 By Evan Moses and Benjamin Ikuta Employee theft increases as the economy declines. Morale and loyalty are difficult to maintain as employees find themselves confronted with the harsh reality of layoffs, reduced hours, decreased benefits and salary cuts. Faced with these difficult situations, employees are more likely to justify theft, believing that they are being treated unfairly or have little to lose in anticipation of having their employment terminated. Workplace theft can take many forms – from the spontaneous removal of a few too many packages of Post-its, to a calculated effort to steal a multi-million-dollar research and development plan. How Much Does Employee Theft Cost? According to the Association of Certified Fraud Examiners, the typical U.S. company lost 7% of its annual revenues to employee fraud in 2008. Last year, businesses as a whole lost nearly $1 trillion dollars. That number is projected to rise as the economy continues to struggle. Perhaps most shocking, in 2008, the median loss for U.S. companies is estimated to be $150,000 per incident. On average, it takes about 18 months for an employer to discover employee theft, if discovered at all. Furthermore. it is quite common for the fraudulent activities of a single employee, either directly or indirectly, to bankrupt a businesses. Because of the significant risks involved with employee theft, it is crucial for employers to implement an effective fraud prevention program. Although there are some up-front costs associated implementing a program, the cost of a fraud prevention program will likely cost the employer far less in the long run than undiscovered employee theft. How to Avoid Employee Theft Background Checks. A company should aim to prevent employee theft before an employee is ever hired. Thorough background checks on all applicants, including calls to all references, can prevent a company from hiring a potentially problematic employee. If there are significant discrepancies between what has been listed on the résumé and what has been discovered through background and reference checks, the prospective employee should not be hired. Dishonesty on a prospective employee’s application indicates a likelihood that this dishonesty will transfer into the workplace. Furthermore, employers should consider running a credit check on potential applicants. The single greatest reason for employee theft is financial difficulties. Due to legal requirements and restrictions, however, companies first should consult an attorney before deciding to use credit checks. Establish and Communicate Clear Corporate Policies. Employers should establish and distribute company policies that unambiguously establish the company’s expectations concerning the proper/improper uses of company resources and confidential information. Employees are less likely to steal if they are aware that the employer takes such matters seriously, and if they have been advised regarding the gravity of the consequences if caught engaging in misconduct. At a minimum, a company’s policies should deal with such topics as: the proper use of physical assets; acceptable uses of company property at home or off-site; timekeeping fraud; improper use of sick leave; the identification and appropriate uses of confidential business information; and prohibitions against downloading or e-mailing sensitive or proprietary electronic records. Employers must also provide periodic training to ensure that employees are reminded of their obligations and do not misunderstand the practical application of esoteric concepts such as “trade secrets.” Warning Signs. Employers should monitor for signs of an employee’s propensity to commit theft. The most common behavioral red flag is when an employee is clearly living beyond his or her financial means. Other possible warning signs may include: financial difficulties so severe that they interfere with work performance; unwillingness to share employment duties; addiction problems; and sudden, unexplained changes in employee attitude and demeanor. Build a Positive Working Environment. Employee morale is an essential element of a successful business and can act as a bulwark against employee theft. An employee who feels valued for his or her work and contributions will be less likely to engage in theft. Conversely, unhappy employees that feel less of a connection to their company and their coworkers are unlikely to care if their actions negatively impact the company. Even if economic times are tough, employers can help create a positive work environment by maintaining open lines of communication, recognizing positive employee achievements and conducting fair employment reviews. Set Up a “Tip” System. Most incidents of employee theft are discovered only because of concerns voiced by other employees. Companies should encourage employees to report suspicions of theft or other potential violations of a company code of conduct. Moreover, employees should be notified that they are obligated to report any knowledge of actual misconduct. In both cases, the company should emphasize that any disclosures will be maintained in confidence and that the company prohibits retaliation against employees for disclosing concerns in good faith. Conduct Surprise Audits. Surprise audits can be an extremely effective method of combating employee fraud. Even though only a small amount of companies perform irregularly scheduled audits, the losses incurred by these companies due to employee theft are, on average, one-third the size of losses suffered by similar organization without surprise audits. Explain Safeguards. Often an employee steals because he or she believes that there is little chance of being caught. Employers should take steps to ensure that their employees know that there are mechanisms in place to monitor and detect employee fraud. Separate Duties. Companies should attempt to separate financial duties. For example, a single employee should not be responsible for both recording and processing a transaction. Dividing responsibilities makes it much more challenging for an employee to engage in or cover up a theft. If separation of duties is difficult or costly for the employer, other safeguards also are available to the employer. For example, the employer could institute a job rotation structure or a mandatory vacation policy. Review Financial Statements. Employers should review bank statements frequently and follow up on suspicious purchases or transactions. Businesses should especially be alert for “phantom vendors” – fake businesses that redirect payments for fraudulent or nonexistent products and services to the perpetrator. Properly Train Managers. Management plays an important role in deterring employee theft. To prevent losses, companies should train managers and owners to look for the warnings signs of employee theft. Furthermore, to prevent an atmosphere that justifies deceitful or illegal behavior, companies should train managers and supervisors to act in a professional and honest way. The dishonest or inappropriate behavior of a manager or owner can justify theft in the eyes of employees who otherwise might not steal from the company. What to Do IF Theft Is Discovered Strictly Adhere to the Policy. Companies should adhere strictly to their zero tolerance policy. Even the smallest amount of theft should lead to outright termination. Terminating an employee for stealing will greatly discourage other employees from committing theft. Furthermore, employers who strictly enforce the zero tolerance policy create a consistent standard less vulnerable to employment-related lawsuits. For example, dismissing one employee for theft while only disciplining another employee for a similar offense opens up an employer to accusations of discrimination or wrongful termination. Correct the Problem. After a company discovers instances of employee fraud, it should implement procedures to prevent similar instances in the future. Large companies should consider developing an internal fraud prevention division and conduct stronger internal audits. Investigate the Extent of the Theft. Employees rarely engage in limited, one-time instances of theft. Once an employer learns of a single incident, the employer should engage in a comprehensive audit of the employee’s financial, business and electronic transactions. Often a suspicious pattern will emerge. For example, during an investigation of an employee who has been accused of timekeeping fraud, an employer may also learn that the employee has recently started sending massive volumes of electronic attachments from his work e-mail address to his home e-mail address. If this conduct is unusual for the employment it may be evidence of trade secret theft. Do Not Engage in Self-Help. Many states prohibit employers from withholding compensation from an employee based on suspicions of theft, or from threatening criminal prosecution unless the employee compensates the employer for the value of purportedly stolen items. Be sure to contact your legal counsel before deciding on specific remediative steps. About the authors: Evan Moses is a partner in the Los Angeles office of the international law firm Winston & Strawn LLP with considerable experience in employment and labor litigation and counseling matters. Benjamin Ikuta is an associate in the Los Angeles office of Winston & Strawn who concentrates his practice on labor and employment relations law. Page: 1 of 1 pages for this article
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