Employee Theft: The Whys and Hows

Some businesses think it’ll never happen to them. You trust your employees and treat them well. But occupational fraud happens to businesses of all sizes, in all industries. Ninety-five percent of all businesses have been targeted and nearly 75% of employees have stolen from their employers at least once.1

Occupational fraud is internal fraud perpetrated by an employee, manager or executive against his or her own employer. And it’s damaging, demoralizing and expensive. A recent Association Fraud Examiners (ACFE) survey takes an in-depth look at occupational fraud and estimates global losses of $3.6 billion annually.2

Why do employees steal?

There are two very simple reasons employees commit fraud – opportunity and misplaced trust. Dishonest employees see an opportunity to steal funds and property and they do it. It’s possible they think they won’t be caught, that the company can afford it, or that they deserve it. Unfortunately, these are the same employees who are entrusted with access to funds and other company assets because of their roles or tenure.

Who’s stealing and how?

Fraud can (and does) happen throughout an organization. However, the ACFE found that almost half of occupational fraud was committed in just four departments — operations (15%), accounting (12%), executive/upper management (11%) and sales (11%). The greatest median loss occurs with upper management theft - $500,000.

Fraudsters who had been with their organizations more than 10 years caused three times the losses of those who had been with the company for a shorter time. That’s no surprise since they know the ins and outs of the organization and can more easily plan their crimes. They are also harder to catch (24 months) and more likely to team with up others to carry out fraud (64%).

According to the ACFE, there are three distinct categories of occupational fraud, all with varying timeframes and levels of damage.

• Asset misappropriation
  This type of fraud involves theft or misuse of company resources. It is the most common fraud (86% of cases) and causes the lowest median loss, at about $100,000 per case.
  
  Billing schemes are the most common type of asset misappropriation. These schemes include invoices for fictitious goods or services, inflated invoices or invoices for personal purchases. Check and payment tampering are the most expensive type of asset misappropriation, followed by cash larceny and theft of non-cash assets, such as inventory.


• Corruption
  Extortion, embezzlement and conflicts of interest are the second most prevalent examples of occupational fraud (50% of cases). In the last 10 years, corporate corruption rose 17%. These schemes cause $150,000 per case in median losses.


• Financial statement fraud
  The purposeful material misstatement or omissions in the company’s financial statements is the least common type of fraud (nine percent of cases) but causes the largest losses at $593,000 per case.

In about 40% of cases, the fraudster commits more than one type of fraud, with the most typical overlap being asset misappropriation and corruption. Regardless of type, the median duration of fraud is 12 months. Billing, check/payment tampering, expense reimbursements, payroll and financial statement fraud tend to last the longest before they are detected, at an average of 18 months. Theft of non-cash assets are typically detected in about 12 months.

The longer the fraud lasts, the worse the financial damage. Schemes that are discovered in under six months cause about $47,000 in average losses, versus schemes that last at least 60 months and cause $800,000 in average losses.

Cryptocurrency opens a new door to occupational fraud.

There are many legitimate uses for cryptocurrency. But in the office, fraudsters take kickbacks or make bribes (48%), convert (43%) or launder (35%) misappropriated funds with crypto. Currently, only eight percent of employee fraud is related to crypto. These occurrences are expected to rise with the digital currency’s popularity and mainstream use increases.

Fraudsters manipulate documents to cover their crimes.

While 12% of fraudsters don’t bother to hide theft, most take measures to not get caught. Creating fake documents (57%) is the most popular method of hiding fraud. Thirty-eight percent conceal physical or electronic documentation.

Some organizations are more vulnerable than others.

While all types of businesses across various industries can experience employee theft, some are more susceptible. Sixty-nine percent are for-profit, with 44% privately owned and 25% publicly held. Losses average $120,000 and $118,000, respectively. Only nine percent of non-profits are affected, with median losses of about $60,000.

Government entities are attractive to fraudsters, including national (46%), state (27%), and local (25%). Median losses range from $200,000, to $56,000, to $125,000, respectively.

Companies with less than $50 million in revenue are more likely to be targeted (38%), although median losses are lower at $100,000. Those with revenues of $50 million - $499 million (26%) and above one billion (24%) are next with losses of $105,000 and $150,000, respectively. Just 12% of businesses with revenues of $500 million - $999 million are targeted, but losses are approximately $150,000.

Losses unevenly affect certain industries.

Five industries bear the brunt of fraud losses. These include real estate, wholesale trade, transportation and warehousing, construction, and utilities.

What are companies doing about employee theft?

When employee fraud occurs, employers have tough decisions to make. Fifty-eight percent refer cases to law enforcement, while 29% pursue civil litigation. Companies that don’t involve law enforcement believe internal discipline such as termination is sufficient (50%), fear bad publicity (30%), or settle privately (28%).

Early fraud detection reduces losses and sends a powerful message.

Early fraud detection can save your business from bigger losses, while sending a strong message that fraud will not be tolerated.

Many sophisticated fraud detection techniques are now in use around the world, but interestingly, most work-related fraud schemes are still detected the old-fashioned way: tips (42%). More than half of those tips came from employees (55%). Customers (18%) and anonymous tipsters (16%) also reported suspicions. Vendors (10%) and even three percent of competitors alerted companies of fraudulent activity.

Internal audits (16%) and management reviews (12%) also reveal fraud, along with other less frequently used means. The survey underscores that when fraud is detected proactively, via methods such as document examination, surveillance, or monitoring, it is shorter in duration and less costly. Fraud that is detected passively — by accident, confession, or police notification — tends to last longer and be much more expensive to the company.

Fraud hotlines are particularly effective, and generally cut the company’s losses in half. Hotlines also cut about six months off the duration of the crime.

Fraud prevention measures work.

Creating an anti-fraud culture is the foundation of fraud deterrence. This includes setting the right tone at the top. Owners and executives must be flawless in abiding by the rules, from not overriding internal controls to correct handling of petty cash. In addition, fraud prevention measures should be visible to employees, increasing the perception of fraud control and detection.

Fraud prevention controls work, but they are not all created equal. Two tactics tend to reduce both fraud losses and duration by at least 50%: job rotation/mandatory vacation and surprise audits. However, neither tactic is regularly used at 25% and 42%, respectively. In the U.S., codes of conduct (74%), external financial statement audits (72%), employee support programs (66%), and internal audits (66%) are most popular.

Be proactive in safeguarding against employee fraud.

Taking proactive steps to deter fraud is the best way to protect your company. Review your internal controls, tighten oversight, and set the right tone.

If you suspect occupational fraud, bring in help. Gather a small, discreet team to investigate, and ask your trusted financial and legal advisors for objective advice. Act quickly to restrict the perpetrator’s access and stop the damage. Talk to your insurance company and don’t hesitate to involve law enforcement.

Your team works hard to keep your company growing and thriving. Don’t let employee theft stand in the way of your success.

For more information on how Synovus can assist in protecting your business from fraud, complete a short form and a Synovus Treasury & Payment Solutions Consultant will contact you with more details. You can also stop by one of our local branches.