Trust everyone…but make sure your employees know the rules.
By William J. Lynott
It’s only natural to place a great deal of trust in your employees. “We’re like one big family” is a refrain often heard in the entrepreneurial ranks. That’s as it should be—but it’s still important to keep your guard up. The unfortunate fact is that employee theft is a growing national problem, and the economy isn’t making things any easier. According to FBI statistics, employee theft is the fastest growing crime in America.
To an employer, employee theft occurs when a worker steals merchandise, money or property while on the job. Even wasted or stolen time is a form of employee theft.
From a strictly legal perspective, a theft is committed when an employee takes something with the intent of depriving the merchant of the stolen item’s value. More important than legal considerations, though, is the devastating damage to a business that can result from employee dishonesty, especially when it affects customer relationships.
Even if you’re confident that employee theft is not a problem in your business, it’s important to recognize the telltale signs and know how to build and maintain an environment that will help your staff to avoid temptation.
The importance of hiring procedures
According to Joseph T. Wells, founder and president of the Association of Certified Fraud Examiners, minimizing the chances of employee theft begins with the hiring process. “Before hiring anyone,” he says, “you should conduct a background check to find out as much as you can about the employee’s previous experience with employers and law enforcement.”
Background checks are always a good practice, but each company must decide whether the time and expense is worth the return. At a minimum, check the background of any prospective employee who will have constant access to cash, checks, credit card numbers or any other items that are easily stolen. Before hiring an employee, check as many of the following as possible:
> Past employment verification. Even though most employers will verify only position and dates of employment when you call to check a reference, you can usually tell by the tone of voice what that person thinks of the employee. Ask previous employers whether the applicant is eligible for rehire.
> Criminal conviction checks. Most public records services (such as Nexis) have criminal conviction records for almost every large county in the U.S. If not, go to the courthouse and search the criminal conviction records in the criminal courts division of the employee’s county of residence (or other counties in which he or she previously resided).
> Drug screening. Many companies are now conducting drug screenings for potential hires as well as current employees. People who are frequent drug users can be more prone to theft or fraud.
> Reference checks. Amazingly, few employers bother to call the references provided by a job candidate. Most probably reason that an applicant wouldn’t provide a bad reference. Sometimes, however, applicants will list important-sounding individuals as references with the hope that you won’t call to verify. People sometimes assume, incorrectly, that a former supervisor or co-worker will provide a good reference.
> Always obtain the consent of the applicant. Numerous federal and state laws, such as the Fair Credit Reporting Act, govern the gathering and use of information for pre-employment purposes. Many of these laws require that you obtain written consent from an applicant before gaining some of the types of information listed above. It’s a good idea to obtain a signed authorization and release from a potential employee. Consult with your attorney about the laws applicable to your business to obtain the proper authorization forms.
Policies and procedures to deter fraud
“Developing anti-fraud programs can be one of the most important things that you can do for your business,” says Wells. “Prevention, in the long run, is always cheaper than recovering your losses.” He suggests these precautions:
> Perception of detection. Employees who know that they could be caught are less likely to commit occupational fraud and abuse. Increasing the perception of detection may be the most effective fraud prevention method. Internal controls do little good in forestalling theft and fraud if their presence isn’t known by those who might be tempted to steal. This means letting employees, at all levels, know that programs are being used to detect information concerning internal theft.
> Proactive programs. Some useful programs cost very little; others may require a significant commitment of resources. In most cases, anti-fraud programs will more than pay for themselves.
> Employee education. Every company should have some mechanism designed to educate managers, executives and all other employees about the serious consequences of internal fraud. This can be done as a part of employee orientation, or accomplished through memoranda, training programs and other intra-company communication methods. The goal is to make others within the company your eyes and ears. Any education efforts should be positive and non-accusatory. It should be emphasized that illegal conduct in any form eventually costs everyone—including employees—through lost profits, adverse publicity, decreased morale and lower productivity.
> Enforcement of mandatory vacations. Many internal frauds require constant manual intervention, and are often discovered when the perpetrator is away on vacation. The enforcement of mandatory vacations can aid in the prevention of some types of fraud.
> Job rotation. Some frauds are detected during sickness or unexpected absences because they require continuous, manual intervention by the offender. It can be helpful to rotate potentially sensitive jobs whenever possible.
> Split responsibility. Wherever possible, don’t allow the person who handles incoming cash and checks to do the paperwork accounting for that money.
Watch for these signs
Despite using the best internal programs, theft can still occur. It’s important to keep aware of early warning signals of possible employee dishonesty, including:
- Any hint of substance abuse
- An employee with a disgruntled, belligerent attitude, often complaining to others
- Bad temper or unpleasant behavior that tends to discourage or avoid questions
- Inconsistencies in explaining discrepancies or errors in paperwork
- Excessive loitering around the business by off-duty employees, former employees, or friends
- Secretive conversations among employees, or phone conversations that stop abruptly when you approach
- Unusually friendly relationships or loyalty between employees and customers or sources
- An employee living a lifestyle that appears to be in excess of what the salary could be expected to support
- An employee who habitually returns to the work area after others have left to retrieve something supposedly left behind
In a small business with loyal and trusted employees, some of whom may even be relatives, it may seem natural to dismiss any thoughts about employee dishonesty. In most cases, however, both you and your employees will benefit from policies and procedures that create an environment that openly discourages dishonest behavior.