As a small business owner, you may feel a strong sense of trust in those you employ. And it’s important to trust your employees; trust that they will do a good job, serve the business and the clients well, and respect what you have built together. But this trust should not be at the expense of remaining vigilant about your business’s financial controls. No one wants to believe his or her business could be victimized by employee theft, but the truth is, particularly for small business owners, that insider crimes may be more prevalent than we’d like to believe.
Small Businesses More Likely to Be Victimized by Insider Crimes
Hiscox’s 2016 Embezzlement Study: A Report on White Collar Crime in America, a comprehensive study of employee theft in the United States, recently found that small businesses with fewer than 150 employees are 10 times more likely to be victimized by an embezzler than those with 250-500 employees. In the past year, 57 percent of thefts occurred within companies with fewer than 150 employees, and just under half of these cases had fewer than 25 employees working for the business.
Instances of embezzlement can also be seen across industries and were found in every sector we examined. With that said, 17 percent of employee theft in organizations with fewer than 500 employees occurs in the financial services industry, the highest of any industry examined. While the median loss for U.S. companies with up to 500 employees is $341,170, financial services companies of a similar size raked in a staggering median loss of $615,101 at the hands of embezzlers.[Tweet “#Entrepreneurs, what drives #employees to #embezzle and how it affects your #biz.”]
What Drives an Employee to Insider Crime?
It is critical to consider what could turn one of your trusted employees into a criminal. Research indicates pressure, opportunity, capability, and rationalization to be key driving factors.
Financial pressure can lead to embezzlement when an employee is put into a situation which, seemingly, can only be relieved by additional money. This financial pressure might stem from gambling, investment or business losses, medical expenses or debt, tempting them to steal. In terms of opportunity, more senior, trusted employees may be more likely to have access to secure files and authority over controls, providing more possibilities to alter the books and cover up the crime. Furthermore, capable employees can turn into embezzlers as they have the skills and knowledge set to commit the crime. Finally, perpetrators often rationalize their crime by convincing themselves they are helping their families, feel underpaid or perhaps that others within the organization are stealing, too.
The typical fraudster may not be who you envisioned – the median age of an embezzler is 49 years old, while women represent more than 56 percent of perpetrators. The most common methods are check fraud and payroll fraud, according to the study.
Best Practices to Avoid Insider Crimes
The impact of employee theft can rock an organization to its very core. There is, of course, an obvious financial impact, but the ripple effect of employee theft threatens the very basic trust employers place in their teams. Business owners can take concrete, simple steps to make sure they are incorporating best practices to prevent fraud, including the following:
- Never give one person end-to-end responsibility for accounting or accounts payable.
- Pay attention to employee lifestyles.
- Conduct criminal background checks (where lawful).
- Educate employees about fraud and what to look for. This has the added benefit of letting them know that you’re watching for it: the perception of detection.
- Promote a culture of trustworthiness and integrity.
About the report:
Hiscox’s 2016 Embezzlement Study utilizes employee theft cases that were active in the US federal court system in 2015, specifically those cases occurring in companies with fewer than 500 employees, which represents 69 percent of all federal cases. The full report can be seen here.
Doug Karpp is the Crime & Fidelity Product Head at Hiscox USA. He is an expert in crime insurance and passionate about helping businesses guard against fraud and embezzlement.