Businesses lose an estimated $2.9 trillion globally, or about 5% of annual revenue for a typical company, to fraud committed by their own workers, according to a 2010 report by the Association of Certified Fraud Examiners, or ACFE.
About 30% of victimized companies had fewer than 100 employees, with a median loss of $150,000 for U.S. firms of that size, the study found.
With median loss for all-sized businesses just slightly higher at $160,000, the numbers send a clear message about the vulnerability of small organizations, said Scott Patterson, an ACFE spokesman. Even more disconcerting were findings about the perpetrators--as many as a fourth had been at the organization for 10 years or more, he said.
However, even the smallest companies can take a few simple steps to reduce their risk. These preemptive strikes are not costly and include understanding the risks, purchasing employee-dishonesty insurance coverage and instituting simple anti-fraud controls.
Tough Times May Mean More Theft
In 2009, insurers reported over $222 million in direct losses for employee-dishonesty coverage for mercantile entities (nonfinancial institution) reported to the Surety & Fidelity Association of America. That number was the highest for the decade, up from about $179 million in 2008, but the SFAA did not track whether the reason was due to an increase in crimes, large recovery amounts in a few big cases or more companies having liability coverage.
Whether those numbers are due to cash-strapped employees more likely to steal in a recession, better due diligence or more companies being insured, losses due to workplace theft do seem to be on the rise over the past few years, said Carla Borda, an agent who specializes in business liability coverage for Waukesha, Wisc.-based R&R Insurance Services.
A number of recent Wisconsin cases point to business vulnerability, she said.
--The treasurer of a local football league was found guilty in October of embezzling $35,000 of league money to use for gambling, a Mexican vacation, car payments and other personal expenses.
--A credit-union branch manager was indicted in early October on a charge of stealing nearly $150,000 over four years by opening six fraudulent loans.
--The vice president of finance of a Milwaukee-based stereo equipment manufacturer was sentenced to 11 years in prison for embezzling $34 million.
"In my experience, it's usually long-term trusted employees who get themselves in a financial situation due to debts or creditors, or believe they somehow have it coming to them," Borda said. "It's nothing that comes up in a background check or personality test."
Why Small Businesses Are Vulnerable
Workplace theft happens when individual need and a moral attitude that stealing is OK or justified converge with opportunity and a work culture that either condones stealing or makes detection unlikely, said Lucy McClurg, associate professor of managerial sciences at Georgia State University's J. Mack Robinson College of Business.
Perceived pay inequity is a common motivator, McClurg said. "Small businesses in general, job for job, pay less than large businesses," she said. "This is [the employee's] way to equalize the pay issue. 'I'll just take a little more from my employer'."
Small businesses may be trusting of employees, especially long-time hires, and thus have lax anti-fraud controls compared to their bigger counterparts, McClurg said, noting that even she has fallen victim. Over 20 years of owning an insurance and consulting business which employed up to 45 workers at any one time, she's fired about 20 for theft.
The transgressions ranged from taking products home to forging a check to pocketing a customer's cash payment and not logging it as received in the company books, McClurg said. She worked closely with her employees and thought she could trust them, and that she was safe to keep her priorities on the big picture, she said.
"I was more interested in marketing my business than I was in managing my employees," McClurg said. "I put all my attention into sales and marketing."
Insuring Against Losses
The median time period of fraud before detection is 18 months, the ACFE study found. By that time, the perpetrator has likely spent the money, and if the case proceeds to prosecution, the employer also faces attorney and court fees, Patterson said.
Most general insurance policies for businesses include some modest fraud coverage, but insurers also offer liability policies to protect specifically against worker theft, often called employee dishonesty or fidelity policies.
Annual premiums are comparatively inexpensive compared to the significant risk, costing about 0.5% to 1% of the coverage limit, said Robert Duke, SFAA's director of underwriting and counsel.
"The actual rate varies because it is based on a number of factors such as size of limit, class of business, the size of deductible, number of employees and how many employees handle money," he said. "There is downward flexibility and the rate may even be less than 0.5%."
To ensure your business has sufficient coverage, ask yourself how much you can afford to absorb in a loss and what funds may be accessible to a potential thief, Borda said. "That starts with your revenues and the size of your company," she said. "How much cash do you have? How much do you keep in your bank account? In other words, if someone was stealing money from me, what is my maximum exposure?"
Simple Pre-Emptive Strikes
Obviously if employers could predict who's going to steal, they would avoid hiring dishonest workers. But criminal background checks aren't much help when more than 85% of fraudsters in the ACFE study had never before been charged with a fraud-related offense.
However, while a business cannot control its employees' morals or motivations, even the smallest companies with one or two employees can take some simple steps to reduce their risks without breaking the bank, said Steve Balmer, product manager for crime insurance products for Travelers Companies Inc. in Philadelphia, Pa.
First, examine your accounting and payment systems and look for any opportunities for the same person, such as a bookkeeper, office manager or salesman, to initiate a transaction and cover it up, he said. The top five fraud schemes in businesses with fewer than 100 employees involved billing, check tampering, corruption, skimming cash and expense reimbursements, according to ACFE.
Then devise ways to segregate those duties. Even a simple step such as the business owner signing checks before the business manager mails them can go a long way, Balmer said. Other tasks owners may wish to do themselves include filling out deposit slips, approving employee time sheets and reconciling petty cash, he said.
If the company uses electronic banking, apply the same logic. "Checking account and bank reconciliation is probably at the simplistic level the most important, he said.
Companies may also want to consider having an outside audit firm look at the company's finances at least every few years, Borda said.
Remember to let your insurer know about your fraud control policies, too. The types of internal controls you have in place may decrease your premiums, Balmer said.