Corporate fraud and employee theft detection

Business enterprises both large and small have to account for the possibility that theft will occur from within its own team of trusted employees. By definition employees have greater access to the inventory and financial assets of a company. Corporations have to balance the positive morale effects of trust and openness with the reality of maintaining enterprise security. Preventing fraud is a combination of good hiring practices,  skilled management, unobtrusive security, and in some cases luck.

The approach to corporate security is slightly different for enterprises of different sizes. While a small corporation with fewer employees typically has a better understanding of each person, their controls and detection systems may not be as robust. A larger corporation will have more secure procedures, but the layers of management remove some of the transparency which allows for closer relationships with each team member. An often overlooked factor is employee morale. The vast majority of employees will maintain reasonable honesty, but that can go out the window when the individual feels mistreated by the firm or a superior.

Private investigators are often engaged with a theft after it has happened or while it is ongoing. The mission is sometimes to determine the extent of the fraud and identify all of the participants. Some forward looking companies hire investigators with specific skills in this area to “stress test” their procedures to find loopholes which can be used by aan internal fraudster. An insightful investigator who has worked these types of cases can be proactive and seek out potential clients by presenting fraud prevention as a segment of their business development.

Secure procedures are even more important considering that some of the most valuable assets a firm may have are its data which is easily concealable and transferable unlike physical products. We recommend having policies to secure data which are just as solid as protecting cash assets.

Four areas of attention on loss prevention which stop a majority of thefts are as follows:

1. Hiring practices – Properly (and legally) running background checks on prospective employees is an obvious first step, but one which is frequently ignored by companies. Subcontracting background checks out to an investigative firm is better than nothing, but employers should be aware of the limitations on the scope of the background they are getting. Some federal and state laws limit what can be investigated and used depending upon the job applied for. There is also a false sense of security when a “clean” background check is returned when the client is not aware that the search may have only included electronic records from a 3rd party database, or only covered  a limited geographic area. Private investigators should clearly describe the scope of their search so that neither the client nor the PI is exposed to liability should an employee later commit a crime which causes damage. A thorough background investigation which includes actually reading the details of a persons history also reveals small clues which can detect an underlying problem. A 30 second database search cannot do that.

2. Management attention – Positive management and motivation of staff not only results in better production, but it also reduces the probability of bad acts. In addition, negative traits associated with a person with bad intentions will be more obvious when surrounded by good morale. Regular updates of an employees personal situation or background should be performed on a regular basis as allowed. Checking for financial distress, foreclosure, bankruptcy, lawsuits, and divorce can help the company understand the stresses on the employee and help if needed, and also keep an eye out for theft in the worst case. For some of our clients we also monitor Secretary of State records for UCC filings or new corporations which could indicate outside interests of the employee. We have discovered on more than one occasion new entities formed by employees with business partners including vendors, customers, and even competitors. Finding this out early prevents greater losses. In one memorable case we discovered an employee stealing about $800 per month using a very complex scheme of double billing for their trade show expenses. It was odd since the employee had been at the firm for over a decade and was a successful marketing team leader making almost $300,000 per year. But in his case the money was needed since his personal expense overhead had risen and was about $1000 more than his take home pay.

3. Secure procedures – Of course internal procedures need to be secure no matter what. Proper accounting of cash, inventory controls, and company asset rules prevent not only outside theft but also “inside jobs.” Some of the procedures should be kept confidential. We discovered that one employee who knew about the companies policy of auditing all checks over $75 to simply steal and write checks of $50 or less. I walked into one firm and found that an open box of blank checks was being used as a door stop. Any transfer in or out of cash or significant inventory should have two non-associated employees cross checking one another. Another good practice is to require that bookkeepers, controllers, and inventory managers take mandatory vacations annually so that another person does their job for a week. It is hard to cover up fraud when you are not “on it” all the time.

4. Detection tripwires – The last line of defense is monitoring benchmarks. A CEO or principal should know the metrics of his or her firm so that when travel expense goes from say 3% of sales to 8%, it is worth looking at. Line items such as cost-of-sales, overtime, cash receipts vs. CC or checks, and discretionary items such as fuel usage are common areas of diversion. Setting expectations for dollar amounts or percentages and then monitoring them makes it easy to see if there is a fraud. Random audits of sub accounts once in a while is good practice. It also lets the bookkeeping department know that there are no permanent loopholes.

Protecting against employee theft may sometimes seem like it takes more time and effort than the money saved. In the short run this is sometimes true, but when employees discover methods to steal which go undetected the amount and scope of the theft almost always increases. Preemptive detection services might seem like a hard sell, but companies who have become victims of theft almost always wish they had done so.

One of the biggest losses in an employee theft case is not the money lost to the theft. The firm also loses an employee who may not have turned bad if they did not have the opportunity, and it results in internal turmoil in any case. The confidence in company leadership is a big loser.

For more reading on the subject you can see these additional articles:

 

Nine year employee arrested for $150,000 theft

Are your employees stealing from you?

Preventing online order fraud

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