Client Journey: Dealing with Employee Fraud and Theft

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Employee theft costs businesses in Australia and NZ around $1 billion per year. While employee theft is not as common as customer theft, it tends to involve a larger amount — for retailers the average value of a customer theft is $415 compared to $1200 for an employee theft. 

In this edition of the client Journey series we explain the key causes of employee theft and fraud and what you can do to prevent it in your small business. 

What are the different types of employee fraud and theft?

Employee theft (stealing) and employee fraud (materially deceiving the employer in some way), comes in many different forms. Some of the most common are:

• Ordinary theft. Most obvious, perhaps, is cash theft, such as when a retail employee receives cash from a customer, but intentionally doesn’t ring it up on the till. It also includes product theft ,where the employee steals from inventory or office supplies. 
• Obtaining by deception. This is the more sophisticated form of fraud or dishonesty. It includes, for example, fake invoicing scams where the employee or their associate sets up a fake company to invoice the employer for non-existent services. 
• Intellectual property theft. This can occur, for example, where a software engineer secretly copies code from their employer and sells it to a competitor. 

What causes employee theft?

It goes without saying that theft is the individual decision of the employee and an employer is not responsible for it. Nevertheless, it is worth looking at the various contributors to theft so that the employer can focus on mitigating those factors that they can control. 

• Revenge. It is not uncommon for those found to have stolen from their employer to claim they have been treated poorly by their employer and to therefore ‘feel’ that they are entitled to steal. Business owners need to pay attention to employees who appear peculiarly aggravated. 
• Apparent addiction issues. In a large proportion of employee theft cases the employee has a serious addition problem such as a gambling or drug addiction. US studies have suggested that $81 Billion is lost by businesses due to employee addictions (this includes losses stemming from reduced productivity, as well as theft and other causes). 
• Lack of controls. Where employees feel that they have an easy opportunity to steal, they will feel more tempted to do so. Poor controls might include a lack of supervision, poor inventory management or no segregation of duties (e.g., the same person issuing and paying invoices without oversight). 

How to recognize Fraud and theft

What can employers do to recognize employee theft or fraud? Two key markers to consider are:

• Employee lifestyle/behaviour. Is an administrator suddenly driving a Ferrari? Employers should also question a continued reluctance of staff to take vacations (This can be a common technique for avoiding fraud discovery by a replacement staff member). 
• Financial irregularities. This could include reconciliations not adding up, inexplicably running out of cash, complaints from creditors that they have not been paid, or the presence of unknown new companies in the list of the company’s creditors. 

How to prevent fraud and theft

What steps should a business take to prevent fraud and theft? We would suggest the following:

1.  Strong internal controls. Think of how you can structure work processes to best mitigate the risk of theft. This could include double sign off on invoices over a certain value, regular financial audits, stocktakes, and appropriate password and access privileges. 

2. Robust employment contracts. Employment contracts should specifically set out confidentiality requirements and the consequences of theft or fraud (e.g., summary dismissal). 

2. Improved employee background checks. Often employees who steal have done so before. This is something that may be picked up from sufficiently rigorous referee checks. For example, has the employee conspicuously left a recent employer off their list of referees? What happens when you ask them about it? 

3. Appropriate leadership. Management need to clearly signal to employees that fraud and theft will not be tolerated. A strong workplace culture is driven from the top and if employees perceive that the management is unethical they may see this as a green-light for their own behaviour.

Preventing employee theft and fraud

When considering their business viability and stability, it is essential for owners and directors to consider both “inside problems” and “outside problems”. Employee theft is a quintessential internal problem for companies, and therefore an area which they can do something about. 

While there is nothing a business can do to completely eliminate employee theft, it often reflects, at least partially, inadequate internal controls and processes within the business. It is not enough to simply ‘trust’ employees without sufficient safeguards in place.