An Inside Job: Combating Employee Crime
The following material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, speak with a qualified professional who can provide guidance that considers your own unique circumstances.
Lately, a lot of attention has been given to the rise in criminal activities targeting manufacturing and service companies both large and small. Criminals worldwide are attacking businesses with highly sophisticated computer techniques such as ransomware, phishing, and other electronic "weapons." Meanwhile, companies are also being targeted by intruders with acts of vandalism, arson, and other destructive actions during sparks of civil unrest. The headlines and news flashes paint a disheartening picture for business owners just trying to make a living by offering needed products and services.
As troublesome as these acts of theft and destruction may be, there is a whole other category of crime that makes business owners cringe: employee fraud. The thought that employees of all ranks and occupations are pilfering company money, stealing company goods and equipment or otherwise robbing the company blind is almost, well, unthinkable.
Yet, employee crime occurs every day. The scope of the problem is clearly illustrated by a landmark study published by the Association of Certified Fraud Examiners (ACFE). For the past 25 years, the ACFE has published its Report to the Nations, which studies the cost of occupational fraud to businesses and government agencies across the globe. The ACFE defines occupational fraud as "fraud committed by individuals against the organizations that employ them."
The latest edition of the ACFE's Report to the Nations, The 2020 Global Study on Occupational Fraud & Abuse, serves as a wake-up call for business owners, executives and managers. Here are some of the most pertinent findings from this latest study:
The typical organization loses 5% of its revenues each year to occupational fraud.
The median per-case loss caused by occupational fraud is $125,000. The average per-case loss due to occupational fraud is $1,509,000.
21% of the fraud cases have losses of $1 million or more.
It typically takes 14 months to discover that occupational fraud is occurring, with an average monthly cost of $8,300.
In approximately 33% of the cases, the perpetrator is committing multiple forms of fraud.
Small companies tend to suffer a disproportionate amount of large losses, mostly the result of billing, payroll and check payment fraud.
Among the three major types of occupational fraud (asset misappropriation, corruption and financial statement fraud), asset misappropriation schemes are the most common, representing 83% of fraud cases. The median loss of such cases is $100,000.
Corruption was involved in 43% of occupational fraud cases, with typical losses of $200,000. Financial statement fraud occurred in 10% of the cases with typical losses of $954,000.
The higher the level of the perpetrator's authority, the greater the fraud losses. Owners/executives commit only 20% of cases of occupational fraud, but losses average $600,000. Fraud losses committed by managers average $150,000 and those committed by employees average $60,000.
By company department, employees in operations committed 15% of fraud; accounting, 14%; executive/upper management, 12%; and sales, 11%.
43% of fraud schemes are revealed by tips from others. In half of those cases, the tipster is a company employee.
In 33% of cases, tipsters use emails or telephone hotlines to report possible fraud.
Companies who set up telephone or other types of hotlines to report fraud had median losses that were nearly half of those companies without hotlines -- $198,000 versus $100,000.
Other top tools for detecting employee fraud include internal audits (15% of cases) and management reviews (12%).
Types of Employee Crime at A/E Firms
The types of employee crime to which a company is most susceptible largely depend on the industry it is in. Manufacturers, for instance, are very susceptible to theft of materials and finished goods, while service companies like architectural and engineering firms are most vulnerable to embezzlement, theft and other types of fraud resulting in the loss of financial resources. Geotech firms are highly vulnerable to theft of their surveying equipment.
Here are some examples of employee crimes that typically hit A/E firms:
Manipulation of company financial statements
Falsified billings from a perpetrator's shell company
Check forging or tampering
Purchasing or sale schemes that funnel funds to the perpetrator's bank account
Manipulated time records
Payroll schemes, such as "ghost" employees or falsified wages or withholdings
Expense reimbursement schemes
Bribery or illegal gratuities
Theft of cash on hand.
Steps to Combat Employee Crime
Fortunately, there are several steps A/E firms can take to reduce the likelihood of becoming a victim of employee fraud. Consider these actions:
Employee fraud awareness. Make it clear to all employees that the company is alert to the potential of employee crime and has a no-tolerance policy.
Anti-fraud training. Teach employees the basics of how to prevent crime in the workplace. An employee crime awareness training program and other risk management tools may be available from your property and casualty insurer or a local business association.
Management fraud awareness. Teach managers the warning signs that employees may be committing fraud. These may include working late without supervision, taking a lot of work home, living beyond their means, and signs of potential gambling or drug/alcohol abuse. Also, stress to managers the importance of adequate employee supervision.
Employee hotlines. Make it easy for employees to anonymously and confidentially report suspicious activity that may indicate occupational fraud by their superiors or coworkers. These can include telephone, web-based or e-mail hotlines.
Vendor and client hotlines. Some companies go so far as to provide anonymous hotlines for outside parties such as clients or vendors. These outside parties can often be in a good position to spot unusual activities or missing equipment or inventories.
Job redesign. In small companies, in particular, employees perform important job functions from start to finish with little if any management involvement or oversight. For instance, one employee may handle all accounts payable and receivable as well as prepare, receive and pay all purchase orders. Look into redesigning job functions so that important financial functions are segregated and involve two or more individuals, preferably one of them a trusted member of management. Also, rotate financial duties among the accounting staff, and subject financial transactions to periodic management review.
Internal or external audits. Consider having all financial activities and inventory counts audited by internal management or external accountants regularly. Surprise internal audits by trustworthy managers equipped with formal financial review procedures can be very effective. Any anomalies revealed by the audits should be quickly and thoroughly investigated.
Computer security measures. Have an expert examine your computer network and software looking for methods intruders might use to divert funds or other valuables. Emphasize the tried-and-true methods of maintaining security, such as regularly updating passwords and strengthening user authorization techniques.
Office security measures. Advanced security and surveillance systems for your offices and other facilities are quite affordable these days. Keeping facilities and expensive equipment secured and having entrance/exit activities recorded on camera can provide a powerful deterrent to employees with crime on their minds. Limiting employee access to financial records and shredding outdated papers is also highly recommended.
Background checks. Conducting background checks on new hires, particularly those with financial responsibilities, may be advisable. But remember, most perpetrators are first-time offenders without a criminal record, and these background checks can be costly.
Important note: Take extreme caution before confronting an employee suspected of crime or fraud. Making a false accusation against an employee can lead to an expensive lawsuit.
Get advice from legal counsel before taking any action against or voicing any suspicion about an employee. Have local law authorities, forensic accountants or private investigators handle any investigations or formal accusations. Make sure you have solid evidence of a possible crime before taking any actions such as suspending or terminating employment.
Fidelity and Crime Insurance
Regardless of the safeguards your company may take, you can never eliminate all threats of employee crime. That's why many companies purchase fidelity and crime insurance to minimize potential losses due to theft, embezzlement, forgery, fraud or other types of criminal activity.
Today, fidelity and crime insurance is readily available for companies of all sizes. Smaller firms can often purchase fidelity and crime coverage as part of a commercial package policy, with coverage limits typically up to $500,000. Larger firms needing higher limits can purchase fidelity and crime coverage as a monoline policy with limits of $1 million or more. Monoline fidelity and crime policies offer greater customization of coverages.
When shopping for fidelity and crime insurance through a commercial package policy, look for dedicated limits for employee theft exposure. Also look for policies with multiple insuring agreements that provide fraud protection for exposures to employee criminal acts such as:
Credit card fraud
Loss of money, securities and other property while on your premises, off-premises or in transit
Computer fraud, including losses caused by malicious software
Funds transfer fraud.
Many crime policies provide reimbursement for claim expenses. Some protect against certain fraudulent acts of non-employees as well, such as vendors or board officers and directors. Many project owners/clients are well aware of the potential losses associated with employee fraud. Some demand in their contracts with A/E consultants that the A/E firm secure a minimum of $1 million to $2 million of third-party employee fraud coverage. This third-party coverage can protect the client if one of the consultant's employees steals funds or assets, or otherwise commits fraud against the client.
As specialists serving architects, engineers and environmental consultants, we can help you secure fidelity and crime insurance that fits your particular needs.
Never an Easy Discussion
Addressing employee crime with your workforce is never easy. But bringing the topic into the light of day is often the first step in reducing the chances of criminal activities taking place in your workplace. When employees know you take a no-tolerance approach to employee crime, are monitoring company finances, and encourage co-workers to be vigilant to suspicious activities, you've already decreased the chances of fraud, embezzlement and theft. Secure the added layer of protection that fidelity and crime insurance provides and you've taken a large bite out of the potential losses you could suffer from rogue employees. We'll be happy to help you review your options.
Finally, one of the most effective ways to prevent employee crime is to maintain a positive workplace. Oftentimes, employees who commit fraud justify their criminal activities by saying the company "owes" them because of poor working conditions, low pay, etc. Employees who feel they are appreciated, well treated and well-compensated are less likely to steal from their employer.
We may be able to help you by providing referrals to consultants, and by providing guidance relative to insurance issues, and even to certain preventives, from construction observation through the development and application of sound human resources management policies and procedures. Please call on us for assistance. We’re a member of the Professional Liability Agents Network (PLAN). We’re here to help.