If the recent brouhaha over a “rogue” derivative trader named Jerome Kerviel of France’s bank Societe Generale losing $7.1 billion isn’t making the hair on the back of your neck stand up, perhaps it should. According to many reports, because Kerviel was such a low-level trader with authority limits below the operational risk red-alerts of his organization, his trades mainly went unnoticed. As a business owner, you may be more worried about missing petty cash, but operational risk-management principles still apply no matter what your organization’s size.
Do you think you treat your employees too well to worry about employee theft? Think again. The Small Business Administration (SBA) estimates that as many as 30 percent of employees pilfer and that 60 percent will steal if given enough motive and opportunity. Employee theft costs businesses an average of six percent per year, according to The Chubb Group of Insurance Companies, a leading writer of fidelity coverage in the United States. A recent study by The Chubb found that in the past five years, more than one in three private companies experienced a theft averaging nearly $350,000. Can your business withstand that kind of loss?
Fraud experts describe the “fraud triangle,” where incentive, rationalization, and opportunity collide to induce theft.
- Incentive occurs when employees face financial difficulties such as high debt, gambling problems, or drug abuse.
- Rationalization can arise easily: an insult, staff reductions, a demotion creating a feeling by employees that management “owes” them.
- Opportunity occurs when inventive employees find loopholes in your system and exploit them. When incentive and rationalization meet opportunity, only bulletproofed businesses can avoid or withstand the loss.
Because big businesses can more readily afford employee dishonesty coverage and have the ability to better withstand the shock of a loss, small companies are particularly at risk, according to Stephen B. Smith, CPA, with Williams Keepers CPAs in Columbia. “Business owners think ‘I know these people and I trust them. They won’t steal from me.’ But only about seven percent of the fraud is caused by repeat offenders; almost all are first-time offenders,” Smith said.
Oversight is the best deterrent to theft. “Internal or external audits generally reduce fraud by 35 percent so when losses do occur, they are typically smaller. The knowledge that someone is looking at the details keeps otherwise honest people honest,” Smith stated. Without internal controls, “By the time the loss occurs, the amount taken is frequently so large, the business is unable to recover or it takes years to recover.”
Your next thief may be sitting in your lobby right now, bright-eyed and bushy-tailed, waiting to take advantage of lax hiring practices.
With a signed release, screen potential employees thoroughly, including credit checks. High debt is a red flag and should be discussed with an employee before hiring. Watch for changes in lifestyle, including the purchase of high-ticket items with no known income sources. Insist employees with financial duties take vacations. According to the Wall Street Journal, Kerviel “scoffed” at his employer for missing a rudimentary red flag of employee dishonesty: He vacationed only four days last year.
Focus loss-control efforts where losses are most likely to occur. Retail establishments, according to the Small Business Administration (SBA), found that amounts recovered from employee theft averaged $1,350 versus the average shoplifting theft of $196, so while the focus on shoplifting may seem justified, the cost-benefit for preventing employee theft may reap bigger returns.
Keep up with paperwork, because unreconciled invoices, unrecorded payments or disorganized shipping and receiving bills can allow theft to go undetected for long periods. Segregate duties. For example, the employee who deposits money should not be the employee who reconciles the checkbook. Smith recommends having business bank statements sent to the owner’s home rather than the business so the owner opens the statement and reviews it each month.
Consider purchasing fidelity coverage. As employees becoming more technologically advanced, businesses’ financial assets are at greater risk from criminal activities than ever before. Employee dishonesty coverage protects an employer from financial loss due to the dishonest acts of your employees, such as misappropriation and theft. It’s an affordable must-buy for most employers.
Encourage employees to report suspicious activities. Prosecute theft. To avoid adverse publicity, some organizations don’t report fraud. This sends your employees a bad message, one that says, “If you steal from us, you get a ‘pass.’”
We like to believe that our employees are honest. If you expect the best but prepare for the worst, you may not have to discover if your business can withstand a loss.