they are justified in taking a ‘loan’ from the company which they’ll promptly pay back when their financial situation improves.
When their first crime goes undetected, they are emboldened to try again. The more times they get away with stealing, the more likely they are to continue. Soon they are regularly embezzling company funds to maintain their new standard of living.
How Can Companies Protect Themselves?
A three-step approach can help companies protect themselves from employee theft.
- Prevent embezzlement in the first place. This means having procedures in place that make it more difficult for employees to steal. No single person should have end-to-end responsibility for any accounting function, like payroll or accounts payable. Business owners may want to have bank statements sent to their home for review before they are reconciled at the office. Perform background checks to the extent allowed by law.
- Detecting embezzlement early is critical to limiting losses. Be aware of employees who live a lifestyle out of proportion to their salary, or who come in early, stay late, and don’t take time off. Encourage employees to speak up if they see something amiss.
- Mitigate the impact on your bottom line by pressing charges against any employee who steals. This sends a message to other employees that you won’t tolerate theft, and it prevents the miscreant from plying their trade at another unsuspecting company. Consider crime insurance, which can make the company whole again after a theft.
A crime and fidelity policy protects against embezzlement, including theft, fraud, and tech fraud of money (including virtual currencies) and property. It also covers employee theft of an executive’s property, including extortion; fraud committed against customers’ accounts; accidental or intentional erroneous transfer of funds, cyber deception, and more.
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. Being on the lookout for the warning signs and taking steps to mitigate the likelihood of theft can help keep a company safe from embezzlement.
Failure to detect fraud or employee theft remains the most significant source of large malpractice claims against CPAs. The risk of defalcation by clients far out weights any other exposure in terms of the potential size of claims. It may be wise to understand these risks and discuss this with your client.
Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or firstname.lastname@example.org.