This article is part of a larger series on How to Do Payroll.
Employee theft is the stealing of an employer’s property or assets for personal use. It includes the more traditional ideas of theft, such as stealing merchandise or money, as well as stealing confidential data and “time” (i.e., not working as many hours as recorded or performing personal tasks on company time).
Historically, it’s been reported that some 95% of businesses have experienced employee theft, yet there are actions you can take to prevent or reduce it. This includes implementing a company-wide policy, training your management team, and conducting audits.
Types of Employee Theft
There are many different ways employees can steal from your small business. Click through the tabs below for details on the types of employee theft.
How To Prevent Employee Theft
Preventing employee theft does not have to be overly intrusive or complicated. Developing and implementing an employee policy, having good audit procedures, completing due diligence on new hires, and resolving employee issues can go a long way in reducing the odds of theft.
Develop an Employee Policy Regarding Theft in the Workplace
One of the best ways to prevent thefts is deterrence. This can be done by creating policies and procedures regarding employee theft. This type of policy is typically contained within your company’s employee handbook.
An effective employee theft policy will contain the following information:
- Company policy on theft: This section should remind employees that theft is illegal. It also should give different examples of employee theft, such as those mentioned above (data theft, inventory theft, time theft, etc.). You should also explain common types of theft in your industry, such as hospitality employees giving food, drinks, and lodging to friends and hourly employees clocking in and out for co-workers for them to receive pay for hours not worked.
- Consequences of committing theft: This section should point to your company’s discipline policy, which should clearly state the repercussions of committing theft.
- Commitment to investigating theft: This section will explain that you actively put measures in place to detect theft, will follow up on all reports of theft, and will discipline those who deliberately make false accusations.
Get a jumpstart by downloading and customizing our sample employee theft policy.
Implement an Employee Policy Reporting System
Along with your employee policy, you should have a policy reporting system. An effective reporting system enables anonymous and confidential reporting, allows both internal (co-workers) and external (clients and customers) shareholders to report, and includes multiple ways for an individual to report a theft (e.g., email, phone, a physical dropbox). You should also provide continuous training on the reporting system.
Train Managers To Monitor Time Sheets
Because managers set their employees’ schedules, they’re the best ones to monitor whether an employee is stealing time. Some managers are diligent, but others may be inattentive and sign off on time sheets without verifying their accuracy. All managers should receive training on how to review all time sheets before the employee gets paid. They may not catch everything, but a manager will be able to spot glaring errors that could be an example of employee time theft.
Catching it before your team runs payroll gives you the chance to speak with the employee to gauge whether it was intentional or accidental and take appropriate action.
Consider the following scenario of what could happen if your managers are not properly trained in this area:
You run a business with 100 employees and dozens of managers who approve time sheets.
- Over two years, one of your inattentive managers, Jack, approved the time sheets of Allen without verifying whether Allen really worked.
- Allen manually entered the time sheets into a spreadsheet that he gave to Jack every two weeks. Allen only worked five days per week, but Jack didn’t notice that Allen routinely added hours for days he didn’t work.
- During the course of a routine HR audit, Allen’s time sheet discrepancy was uncovered.
- Because of the length of time this was going on and the number of hours Allen falsified, your company overpaid Allen $65,000 plus thousands more in employment and business taxes.
- Time to terminate Allen, potentially sue for fraud, and discipline Jack. Because of the amount of money stolen by Allen, it may also result in criminal charges as well.
You may not want to get involved in a time-consuming legal battle with a now-former employee, but that’s a substantial amount of money your company has lost, and other employees may take advantage of the situation if you don’t make clear that your company will not stand for this type of behavior.
Conduct Unannounced Audits
Having routine audits is a great way to discover fraud at your company. Having unannounced audits will prevent some employees from disguising their misdeeds.
The following tips will help in a successful audit.
- Hire an external accountant and auditor to conduct the audit.
- Conduct audits, both payroll audits and HR compliance audits, at different times of the year.
- Conduct random checks of petty cash, register cash, inventory, supplies, and merchandise.
- Conduct periodic internal audits of financial records and vendor files.
- Encourage your managers and HR personnel to review employees’ timecards to see if it matches their expectations on hours worked. For more tips on processing payroll, visit our article on managing payroll.
- Use Benford’s Law for auditing large data sets. This mathematical observation shows that most numbers in a natural data set (such as ledger entries) begin with smaller numbers like one and two; so, if your data set shows eight or nine as the first digit more frequently, Benford’s Law would at least indicate that is an anomaly.
Develop Company Procedures That Discourage Theft
You can reduce the risk of company theft by creating processes to increase visibility of all your company tasks.
- You can assign multiple employees to job tasks where the risk of theft is increased. Examples include scheduling two workers per shift to restock inventory, count cash, and process customer returns.
- You can also segregate duties as a deterrent to theft since employees will know that there is a check and balance system in place. Examples include making sure that any person handling money or checks has a receipt signaling that a co-worker has reviewed it, making sure that the employee writing checks has his activity reviewed and reconciled by another co-worker, and that employee timecards are reviewed by someone other than the person running payroll.
Evaluate New Applicants Thoroughly
You can reduce your odds of employee theft by using thorough applicant screening procedures, including background and reference checks, to identify red flags shown by applicants before an offer letter is presented. Specific issues to be aware of include dishonesty, whether that is on their resume or application or during an interview, and an unwillingness to submit or explain results on a background check.
Speaking with an applicant’s former managers can also be a key element of a thorough evaluation. (For more information, check out our article on employee reference checks.) In addition, for positions that require handling money, you may consider asking the employee to submit to a credit check.
Resolve Employee Issues
One way to reduce employee theft is to meet the needs and wants of your employees. Some of these items include a good company culture, a robust benefits program, competitive compensation, and employee recognition for great work. Understanding your employee needs can go a long way in reducing discontent employees, which is one of the reasons why employee theft occurs.
Use an Electronic Time Clock
The best way to eliminate time theft is to use software that prevents it for you. With an electronic time clock system, you can restrict your employees from changing their own time sheet and prevent them from having a colleague clock them in. Employees clock in and out electronically with their own unique login information, creating a trail that, unlike pen and paper, can only be modified with your approval.
Time clock software can:
- Restrict where employees can clock in and out
- Prevent buddy punching
- Require regular time tracking updates on projects
- Restrict employee’s ability to modify their time sheets
- Run detailed reports on employee productivity, attendance, tardiness, and labor costs
Employee Theft Warning Signs
There are common warning signs at both the employee and organization levels that fraud is occurring at your organization. It is important to note that these warning signs do not mean that an employee is committing theft for certain, as there are other reasons that could explain the situation. However, these warning signs should encourage you to investigate further.
Why Employee Theft Occurs
Employees commit theft for a variety of different reasons. Some of the main reasons are mentioned below.
- Employee Workforce Issues: Many times, employees feel like their employer has treated them poorly and would like to “get even.” This can be broken down to failed relationships between their co-workers or managers, or with the organization in general. Some examples of these issues include being in constant disagreements with the teammates in a department, feeling that a manager is showing favoritism to certain employees, and/or workplace harassment.
- Employee Personal Issues: Employees may have personal issues that lead to them committing theft at the workplace. These items can include unexpected expenses, such as legal and medical expenses, as well as loan payments that have increased due to penalties and interest.
- Limited Theft Prevention Measures: If your organization has security vulnerabilities known by employees, it is more likely that employees will attempt theft. There are some employees who try to weigh the benefits of theft versus the odds and penalties of getting caught. There are other employees who commit theft simply because they believe they can get away with it. Too many businesses make the mistake of believing the company culture is solid enough that there is no need to have anti-theft safeguards such as installing a business security system like SimpliSafe.
- Inexperienced or Untrained Staff: Employees who commit theft may try to take advantage of employees who they believe are inexperienced in their job or not properly trained. For example, employees may ask your payroll or human resource professional to enter time on their behalf without checking with their manager.
Employee theft is an issue that affects all companies, but can have a bigger impact on small businesses. The Association of Certified Fraud Examiners found in a recent study that companies with fewer than 100 employees had a 50% higher median loss from occupational fraud than larger companies (and the duration of the fraud was longer).
If you would like more statistics, please see our article on employee theft statistics.
These issues impact not only company finances but it company culture, employee morale, and your company’s relationship with its partners and customers. This article should help you reduce your risks through understanding the causes, warnings signs, and prevention techniques.