How to Prevent Employee Theft: Stop Business Employee Theft

You may find yourself wondering sometimes if you're doing everything you can to prevent employee theft in your small business. Relax, you're not alone.

You may find yourself wondering sometimes if you’re doing everything you can to prevent employee theft in your small business. Relax, you’re not alone.

Paranoia isn’t the cause of your fears. According to a recent study by the Association of Certified Fraud Examiners, organizations lose six percent of their annual revenue to fraud and abuse, to the tune of $400 billion annually. Now for the bad news: Small businesses with 100 or fewer employees are the most vulnerable.

One Kentucky physician found that her receptionist, a “whiz” at her job, had been filling her appointment book with dummy patients whenever she wanted time off. The scam cost the doctor $100,000 over five years.

A Washington, D.C., accountant says that unfortunately the perpetrator is often the employee you would least expect, “the long-term, very trusted, very valued employee who never committed fraud before.”

So how do you protect yourself? Start by hiring carefully, which means doing legwork on references. Although some employers will only confirm dates of employment for fear of lawsuits, some will tell more and point out integrity warning flags. Search criminal records back five years if the employee will handle your money, or pay a professional to do it. Don’t trust temp agencies to have done it, either.

Watch for changes of behavior in employees. Are they suddenly spending more money than before? Do they talk about recent financial troubles? Plus, are they working too hard? Sometimes employees who are working an unusual amount of overtime, taking work home or refusing vacations may be establishing cover-up operations. Some experts recommend stipulating that employees with access to cash and receivables must take vacation time.

Have separate employees handle bank reconciliation and financial transactions. The person making the deposits should never be the one doing the reconciling. Such a “division of labor” also works well for disbursements — have different employees pay vendor bills and monitor invoices and balances due.

Spot-check your vendor list for companies you don’t recognize, and make sure charges are correctly entered into your computer system. When signing checks, use only original invoices, no photocopies, and make sure the invoice is dated and marked paid.

Above all, let employees know you’re watching things. Ask for explanations. Be seen reconciling the bank statement — and have it mailed to your home.

And when you do find theft, act prudently. False allegations, inaccurate allegations or even an inappropriate investigation can all lead to a lawsuit by the “harmed” employee, legal experts warn. Get legal advice as quickly as possible, and acquire as much competent information as early as possible before making your decision. Remember that your actions may be scrutinized by a jury at some point in the future.

If there is a precedent in your small business, then review your files to determine how employee theft has been treated in the past. It’s important to treat similarly situated employees similarly for the same offense. Check with a lawyer before putting the words “theft” or “stealing” in written termination notices, since often “violation of company policy” is more advisable to head off future lawsuits instead.

Be proactive, and don’t wait for problems to grow. Unlike fine wine, employee theft problems get worse with age.

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