Preventing Employee Theft

Mar 29, 2010

In my 30 plus years of business experience, unfortunately I have seen more than my fair share of employee theft or fraud.  The thefts have ranged from $5 to over $500,000 and the fraud has been in the millions of dollars. These include:

  • Restaurant employee gave free food to his friends
  • A bank customer service rep ordered a duplicate ATM card for herself and then had the customer give her the pin # so she "could make sure the new card for the customer worked." She then helped herself to the cash in the account using the second ATM card.
  • A bank branch manager at a retirement center learned all about the families of her customers. She would renew customer cd’s into her name when they matured and make up phony documents for the customer.
  • A loan officer made fraudulent loans and put the money into personal accounts
  • A bank officer sold loan participations without recording them on the books of the bank using the money for personal use
  • A bookkeeper hid losses in the company by inflating inventory, receivables and cash
  • Maintenance personnel kept the cash they received from the junk yard for scrap metal
  • The office manager for a physician’s office took cash and paid personal expenses through the business

One study estimates that theft by employees of small businesses totals nearly $40 billion in this country each year. Theft can take many forms including stealing office supplies, time, or cash. Employees can get very creative in hiding losses, especially when they are completely trusted by the business owner. Dishonest employees come in all shapes and sizes, ages and ethnic background – you can’t judge a person based upon their demographics.

In “How to Prevent Small Business Fraud: A Manual for Business Professionals,” the Association of Certified Fraud Examiners cites two key factors that contribute to large losses suffered by small companies – lack of basic accounting controls and a greater degree of misplaced trust. More often than not it is the long-trusted employee who is found to be the thief.

While it is impractical to completely eliminate employee theft, there are many ways to reduce it. The first step is to have the right culture. A positive work environment can deter employee theft and fraud. The business owner that uses the business assets for personal use gives employees the feeling that it’s okay to steal. Enforce written policies that indicate a zero tolerance for theft including outright stealing or falsifying time and expense reports.

Secondly, hire good people. Perform thorough investigations and background checks on employees. Be alert to disgruntled or stressed employees, or those who have are having financial difficulties. Also look for any unexplained significant rises in an employee’s living standards. Be wary of employees who won’t take any time off for vacation or always stay late to complete their work.

The final step is to remove the opportunity to steal by having good internal accounting controls and segregation of duties. It’s critical to have a system of checks and balances and oversight of those responsible for keeping the records or the company’s assets. Good accounting practices include having bank statements opened and reviewed by the business owner or external accountant. The employee who prepares the checks or makes the bank deposits should not prepare the bank reconciliation. Vendor records should be reviewed for phantom accounts. The person who takes orders should be different from the one who handles the shipping.

If you are concerned that your business may be vulnerable to employee theft, a B2B CFO® is an expert at internal controls and industry best practices. We can review your policies and practices to assist you in creating a system less vulnerable to employee theft. Let us come help you protect your business assets.


A collection of books from B2B CFO® to help any business succeed. Read the first chapter from books, including the Wall Street Journal’s book, for free.