Worker Theft

It often starts with a trusted employee who a small business owner would never suspect. Invoices might be forged, or checks might be stolen. By the time the boss catches on, thousands of dollars in cash or inventory have been stolen.

Employee theft or fraud is a big and expensive problem at many small companies. But the pain is often more than monetary. A boss feels a sense of betrayal, anger and shame – and wishes after the fact that he or she hadn’t been so blind to what was going on.

The following is a look at the problem and steps a business can take to try to prevent it:

Who Does It

Lawyers who handle employee theft cases say workers who steal from their companies are usually not the recent hires. The thief tends to be “the long-term trusted employee who’s never had any evidence of (prison) time on their record,” said John Palter, an employment attorney with the law firm Riney Palter in Dallas.

“Generally, it takes someone with a high level of access to the various accounting systems and a high level of trust from management to be able to perpetrate the fraud,” Palter said. Consider that the thief might be a bookkeeper or controller.

Because of that trust, owners often don’t think to check up on their staffers – or even their business partners – and the theft can go undetected for years.

How Employees Steal

Attorneys say there are several methods that employees tend to use when they steal. A common one is for an employee to create a fictitious vendor who is paid for goods never received or services never performed. The employee creates an invoice, and a check is cut to pay the nonexistent vendor. The employee cashes the check.

Another method involves an agreement between the employee and an actual vendor. The vendor agrees to markup the price charged the company, and after being paid turns over the extra money to the employee. In return for this kickback, the employee promises the vendor that the company will keep doing business with him or her.

An employee might also open an account with the same name as the company, take customer checks and deposit them in that account. The company’s books are then adjusted so there’s no record of the customer transaction.

Hubert Klein, a certified public accountant with the firm Amper, Politziner & Mattia in Hackensack, N.J., said he usually sees cases of theft at a company where only one person does several jobs: receiving the mail, depositing checks and cutting checks. There’s often little or no supervision.

“That may be deemed to be weak internal controls,” Klein said, but added that many small businesses are forced by economics to have one person doing all those tasks.

Thefts also occur from petty cash, or when an employee asks a vendor to pay in cash and then pockets some of the money.

Thefts of equipment and inventory tend to come after hours, when an employee doesn’t expect to run into anyone else. They’re most likely to happen in companies without security and inventory-tracking systems.

How To Prevent It

“There should not be one individual that is exclusively responsible for the accounting,” Palter said.

That employee should also be required to regularly take vacation time. “It’s a way of ensuring that there are other sets of eyes reviewing the paperwork,” Palter said.

You also need to have an accountant come in and audit the books at least once a year. An audit will not only uncover a theft, it will also let employees know they could be caught.

An owner who is a little more hands-on can also help. “The way to prevent theft is to have owners who, at a minimum, review the bank statements, review all the checks” each month, Klein said.

Employers should also let staffers know through a clearly defined and written policy, that they cannot accept gifts from vendors, Palter said. Employees also should be aware that there will be consequences if someone is caught stealing from the company.

If a theft does occur, it’s a good idea if employees know that you’re prepared to have it thoroughly investigated by accountants and information technology experts who will be able to trace fraudulent transactions.

In the case of inventory, companies can embed chips in individual containers that will be scanned as they are removed from the building. Used along with video cameras, this technology can help an employer determine who took something and when.

Don’t Forget Identity Theft

Reports that disgruntled employees have stolen co-workers’ personal information are becoming more frequent. These employees often gain access to payroll records, including employees’ addresses and Social Security numbers.

Palter suggested small businesses bring in information technology specialists to help create secure computer systems that limit employees’ access to sensitive information. He said a company also needs to make it more difficult for an identity thief to copy and remove files. For example, he said, access to computers’ USB ports should be limited.

He also said a company should ensure that no one staffer has access to the entire system.

What Do You Do When You Discover It

When you discover that money, inventory or equipment is missing, and you suspect a particular employee is responsible, do not immediately confront him or her. Palter and Hubert warned that accusing someone who is innocent could make the company liable to a big judgment for defamation.

You should consult a lawyer and an accountant. The lawyer will tell you when it’s time to take the case to the police or district attorney’s office. An accountant can arrange for forensic specialists to go through your books and try to determine who had access to them and who likely committed the crime.

Klein warned that if the amount of theft was relatively small, the DA’s office might not want to prosecute. But the DA might be able to pressure the thief to return the money, provided it hasn’t all been spent.

However, Klein said, many companies also don’t want to take legal action, preferring to just quietly fire the employee.

“They don’t want their reputation damaged,” he said.