It has been said that one in three business failures is due to employee theft and nearly 80 percent of workers admit they have stolen, or would consider stealing, from their employers. Unfortunately, many businesses remain unaware of workplace theft until it’s too late. This two-part guide on cause and prevention will help you identify and deal with theft or fraud.
Staff steal for many reasons. In most cases theft does not occur out of any need but simply because of opportunity and lax business controls, or as a form of 'compensation' because the worker feels poorly treated. A common rationalisation is: "the business is making heaps of profit and I'm only taking what's really due to me for my hard work."
Theft is not necessarily the realm of the lower paid workers either, as research shows that theft can happen in all areas within a company with a trend towards higher sums and more sophisticated methods at the upper management levels.
Common forms of employee theft
Employees have been known to use a variety of methods to steal from their employer including the obvious ones of stock theft and 'fingers in the till.'
Common forms of employee theft include:
removing cash from the till
taking home stock
discounting to 'friends' and colluding with others (turning a blind eye)
fictitious 'supplier accounts'
fictitious petty cash purchases
taking cash 'commissions' from suppliers
using business facilities and materials for personal gain
giving away or using confidential company information or trade secrets for personal gain.
Signs that theft may be happening
Stock shrinkage and/or reduced sales may be indications of a problem but you will need hard evidence to prove that a particular staff member is stealing from you.
Evidence of employee theft can take some time to become apparent unless you catch someone in the act. Often you may only have a suspicion that figures just don't seem right. For instance, in most established businesses the gross profit ratio remains relatively constant, so downward trends can be a sign of theft occurring.
Here are some of the things you should also be looking out for:
stock levels that are lower than your sales records indicate
sales figures dropping on the days that a particular employee is working
in-house rumours of dishonesty.
Other evidence of theft might include:
invoices appearing as copies rather than originals
employees who are reluctant to take holidays (as evidence may be discovered in their absence)
stock left near exits.
Businesses with inefficient systems offer the easiest pickings. Thieves love businesses where:
stock records are out of date or in such a shambles that missing stock could go unnoticed for a long time - or possibly never be picked up
the owner is too busy or 'can't be bothered' with core functions such as buying or keeping expenses under control (for example, by getting several quotes for supplies before ordering) and delegates these tasks to others
the books are in a mess because the owner is not interested in accounting.
the owner does not set performance or sales targets.
Staff quickly pick up on attitudes. If they perceive that the owner simply doesn't care about monitoring of stock or watching expenses, some may take advantage of the situation to help themselves, justifying their actions along the lines of: "well, the owner doesn't care, so why should we?" Even if they don't steal themselves they may simply turn a blind eye to their colleagues' thefts: "it's not my responsibility" is the common rationalisation.
Not all forms of theft involve the direct stealing of stock or materials. Employees can also steal time from the business by taking much longer over tasks than necessary. Computers and information technology have opened up whole new areas for dishonesty. For example, an employee could sell your database of customer names and details to a competitor. A computer expert can email your latest marketing plan or pricing system to the opposition, or rig the accounting system so that fraud goes undetected for some time.
It is important to be 'hands on' in your business, or to employ a competent and honest manager to control the day-to-day running of the business. The more closely you monitor your business, the more likely you are to detect theft or fraud before it becomes a serious problem. This is one strong argument for efficient systems. Note that it's not necessary for you to do the bookkeeping yourself, but it is important that you understand the basic principles behind small business bookkeeping so that you can monitor and control what others do for you.
Many thefts are committed by people who have direct access to cash, stock and/or the company's records. It is therefore a good idea to segregate as many responsibilities as possible among employees and establish good systems where your authorisation is required for some transactions, such as all purchases above a certain value or unusual purchases.
Hold snap in-house audits of all sales and purchases, cash receipts record keeping and stock control. It's also sound policy to review all purchases and expenditure from time to time and to ask tough questions. You should know all your suppliers, so you can spot fictitious ones. If staff know that there is surveillance of these areas, they will be less likely to take chances.
You can take out insurance cover to protect your business from the harmful effects of theft and burglary.
Treat workers well
The retired owner of a department store offers this advice: "I've always felt that theft mostly results from disgruntled staff. If people feel downtrodden or exploited they're going to take it out on you somehow, and theft is the easiest option - particularly in a department store! I always treated my staff well and paid them above average rates - and compared to others in the industry I had very little problem with stock shrinkage. Of course, there are always basically dishonest people to contend with, but I found if you're firm but fair, staff will respect you and behave accordingly."
Exposing a thief
The owner of three hairdressing salons suspected that the manager of one of the salons was stealing from the business, but lacked hard evidence. In the end, the solution was simple: she rotated the managers on the grounds that they should all be familiar with the operation of each salon. As soon as the suspect manager moved to another branch, the weekly turnover at the manager's former branch shot up. Confronted with this evidence the manager chose to resign.
What to do if you detect theft/fraud
The first rule is: never summarily dismiss an employee. Get expert advice first.
Things might not be what they seem: the owner of a camera shop caught a suspected employee taking a camera home from the shop and promptly dismissed the employee for theft. However the employee promptly took out a personal grievance for unjustifiable dismissal. His defense was that he had taken the camera to show a friend who was interested in buying the camera, but was unable to visit the actual shop. In the end the owner was advised to reach an out of court settlement or take the employee back. The owner had basically made two mistakes: firstly, improper procedure in dismissing the employee so quickly without giving the employee an opportunity to state his side of the story. Secondly, the rules should have been clear to everyone. If taking stock out of the shop without the owner's permission was cause for dismissal, this should have been clearly stated in the shop's operations manual and employment agreements.
As this example shows, if you fail to follow proper procedure, you could open yourself to a personal grievance, even if the case seems cut and dried. Employment laws can make it tough on an employer who jumps to conclusions and fires an employee suspected of theft without hard evidence.
If you suspect that theft is occurring then try to get the evidence you need prior to taking any action. For example:
video surveillance might help you get the evidence but be careful of privacy laws. Get expert advice before you install hidden cameras
observation by yourself or another senior staff member is another option, but it's unlikely that an employee will steal while being watched, so you may need to try undercover methods
private investigators are a pricier option, but in extreme cases may be justified. They will be able to advise on the legal aspects of privacy, etc.
use a mystery shopper purchase something from the suspected staff member and give them the opportunity to steal (for example, not putting the money in the till).
Try thinking like a thief
Try imagining yourself working in the various roles in your business. How, when and how often could you steal if you were in charge of certain functions and how would you go about escaping detection? This exercise can be very productive in revealing some serious security gaps and loopholes in your business.
Here are some other measures you can take:
create procedures that require transactions be recorded in a timely manner, following an established process
adopt a zero shortage policy (stock, cash, etc.) and stress shortage control even if losses diminish
rotate business duties to avoid employees gaining a monopoly over functions that are theft prone
limit pricing authority to a small group of employees
make it clear to staff and customers that you will prosecute thieves rather than settling for an apology. If staff sense you lack confidence in this area, they might take advantage
have only one exit point for staff - in full view of other staff and management
have an anonymous tip-off policy
ensure that all staff are subject to the same measures
don't employ thieves in the first place. Be vigilant about checking the references of new employees. Few people who steal actually have a criminal record, so ask previous employers how honest the person was
put appropriate computer and information technology safeguards in place. Use passwords to control access to different areas. For example, not everyone should be able to access the accounting software
make staff directly responsible for theft control by explaining it affects the basic viability of the business and therefore everyone's job depends upon stopping theft and fraud
include your staff in theft prevention schemes and get their input. Make them aware of your objectives and the measures you are taking to prevent theft occurring
Spell out clearly the business's policy on theft and fraud in employment agreements and in the business's operations manuals. Leave no one in any doubt as to what the rules are and what is expected of them.
For more information
ANZ has a range of free workshops for your business, covering topics from 'How to effectively recruit and manage staff' to 'How to write a marketing plan.' Whether you're starting a new business or you're established and looking for inspiration, there's a workshop to suit your business
This material is provided as a complimentary service of ANZ Bank New Zealand Limited ("bank"). It is prepared based on information and sources the bank believes to be reliable. It is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to acting in reliance on it. To the extent permitted by law the bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material.
This material is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product. If you wish to consult an ANZ Business Specialist, please contact us on 0800 269 249.