Employee Theft: Ways to Prevent Stealing in Your Business

Employee theft is a concern for businesses of all sizes. And in the fight against insider fraud, small-business owners are often on the front lines. "Occupational Fraud 2022: A Report to the Nations," a global study from the Association of Certified Fraud Examiners (ACFE), shows that organizations with the fewest employees have the highest median losses, at $150,000 per incident. (The report is based on the results of the ACFE 2021 Global Fraud Survey, which included 2,110 responses from certified fraud examiners.)

Meanwhile, more studies from trade groups in the U.S. help complete the picture: Insider theft is on the rise. The 2022 National Retail Security Survey, a National Retail Federation (NRF) survey of 63 U.S. retailers, found that 56.9% of respondents have seen employee theft worsen in the past five years, and 58.6% said the COVID-19 pandemic has aggravated the situation.

If it’s true that knowing is half the battle, business owners are wise to arm themselves. To get started, here you’ll find information about common types of insider fraud and a range of tools and tactics to help combat it.

Types of Employee Theft

When it comes to assets lost to employee theft, money, of course, is often the first thing that comes to mind. But goods such as food and drink, clothing, office supplies, and electronics are also subject to theft. Meanwhile, don’t overlook time theft – hours paid for work that haven’t happened.

Theft of Inventory

Traditionally, inventory theft includes merchandise that “falls off the truck,” but with the rise of organized retail crime gangs, it also includes shoplifting sprees and smash-and-grab attacks enabled by employees. According to the NRF survey, insider theft accounts for 28.5% of “inventory shrink.” Stealing office supplies and using company services for personal use are other common varieties of this kind of theft. And it can go way beyond taking paper clips and pens from the supply closet.

Theft of Intellectual Property

Stealing a business’s intellectual property – such as copyrights, trademarks, and patents, that hold high value – used to require an insider physically stealing or copying documents. But with digital operations, users with valid logins can now plant malware in the company server that will extract data. They could also sell the use of their authorized credentials to hackers looking to steal information.

The Verizon 2023 Data Breach Investigations Report, which analyzed 16,312 security incidents and 5,199 breaches, found 19% of data breaches reported in 2022 were enabled by insiders (current employees, former employees, or third-party contractors, for instance). These individuals were usually motivated by money. Meanwhile, the ACFE report found 8% of fraud cases now involve the use of cryptocurrency to pay bribes or launder stolen assets, something unheard of a decade ago.

Theft of Money

Money is the main motive and the top target for employee theft. Employee theft can come in many forms, including overcharging for cash purchases, doctoring receipts to show a smaller amount and keeping the difference, skimming from the register, or not recording purchases and pocketing the proceeds.

Payroll Theft

Another form of employee theft involves manipulating payroll and procurement records to cash in, for example, by writing paychecks for nonexisting employees or paying for phantom purchases of materials or services. Invoice fraud can also extend to submitting counterfeit expense reports to collect reimbursement for phony expenditures.

Time Theft

“Buddy punching” is an old practice: A colleague marks an employee present, even when the person has not shown up. But other practices, such as fake time sheets and excessive overtime claims, can cost enterprises millions of dollars annually in higher payroll costs and lower productivity. 

The Ramifications of Employee Theft

According to the ACFE, organizations worldwide lose about 5% of their revenues to internal fraud every year – and the consequences of these incidents are multifaceted. Losses can mount beyond stolen money to lost business, especially if the company’s reputation takes a hit and subsequently hurts relationships with vendors and business partners. In the case of public companies, share prices can also drop.

The effects continue internally, as well. As the company focuses on dealing with the aftermath of theft, losses can affect its ability to afford improvements, employee raises, and capital investment. Even honest employees suffer: Nearly one-quarter (23%) of companies that experience fraud report lowered employee morale afterward, according to PwC’s 2022 Global Economic Crime and Fraud Survey of nearly 1,296 executives in 53 countries and regions.

Losses can mount beyond stolen money to lost business, especially if the company’s reputation takes a hit and subsequently hurts relationships with vendors and business partners.

How to Help Minimize Employee Theft

According to the ACFE report, the average fraud case takes at least 12 months to be detected and causes a monthly loss of $8,300. With a bit of basic math, it’s not hard to see why preventing and correcting this situation should be a priority. A variety of best practices can help.

Improve Internal Controls

Lax bookkeeping enables theft; ACFE’s survey found a lack of controls made possible 29% of employee fraud cases. Internal audits are the second most frequent detection method for spotting insider theft (after tipsters), but with stronger controls, fraud can be spotted sooner and stopped before losses mount.

Some simple steps, such as frequent account reconciliation, can help expose discrepancies in credit card, bank, and financial statements. Strictly numbering invoices and checks sequentially can make it easier to spot missing or duplicate documents, while matching payments to expenditures can make it harder to disguise phantom purchases. Checking billing addresses in credit card statements, requiring signatures for all transactions, and setting up alerts for large or unusual purchases can help find fraud faster.

Pay Attention to Credit Card Authorizations

Who has use of a company credit card and what authorizations do those individuals have? Careful decision-making and tracking here can be key. Periodic reviews of existing authorizations, which can allow you to revise as necessary, can help as well. For example, an employee traveling on business might get a temporary increase to their spending limit, then go back to the regular spending limit upon their return. A change to an employee’s role might prompt a change to the spending limit, depending on their updated duties. Thoughtful upfront vigilance can be critical, since once a business authorizes the employee to use the card, it may be responsible for those purchases.

Empower Individuals

The majority of perpetrators of employee fraud exhibit at least one behavioral red flag before they are caught, such as spending beyond their means or having unusually close ties with vendors or select customers, according to the ACFE report.

Fraud training that teaches employees how to spot red flags is key, as co-workers can often be the best ones to spot potential occupational fraud. Enabling tipsters by providing an anonymous reporting hotline, dedicated email address, an online form, or similar vehicle can help put a stop to employee theft.

Reduce Opportunities for Theft

Thoughtful division of labor can also play a role in preventing employee fraud before it happens. Consider splitting sensitive functions, such as payroll and purchasing, across several employees, so no one person is authorized to run the whole process. This separation of duties can make it harder for one person to make up nonexistent transactions and pocket the money. Rotating employees in sensitive functions and limiting which employees are authorized to make purchases and expenditures can also make it harder to commit fraud and easier to find the person responsible when it happens.

Leverage Technology

Just as thieves are taking advantage of digital tools, small businesses can take advantage of new fraud detection tools. Networked cameras operating via Bluetooth or Wi-Fi, for instance, can help even the smallest of businesses stop employee theft with minimal expense.

Increasingly sophisticated point-of-sale systems (POS) are also available to small businesses, thanks to SaaS and mobile devices that can turn a tablet or phone into a POS terminal. These systems not only ring up purchases, but they allow businesses to reconcile sales and stock-keeping in one place, which makes it harder for inventory to be stolen.

Near-field communications (NFC) technology can help fight against inventory shrink by tagging merchandise so it can be tracked in real time. NFC can also help prevent time theft by allowing employees to clock in and out only when their device (smartphone or tablet, for instance) is within an appropriate distance of their workplace. And biometric markers as simple as the Touch ID on a phone can validate employee identity, effectively putting an end to “buddy punching.”

Enlist Outside Help

No business needs to tackle insider fraud alone. Consider outsourcing functions, such as accounting and payroll, to an outside firm. This can not only short-circuit employee theft and fraud, but it can also cut costs and bring in added, objective expertise.

Connecting with support networks can also offer best-practice advice and recommendations for outsourcing. Groups such as the U.S. Chamber of Commerce and SCORE (Service Corps of Retired Executives), a nonprofit network of mentorship and advice for small businesses supported by the Small Business Administration, can be valuable resources.

The Bottom Line

Preventing employee theft is not just a financial issue, it’s also a workplace issue and an employee experience issue. By tightening internal controls, carefully managing employee credit card usage, offering fraud awareness training, reducing opportunities for theft, leveraging technology, and getting outside help, you’re not just safeguarding assets – you’re supporting a foundation of trust and integrity. In turn, this proactive and comprehensive approach can help enhance the overall employee experience while fortifying your business against insider theft.

A version of this article was originally published on November 12, 2013.

Photo: Getty Images