All businesses have some exposure to employee theft, but according to the Association of Certified Fraud Examiners (ACFE), companies with fewer than 100 employees disproportionately bear the brunt of this problem.
The consequences of employee theft can be crushing, from loss of reputation and productivity to impact on profits — and the longer a fraud scheme goes undetected, the greater the loss. The ACFE reports that the average crime scheme lasts about 18 months, while a third of all fraud schemes continue for at least two years. And the financial toll can be staggering — the average commercial crime loss costs an owner $150,000, and many losses exceed $1 million.
While most companies survive this kind of fraud, many do not. The U.S. Chamber of Commerce says one-third of all small business bankruptcies result from employee theft. Statistics from the ACFE suggest most employees who commit fraud have worked for the company for more than five years. Employees who stay for longer periods of time often take on more responsibilities and, in turn, have more opportunity to commit larger frauds.
Are you prepared to help your commercial clients mitigate potential employee theft-related losses with the right insurance and proven prevention processes?
Top four employee crime schemes
What should you tell your business-owner clients to watch out for when it comes to employee theft? Based on an in-depth study, The Hanover identified these five common employee-related crimes:
- Billing and vendor schemes — employees set up false vendor accounts and then bill their companies for non-existent parts or services
- Check tampering schemes — employees use company checks to pay themselves, or reissue the company's old outstanding checks and change the payee to themselves
- Payroll schemes — employees create "ghost" employees, add them to the payroll and direct-deposit their salaries into a fraudulent account they set up; or, employees fraudulently increase their salaries within payroll or HR systems, triggering payments in excess of their actual salaries
- Expense reimbursement schemes — employees submit reimbursement requests for expenses never incurred or not of a business nature, and are then reimbursed for those fraudulent expenses
Preventing employee theft
While most basic business policies provide some crime coverage, basic coverage may not be enough. Consider placing a standalone crime policy that offers coverage in the event that a commercial client's employee steals money, securities or property. Even an entry-level crime policy can provide affordable coverage for a potentially big problem.
Depending on the type of business, it may also make sense to also consider a third-party off-premises policy, which can provide protection in the event that an employee steals from a client while working at the client's location. Third-party off-premises coverage is crucial for technology and consulting companies, contractors, janitorial firms, health care providers and employee placement firms, along with other businesses that deliver, install or repair items at clients' locations.
In addition to securing proper insurance protection, encourage your business clients to review their internal processes and procedures and implement the following best practices:
- Perform background checks. In accordance with law, perform thorough background checks of all potential hires. Do not take shortcuts or make assumptions.
- Set up a system of checks and balances. Make sure there is clear accountability for every position and that no position has broad enough power to authorize payments without the consent of another individual.
- Set up an anonymous tip line. Having a line where employees can report suspicious activity or business practices is a top way for business owners to be alerted to fraud.
- Have a clear employee conduct policy. Communicate often and clearly about the company’s employee conduct policy.
- Establish clear vendor processes. Set processes for vendor acceptance and setup, inventory control, and expense reimbursement can help avoid potential theft.
From inventory theft to falsified expenses, payroll fraud and more, no business is immune to employee theft. But independent agents can identify effective crime insurance solutions, putting their business clients in a better position to withstand and prevent employee theft.
Learn more about fidelity and crime insurance