Part I.  Thieves At Work–The Who, What, Why, and How Much?

 If you judged employee theft by the number of employees “caught in the act” and/or prosecuted, your conclusion would be that it’s not much of a problem.  However, studies and citations from such organizations as the accounting firm Ernst and Young, the U.S. Chamber of Commerce, and the U.S. Small Business Administration all argue to the opposite view–that is, at least 90% of businesses suffer from employee theft.

The magnitude of the problem is judged on several scales, with somewhat varying estimates as to its extent.  Among the assessments concerning employee fraud and theft  in which there is full agreement are:

  • It is experienced by at least 75% of all US businesses
  • It accounts for a loss of 5% of the revenue of all US businesses
  • It accounts for up to 1/3 of small business failures
  • Less than 20% of employee thefts are detected and/or reported
  • Globally, US retail workers are #1 in employee theft (“We’re number 1!)

There is significant consistence among the various studies, reports, and columns concerning such factors as which employees are most likely to commit theft, how long it takes to detect fraud, and the losses incurred.  From this point on, however, estimates of the extent of the problem vary, undoubtedly due to several survey factors, including the makeup of the group surveyed.  For example:  A 2015 Statistics Brain report on Employee Theft Statistics reflected that the Amount stolen annually from US businesses by employees was $50 billion.  Other studies, including two 2015 reports–one by the National Retail Federation and one from–indicate a total inventory shrink (including employee theft, shoplifting, administrative errors, and vendor fraud) of up to $60 billion, with employee theft totaling about 35% of that amount.  No matter how you count it, it’s a big deal.

Especially vulnerable to employee theft and its impact are small businesses.  The Small Business Administration (SBA) indicates that companies with fewer than 100 employees had 28% higher relative fraud losses than larger companies.

So, who are these business Jesse James’?  Who steals from their employer?  This “who” has been well-defined by any number or sources.  In first place among the sexes is men, at 59%.  Refining the statistics as to which employees are most likely to steal, the conclusion is consistently that managers are the most likely to steal, and are again most likely to be involved in continuing theft schemes.  There’s no thought given to imply that 50% of managers are corrupt by nature.  Rather, it’s that old bugaboo, opportunity.  Promoting someone to management is usually the result of that person being a long-term, trusted employee.  “Trusted” implies that managers are allowed to work alone, without supervision.  They have authority to make decisions.  It’s a truly sad commentary to realize that, statistically, 50% of the time this trust is misplaced.

Some studies indicate that newer employees are more likely to steal than are those more senior in the firm.  This is perhaps valid insofar as minor thefts are concerned.  However, given that managers are 1) most often senior employees and 2) responsible for 50% of overall thefts and are involved in the vast majority of major thefts, the “newer employee” data should be taken into the context of other information.

While all businesses experience some degree of employee theft, it is estimated that 10% of the employee population is responsible for 95% of the total losses from theft.  Meaning, of course, that the majority of theft is not a one-time-and-done.  It’s an on-going scheme.  Who’s at fault?  Management, for one.  Those in management who didn’t exercise proper interface with employees, who didn’t adequately monitor revenue, payments, inventory, and bank accounts.  And those others in management who found an opportunity to steal and took advantage of it.

What do they steal?  The list could go on and on.  It’s not just pencils, pens, staples, and staplers.  It’s cash from the register of a small business; product from the shelves or stock room; workers compensation fraud; “sweetheart” ring-ups on sales (not ringing up or false price ring-up on registers); and time sheet fraud are among the most common.  It’s also lost production time due to employees engaged in “diversions” such as personal matters, sports events, computer games, and the like.  These thefts can be “small-time,” absorbent within your company profit/loss statement.  But, as part of an organized plan or conspiracy, they can be immensely costly, both monetarily and in terms of company survival.

Embezzlement of company funds is a potential destroyer of an enterprise.  It can start with “innocently” borrowing a few hundred dollars, with the intent of repaying it on Monday.  Too often, it goes out of control.  We’ve all heard the stories of hiring a friend’s Aunt Milly to have sole authority in the management of company accounts.  Your friend is a good guy, and Aunt Milly seems so nice–there’s no need to do a background screening or to routinely monitor the accounts.  Then, one day, you and Milly find yourselves in circumstances from which neither you, nor your friend’s aunt, nor your company will emerge unscathed.

Why do employees steal?  Opportunity seems to be the major driver.  Lack of or shoddy control procedures, inadequate top-level involvement concerning policies on theft control, and a casual “We all work here. we’re all friends, and we all have the same dedication to the company”  by upper management can all lead to an environment in which theft is accepted as “something we all do.”  All that often, it isn’t financial pressure; it’s just easy to do.

In a 2014 Pinkerton study report another “why” explanation was provided, that of a changing social attitude, a shift in the way of thinking.  As, over the years, the idea of working for one employer throughout one’s working life has gone into oblivion, loyalty to an employer has diminished.  With this has come, Pinkerton’s Jack Zahran believes, a shift in attitude “from one of responsibility to one of entitlement.  When an employee feels like he/she is not paid enough, or is over-worked, or the job is beneath their level of skills, they empower themselves with an attitude of “I deserve this,” for whatever it is they plan to steal.”

Employer loyalty can be especially absent in part-time employees, be they employed over a summer or during a holiday season.  An attitude of “they won’t miss this one little thing, and who cares if they do?”  Thefts of cash from registers, clothes from stock, and sweetheart ring-ups are most common with temps.

How much do they take?  Statistic Brain’s Employee Theft Statistics indicates that the medial loss is about $175,000.  The highest percentage of losses (28%) range between $100,000 and $499,000.  Second place results from this den of thieves (25%) are losses of $1 million and up.

How often is employee theft reported?  Estimates vary greatly on this point, but they generally fall into the range of 15% for small businesses.  Reasons for not reporting are what you would expect:

It was just a few dollars.  I don’t want him to get a police record.

I know his dad/mom.

If I punish him, the other employees will resent me.

How much would I have to pay a lawyer to handle this for me?

So, what’s the solution?  Too often, the quick and easy/least painful “solution” is firing or the more casual “letting go” the offender without reporting the incident.  The resulting problem, of course, is that the person is free to find another job, and do the same thing again.  This is especially harmful if the thief was a management employee, who could move to another management job with  an unsuspecting company waiting there.

There really isn’t one single solution, but there are a number of preventive measures that can be put into place. In “Controlling Employee Theft,” we’ll look at what the experts say are the best and most reasonable measures that can be put into place.  Spoiler Alert:  The most important preventative measure is also the most obvious:  Know the person you’re hiring.  You should never hire someone (other than a member of your immediate family!) without first having a background screening conducted.  Completion of an employment application isn’t background screening.  A good word about the prospective employee from your neighbor isn’t a background screening, nor is a pretty face or a nice suit.  The protection of your business, your other employees, and yourself starts with ensuring the integrity, honesty, and reputation of those you hire–family members included.

No matter what steps are taken, employee theft will not be stopped entirely.  But, through the application of background screening as well as intelligent thought and reasonable protective measures by business owners, managers, and human resources personnel, employee theft can be significantly reduced, to the great advantage of US business.

Part II.  Controlling Employee Theft

Having examined the issues of who, what, why, and how much of employee theft–and believing that you should never report a problem without proposing a solution–the following is an examination of the preventative measures that the business owner should consider putting in place in order to reduce employee theft to an “acceptable” level.  That is–considering that this thievery cannot be fully stopped–a level of loss that is reasonably manageable within the profit/loss statement.

There is no intention herein to assert that the means and methods to be discussed are new, inventive, or “mind-blowing.”  Rather, I mean to offer potential solutions, provide a discussion of their merits, and hopefully open a discussion as to steps a business owner might wish to undertake to protect their business, business relationships, and their employees.  And yes, I believe that taking appropriate theft control measures can be highly beneficial to employees.  Too often, employees might steal from the company register, shelves, or supply room because “it’s easy, and no one’s watching, anyway.”  Embezzlement can start because the owner didn’t take the time to routinely check the financial records.  As a great person (Oscar Wilde?  Mae West?) once said, “I can resist anything but temptation.”  (It was,  of course, Oscar Wilde.  Although, Mae West was credited with a saying very similar: “I generally avoid temptation unless I can’t resist it.“)   The point is, people can yield to the temptation of theft, if it looks too easy, or that it seems to be “accepted” as something that is okay to do once in a while. \

Let’s start with the issue of how the right company atmosphere can work to keep employees honest.  There are at least two components that need to be present:  First, an feeling among the employees that they are respected and treated fairly.  Second, an atmosphere that indicates that appropriate checks and balances exist within the company that ensure that the company is, in turn, treated with respect by the employees.   These aspects of a positive work environment begin with establishment of clear established company policies and procedures.  Job descriptions and a clear reporting structure are essential.  There must be open lines of communication between employees and supervisors, supervisors and management.

Nothing will break down employee morale so quickly as policies that are not followed, rules that seem to apply to some but not to others.  Leading by example is critical, but by no means should managers or supervisors act aloof, as though they are superior to others.  If managers don’t appear to follow company policies, employees will soon develop a “if it’s good for the goose, it’s good for the gander” attitude.  Employees need to understand the policy and procedures in place regarding theft and fraud, and they need to know that all company employees are held to those standards.

A January 30, 2010 article in Psychology Today by Bob Sutton presented his belief that stealing from employers was “driven in large part by employees’ desires to “get even” with companies and managers who treat them in cold and unfair ways.  The incentive to get something valuable is part of the story with theft, but… research suggests that giving people bad explanations and treating them without dignity is what really pisses people-off and drives them to exact revenge–to steal and get even.”

It’s difficult to find fault with this study and its conclusions.  While there is also a body of evidence that the major drivers are a combination of opportunity and greed, the “getting even” suggestion certainly carries weight.  (The full article in Psychology Today is well worth reading.)  Not treating employees fairly and with the dignity they feel they deserve is potentially a company train ride to bankruptcy.

The creation of a positive work environment is quite likely the most important key in curbing employee theft.  And the environment is a product of who is employed at the business.  Good employees, coupled with good owner decisions, will create a positive work environment.  So, how does a company get good employees?  By making good hiring decisions.

Rule 1.  Hire good, honest people.  Not everyone who applies for a job fits that mold.  It’s critical to weed out the sheep from the goats, wheat from the chaff.  No matter what the job application indicates, no matter what your friend or neighbor says, you need more information from an impartial source.  Would you believe that many people are not totally honest when filling out an application?  Could you imagine that an endorsement from a friend could be based on inadequate acquaintance with the applicant?  Yes, it happens.  It’s up to the HR department and management to be the point guards in assuring that the company makes good hiring decisions.

A completed application must be required of everyone who is looking to come on board.  References are essential.  The application cannot be treated as gospel; all information must be checked and verified.  Remember–a bad hiring decision can become a spreading infection, leading to a slow dissolution of company morale and standards.  A background screening should be a mandatory pre-hire accomplishment.

Rule 2.  Creation of a work environment that has structure, fairness, and reward.  In-place policies that are made known to all employees, along with management affirmation that policy compliance is not optional; a clear organizational structure; written job descriptions; positive employee recognition.

Without question, an employee will be more inclined to steal from a company where he doesn’t like the boss, or doesn’t have a positive relationship with company managers or the business owner.  The employee doesn’t expect to be invited for dinner, but there is an expectation of friendliness, respect, and positive recognition.

Rule 3.  Implement internal controls that will discourage theft.   Never allow a single employee to generate and approve financial documents.  First, mistakes can happen–Rarely can a person both create and effectively proof-read a document or table.  Second, the opportunity/temptation for payments to false accounts, embezzlement, and other theft actions can be too great.

Regular checks and assessments of financial and inventory records should be made.  Some checks scheduled, some not.  These checks should be announced and conducted in a friendly, professional way.  There’s no reason to make them adversarial or accusatory.  Make sure that employees understand that fraud prevention is a part of doing business.  Ensure that no element of the company is excluded from these assessments, as this would present an image of a double standard.

Rule 4.  Create a reporting environment that is genuinely anonymous and secure.  How many times have people walked by a “Suggestion Box” with the fear that any comment they make would be traced back to them?  Have you ever filled out an “anonymous” survey with the feeling that it will somehow be tracked to you?  Well, this is the way that all employees feel when they are told that the company has an anonymous system in place to report suspicious activities or a flawed control system.   They wonder:  Can I trust it?

Look back at Rule 2, creation of a work environment that has structure, fairness, and reward.  If the company has demonstrated that it treats all employees honestly and fairly, the employees will have reason to believe that they can trust the reporting system.  Conversely, if they have the feeling that the rules apply to some and not to others, they will trust neither the company nor the system.  It’s up to company management to explain who sees the reports, and how they are controlled.  The existence of a reporting system should not be treated as a company secret; rather, it should be acknowledged as a part of the company environment of quality, trust, and fairness.

Rule 5.  Investigate every reported incident or valid suspicion.  Nothing could be more discouraging to an employee–or a vendor or customer– than to report an incident or a control system that does not appear to be working, and have the feeling that no action was taken.  There is no point to having a reporting system if it is just policy “fluff.”  A quick and discrete investigation of all reports makes sense.  The company protects itself, the person submitting the report gains a feeling of positive contribution, and the system achieves validity.

Rule 6.  Get rid of the “bad apple.”  Forgiveness is a wonderful thing, but it has its place.  Statistically, an employee who steals once will likely steal again.  “But, people aren’t statistics.  They make mistakes, like we all do,” I hear you say.  I agree with this point of view, so let’s compromise.  Forgive the theft of $20 from the cash register, but send the transgressor on his/her way.  Be very cautious, however about firing someone for a theft.  Unless you have ironclad proof that the person committed a theft–and perhaps even a signed confession–contrite attitudes can change and the employee could later accuse you of an unwarranted dismissal.  Other employees, possibly personally sympathetic to the thief, could believe that the accusation was unjustified and untrue, and they could resent action taken against him/her.  It can often be best to invent a reason for dismissal–“downsizing,” for example–and make the parting as neutral as possible.

Understanding that there is a price to pay for even a peccadillo is an important lesson, both for the (former) employee and those who are still on the company payroll.  Giving minor incidents of theft a free pass begins a conversation that will reverberate around the dining room and break area.  Good employees could well be tempted.  Remember what Kitty Wells–and, later Dolly Parton–sang about how the faults of others (men, in this case!), “has caused many a good girl to go wrong.”  The fact is that seeing fellow employees go unpunished for theft–stealing a few dollars from the cash register, or habitually taking an extra-long lunch breaks, or consistently arriving late for work and leaving early, or playing video games on company time–can lead to a damaging work environment.

There are large “howevers” to go along with employee dismissals, for any cause.  First, management must not discuss the matter with employees.  No “Jimmy was fired for stealing, and let that be a lesson for all of you!”  Employees will know that Jimmy no longer works at the company, and the rumor mill will likely pass along the “why.”  That’s good enough.  A deterrent has settled into place without creating undue animosity toward management.  Secondly, before you accost or accuse anyone, do your best to ensure that the thief you know about is the only one involved.  This could be a matter that will require assistance from an investigative firm.

In a Wall Street Journal column of January 26, 2015, Alina Dizik adds an interesting comment:  “Bosses may also consider offering the thief a departure package. The idea of giving extra cash to somebody who stole from the company may sting, but it can also help to head off any potential legal tangles about the firing.

“Offer them severance in exchange for a release of all claims and a confidentiality agreement,” says Heather Bussing, an attorney in Santa Rosa, Calif.”

If you believe there is or may be an internal theft scheme underway, your best action could be to contact an experienced private investigative or security firm and ask them for recommendations as to how to detect and stop the thefts, and how to collect court-admissible evidence.

In the case of a major theft, call the police and work with them to protect your business.

Rule 7.   There is a group of protection/control measures that should be strongly considered as components of a “preventing employee theft” plan.  Among these is the use of security cameras.  Cameras in not only the retail areas but also in stock rooms, loading areas, and the like.  Perhaps even a camera that looks at the trash removal area, to deter employees from dumping stolen goods into the trash and coming back at night to retrieve them.

Don’t make the cameras a secret–explain to employees that the cameras are part of your company security plan.  They will understand both the security and deterrence aspects.

A business can be subject to all kinds of thefts, including those of time, money, inventory, supplies, or business property.  Preventative measures, controls, and systems need to be employed and varied as circumstances dictate.  Multiple employee entry and exit doors present opportunity for theft, and the business owner needs to intelligently respond to this vulnerability.   Control of employee access to business property–particularly during non-working hours–is an issue of significant import.  A plan for follow-up on repeated vendor complaints of non-payment needs to be in place.  It’s a long list.

So, What’s the Bottom Line?

Control of business theft begins with hiring the right people.  Then, treating those people as important constituents of the business.  Internal controls–and employee awareness of those controls–help to set the  tone and expectations.  Survey the physical plant and take whatever protective/corrective action is appropriate.  And then, when problems happen, as they undoubtedly will, taking quick and positive steps to correct the situation and remove the problem.  In short, taking the steps necessary for creation and maintenance of a positive work environment.

Statistics Brain 2015 reports that the median amount lost in employee thefts  as $175,000.  The old adage about the ounce of prevention certainly applies here, as it would be extremely difficult to spend as much as that to implement all of the protective measures suggested in this article.  It is the decision of the business owner as to what theft-control measures/enhancements would be appropriate.