MLR

When a relative or trusted employee steals

Theft in small businesses happens more than any of us would like to think.

Young employee eyeing cash

And the saddest part of it is that the thief is most often a longtime trusted employee, or even a member of the family.

The results of employee theft can be dire for some companies struggling to succeed. Large thefts have literally forced some small businesses into bankruptcy.

What is stolen?

In a recent University of Cincinnati study of 314 small businesses – nearly half of them family businesses – 64 percent said they had experienced employee theft. Cash was stolen more than anything else.

The amount of cash stolen ranged from just $5 to as much as $2 million. But the average over time was $20,000. The study found that the thefts were rarely one-time incidents but instead were ongoing schemes.

The employee theft reported in the study had an average duration of 16 months, with as short a length as two weeks and as long a duration as 20 years.

While cash was stolen 40 percent of the time, 18 percent of the theft reported in the study was of products sold by the business. About 12 percent were of materials, 8 percent tools and 6 percent equipment. The rest was office supplies and time-card manipulation.

Who steals?

The Cincinnati study found that 60 percent of the thefts were committed by the lowest level, nonmanagement employees. About 20 percent were committed by managers and executives, and the other 20 percent by financial, purchasing and billing personnel.

Perhaps surprisingly, the study found that only 2 percent of the people who handle cash the most – cashiers – stole from their employers.

The largest thefts were committed by the most trusted employees.

The motivation for the thefts, in most cases, was not need, according to Jay Kennedy, the doctoral student who conducted the study in University of Cincinnati’s Center for Criminal Justice Research.

“Most people believe that employees who steal are doing so because they are poor, in desperate need of money for, say, medical treatment or other dire circumstances,” he said. “I’ve found in my research that these crimes actually tend to be a matter of lifestyle enhancement. Those convicted of fraud cannot account for how they spent the money.”

Are the crimes reported?

Perhaps surprisingly, only 16 percent of the victimized small businesses in the study reported the crime to authorities.

Why?

Emotional obstacles are a big reason. Since many of the perpetrators are longtime employees or possibly family members, business owners hesitate to prosecute.

“You have a combination of factors where prosecution won’t likely recoup assets, plus the added emotional burden of knowing this person very well, and who may be a relation,” Kennedy said. “In the intimate environs that are small businesses, you may know this person’s spouse and children, or may see him or her in family settings at the holidays. All in all, you just want to put the betrayal behind you as much and as quickly as you can.”

Though prosecution is typically recommended to prevent future thefts, in this study many owners said they were advised by counsel that the time and trouble involved in prosecuting will bring little financial recovery.

“For instance one company went through all the time and steps for a successful prosecution of an employee who stole $200,000. The employee was convicted, put on probation and ordered to make restitution at the rate of $50 per month. In essence, the small business will never recoup the stolen funds,” Kennedy said.

The Association of Certified Fraud Examiners found that 58 percent of businesses don’t recover a dime of fraud losses. Only 14 percent of businesses make a full recovery of losses, and just 9 percent recover more than half.

The Cincinnati study also discovered that many business owners who are victims of employee theft don’t believe the local police are equipped to handle financial crimes.

“Small businesses often assume that a responding officer won’t have the business background to appreciate or even, initially, do much about a reported crime other than write up a report,” Kennedy said. “Most small businesses don’t realize that the police have a financial crimes unit.”

When a family member is involved, you may wish to keep a low profile during the time needed to investigate. Fraud experts recommend that you send the relative out of the office on a special assignment or vacation, if possible. Most importantly, isolate the person from the duties that enabled the theft, and don’t give the employee the opportunity to remove files from the office. It is important to document each step of the process in case there is further legal action.

The obligation of the business owner is to protect the business. The owners of small businesses should be proactive in preventing fraud at their businesses. The tone must be set at the top, with employees made aware that fraud prevention measures are in place.

Honest employees will have no problem with this. For employees who may have the potential for committing fraud, the feeling that there is a greater chance of being caught plays on the ego – and the image of how they want peers, friends, family and the community to perceive them.

In addition to communicating a code of conduct to employees, effective, low-cost fraud controls include personally reviewing bank statements, not placing too much trust in a single employee, requiring job rotation and mandatory vacations, and regularly conducting management reviews.