Inside Job: How to Approach and Prevent Internal Theft

Inside Job: How to Approach and Prevent Internal Theft

When most business owners envision prospective thieves, they imagine archetypal crooks in black turtlenecks breaking in after hours — however, they are much more likely to be victims of internal theft and be robbed by their very own employees.

To the danger of business owners everywhere, one of their greatest assets is also one of the greatest risks to their success: their own employees. According to the National Federation of Independent Business (NFIB), an employee is 15 times more likely to steal from an employer than someone who doesn’t work there, explaining the rise of internal theft as a prevailing threat to businesses both small and large.

Combatting this workplace hazard is no small feat, but it is paramount to devise protocol for how to approach and prevent internal theft.

How to Prevent and Approach Employee Theft

Employee Motivation To Steal

As any crime drama will explain, no two criminal minds work the same, though there are underlying principles that may help understand your employees’ motivation to steal from the company, which in turn will help you protect yourself from it. In a study by the NFIB, it was revealed that 6 in 10 cases of internal theft include ongoing schemes, ranging from two weeks to 20 years, with the average length of an employee theft scheme being 16 months — more than long enough to become so invested in the company that the employee’s integrity may never be doubted.

The Association of Certified Fraud Examiners identified three factors that drive internal theft, as developed by the “fraud triangle” of criminologist Donald Cressey: perceived unshareable financial need (greed, financial strife, unexpected bills, addiction); perceived opportunity (weak financial controls, cash management processes); and rationalization, such as the belief they deserve a raise or the notion that the business won’t notice.

Part of the solution for business owners is to prevent these motives straightaway in the workplace through tight hiring practices and company culture; however, theft and fraud will likely still find a way, so it is imperative to learn what prospective thieves will steal, and how they will carry out their crime.

Ways In Which Employees Steal

To underscore the seriousness of internal theft, the FBI, according to Statistic Brain Research Institute, has announced that employee theft is the fastest growing crime in the United States. In their research, it’s revealed that internal theft accounts for 42.7% of shrinkage — an allowance made for reduction in the earnings of a business due to wastage or theft — while shoplifting only accounts for 35.6%. This high number is due in part to the myriad ways that internal theft is carried out.

Outright theft (larceny), diverting business funds (skimming), tampering with checks and expense reports (fraud), misuse of customer lists and company secrets (theft of intellectual property), and embezzlement are just a few of the ways employees may engage in internal theft. As the NFIB explains, nearly two thirds of small businesses fall victim to internal theft, which includes stealing money (40%); inventory (18%); time (16%); as well as tools and equipment (14%).

These are the easiest for prospective internal thieves to capitalize on your business, but thankfully, they are also the easiest to combat through diligence and preventative practices.

Prevent Internal Theft #1 [Money]

 

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A few dollars here and there nicked from the cash register may seem next to harmless for some unwitting employees, but it all adds up to serious damage for your company in the end. As explained by the NFIB, there’s an estimated $200 billion annual losses due to employee theft in the U.S., with $20,000 on average stolen from any single small business over time.

For cash-based businesses, cashiers must balance the register at the end of their shift, but they can skim cash by undercounting change to customers or quoting a higher price for merchandise and pocket the difference. This is on the small scale, but even greater opportunities for larceny and fraud occur in all sales-based businesses.

Diligence is the best defense against this sort of internal theft. Use purchase orders, including separately managed payment, receipts and preparation, to track and verify all orders. Carefully control cash receipts with pre-numbered sales slips that can be conveniently balanced and confirmed. Most importantly, perform frequent audits, both internal and by an outside firm, both scheduled and unannounced, throughout the year.

Prevent Internal Theft #2 [Inventory]

It’s great to hire employees who are passionate about the wares they’re selling, however that interest may sometimes compel them to steal the merchandise from their own store.

Whether it’s for their own personal collection or part of a more serious syndicate, internal theft of inventory is often carried out in similar ways. On the sales floor, employees may stash the items they intend to steal in waste receptacles or other hiding spots, then tuck the pinched merch in their car or in their locker while doing something as simple as taking out the trash. Otherwise, items are often stolen before they are even scanned and loaded into the company’s inventory software. This can be easily done by removing them individually from warehouse shelves or even by hijacking shipping trucks loaded with merchandise bound for your business.

 

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To combat internal theft of inventory, separate the receiving, storekeeping and shipping functions so that it doesn’t all rest with a single employee’s duties. Additionally, leverage the good nature of your other employees to hold the whole team accountable. Setup a means by which employees may report theft and encourage whistleblowers to come forward with information about missing inventory. For every one dishonest employee, there are many more who want the best for the company.

“If people know that their fellow co-workers are watching out for theft, they will think twice before stealing because there are higher odds they will be caught,” says Terrence Shulman, founder of The Shulman Center for Compulsive Theft, Spending & Hoarding.

Prevent Internal Theft #3 [Supplies]

From office supplies to building material, every company has plenty of tools in their possession that any employee could use in their own home or even sell for quick cash.

In its 30th Annual Retail Theft Survey, loss prevention and inventory shrinkage consulting firm Jack L. Hayes International revealed the apprehension of over 40,000 dishonest employees last year, as well as recovering over $38 million in assets through their diligence. According to Jack L. Hayes International, one in every 35 employees was apprehended for internal theft from their employer in 2017, based on their study of over 1.4 million employees.

Proper security is the best way to combat internal theft of supplies and tools, as stringent security measures both prevent employees from stealing as well as helps apprehend the culprit and recover any stolen material.

Internal Theft Protocol

First and foremost, to approach internal theft it is imperative to establish clear protocol on the practice. Forty-eight percent of small businesses have a code of conduct for their employees that likely outlines the prohibition of internal theft, according to the NFIB, but as only 16% of businesses report internal theft to police, most business owners don’t have a plan in place if it is uncovered.

If you suspect internal theft has occurred in your business, the attorneys at the Small Business Legal Center stress caution and care above all else. A false accusation may result in a lawsuit against the company, so verify suspicions with an impartial and thorough investigation. If the employee is caught, terminate them immediately, but fairly, in accordance with the repercussions that should be outlined in your code of conduct.  

Your business is your dream — don’t let internal theft steal that dream away from you.

 

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