Understanding and Preventing Employee Theft
Employee theft in the workplace is a serious problem for employers: 75 percent of employees have stolen from their employer at least once, and businesses lose 5 percent of their annual revenue to employee fraud, theft and abuse. Employee theft is a crime that is costing U.S. businesses $50 billion annually, but even more shocking is that employers think they are immune from such a crime.
What Employees Steal
Employees at various levels can steal almost anything they want. For example, time theft includes spending hours each day writing personal emails, surfing the internet for one’s personal pleasure and having coworkers clock in for workers before they arrive at work or clock out for them after they had already left. Simple theft of money occurs when an employee pockets cash without recording the transaction.
Embezzlement schemes include skimming, lapping and kiting. Skimming happens when an employee does not deposit cash or checks received and keeps the funds for themselves. Lapping involves the theft of cash or checks received by crediting one company’s accounts receivable account through the abstraction of money from another customer’s accounts receivable account, also known as robbing Peter to pay Paul. Lastly, kiting involves building up balances in two or more bank accounts based upon floating checks drawn against the other accounts.
Another example of theft is the stealing of inventory which accounts for 39 percent of all unconventional ways workers and managers steal in the workplace. The pilferage of paper clips, pencils, stationery and postage amounts to $1 billion annually. As companies become more and more reliant on technology, the theft of intellectual property is inevitable. Furthermore, the increased use of mobile devices and electronic data that can easily be transported by employees increases the risk for inappropriate disclosure of confidential information. Nearly 75 percent of the $250 billion annual loss that can be attributed to trade secret and other intellectual property theft involves trusted insiders, such as employees, former employees or consultants. This is very common especially when employees leave one organization to go to another.
How They Commit Fraud
Regardless of industry or business, three factors are always present for employee theft to occur: pressure, opportunity and rationalization. The greedy employee will first steal when their income can no longer support the desired lifestyle (pressure). This employee justifies stealing small quantities before becoming bold and then justifies the theft of larger quantities by believing it is acceptable because of his or her condition. For example, they believe they are underpaid (rationalization) and will only commit the crime when there is a chance to do so (opportunity).
The following cases demonstrate how these three factors allowed for employee theft.
- David Smith, a former Quest Diagnostics manager, was reimbursed for over $1.2 million in false expenses through a complex web of deception. Smith set up fake companies, created fake invoices and turned in fake expense reports for payments he’d supposedly made to companies on Quest’s behalf. Eventually, the FBI caught on because Smith had created phony companies that had fake mailing addresses. He was ultimately sentenced to five years in prison.
- Another example highlights the importance of internal control. Barry Webne was hired at Block Communications, Inc., as a “theft-prevention specialist.” However, prevention was the furthest thing from his mind. With the help of another co-worker, he wrote checks to himself on company stock. The two were cashing the checks and then destroying the canceled checks that were returned to the company. Webne made false entries in the company’s books to cover his actions. Eventually, he was caught. In total, Webne robbed Block of a staggering $1.2 million.
- Another case demonstrates the length of time employee theft can continue. Over the course of seven years, a fare counter for Calgary Transit, David Hamilton, took coins home with him by hiding them in his bag. When it was all said and done, Hamilton pilfered almost $375,000 from his company.
- The following examples show the need for segregation of duties. After mastering the furniture company’s phone and mail-order system, Suraj Samaroo began issuing refunds to himself for purchases made by customers. Samaroo would cover up his rampant refunding by altering inventory records. In less than a year, he stole just under $400,000. At an independent bookstore in North Carolina, bookkeeper Anna Susan Kosak was nabbed for embezzling around $350,000. Because Kosak was the only person to handle the company books, she would write and cash checks written out to herself without any oversight.
How It Can Be Prevented
Fortunately, employee theft can be controlled or prevented with specific policies and management’s commitment to eliminating this workplace problem. Leaders serve as role models to their employees and must be ethical in their actions in order to build an environment and culture based on honesty and integrity. An organization should incorporate all aspects of ethics including a code of ethics, an ethical office, an ethics consultation committee and regular personal ethics training programs. These elements help to align the strategies and goals of the organization with those of the employees. There needs to be harsh punishment to the employee to emulate that this type of behavior is not tolerated. Simply put, employees need to be held accountable for their actions. A company should have a rewards system in place for employees who report any dishonest activity occurring in the organization or who participate in activities to prevent employee theft.
Another way to prevent employee theft in the workplace is to make it mandatory for all employees in accounting, human resources and those who handle cash and merchandise to take vacations each year. Employees should be cross-trained to do the job of other employees so there is no lapse in duties as well as a double check of the work of vacationing employees. An excellent suggestion would be to have a toll-free hotline answered by an outside company where employees could call in anonymously to report known or potential theft.
Having strong controls for cash-handling procedures could further eliminate some opportunities for theft of cash. The best practice is to make sure a daily reconciliation is prepared, comparing the cash receipts log to the daily bank deposits and the cash held in the safe or a lockbox. Any discrepancies not due to deposits in transit should be investigated and the reasons noted on the reconciliation report. Each reconciliation must be signed and dated by the person who prepared it. Employees should be informed that they are responsible to pay for the discrepancies, and, if it occurs multiple times, the employee can be terminated.
It is absolutely critical to have segregation of duties. This involves ensuring that duties are segregated such that the work of one individual provides a cross-check on the work of another employee. Essentially, assigning different people the responsibilities of authorizing transactions, recording transactions and maintaining custody of the related assets reduces the opportunities for any employee to both perpetrate and conceal the crime. This concept works hand in hand with the employer’s internal control. For example, to prevent data theft there should be restrictions on portable media and size of emails. Internet usage should be limited to work related activities only. Thoughtful and effective employee supervision can also help companies manage the risks of reduced productivity, liability claims and loss of assets. Similarly, employee theft can be potentially reduced through better screening of employees before employing them. All dates and time gaps in an employee’s resume should be scrutinized. A background check and contacting the future employee’s previous supervisor are additional ways to prevent employee theft.
Employee theft in the workplace happens more often than employers would like to think and without a doubt is a financial drain on their businesses. There are many reasons why employee theft occurs and various factors must be present in order for an employee to steal. Many examples exist and there are ways to prevent it. As an employer, know this: the cost of employee theft is too high to ignore.
Ralph J. Evangelista
Ralph J. Evangelista, CPA, MS Taxation, CGMA, is an adjunct professor of accounting and taxation at Seton Hall University and co-managing member of Frazer, Evangelista & Company, LLC, CPAs. He is a member of the NJCPA Professional Conduct Committee and several NJCPA interest groups. Ralph can be reached at firstname.lastname@example.org.
Sean P. Brophy
Sean Brophy is an associate at Deloitte and pursuing his Master of Professional Accounting at Seton Hall University. He can be reached at email@example.com.
This article appeared in the January/February 2020 issue of New Jersey CPA magazine. Read the full issue.