Employee theft can be avoided by implementing proven risk-control techniques
by Leslie Kazmierowski
In the current tight job market, hiring and retaining quality employees are critical to a company's success. But you have to be careful—though a majority of employees are trustworthy, unfortunately, most businesses will suffer losses caused by employee theft.
In a roofing company, most employees who are likely to steal will be drawn to tools, equipment and money, and you must practice proven risk-management techniques and know your rights as an employer to minimize such losses.
The truth
Employee theft and dishonesty are more widespread than you may think. Consider these facts:
- The annual cost of employee dishonesty in the United States is estimated to be $40 billion—10 times the cost of street crime, according to the U.S. Department of Commerce.
- The American Management Association estimates 20 percent of businesses fail because of employee dishonesty.
- The FBI says that of all business types in 1996, 15,700 employees were arrested for embezzlement, which is an increase of nearly 25 percent from 1993.
- Businesses that earn less than $100,000 in sales are 35 times more likely to suffer from employee theft than those with sales more than $5 million.
To avoid your company contributing to these statistics, you need to be aware of who in your company may be likely to steal.
According to the business-management firm Ernst & Young LLP, 42 percent of theft in companies is committed by owners and managers, including high-ranking accounting staff members. Average losses perpetuated by owners are 16 times higher than those involving other employees, and manager-related losses are four times higher. These crimes typically involve money because owners and managers have greater access to liquid assets and can alter financial statements, as well as subvert security measures.
Lower level employees find ways to steal, too. There are several ways lower level employees steal, typically by committing fraud. Some of these ways follow:
- Padding expense accounts
- Vendor kickbacks
- Forming fictitious companies to receive supplies and services
- Unauthorized purchases
- Forging wire-transfer authorizations
- Fraudulent billing practices
Construction companies can be more vulnerable to low-level employee theft because of the amount of readily available tools and equipment. Small roofing companies should be especially concerned about employee theft because they typically cannot afford extensive safeguards and do not have the financial capacities with which to absorb losses.
Insurance
Crime insurance and good risk-control techniques are the best methods you can use to enable your business to minimize losses caused by employee dishonesty.
Fidelity bonds are similar to insurance policies and cover employee theft. Insurance companies often are unwilling to provide fidelity bonds to a company unless some basic risk-control procedures are in place, such as countersignature of checks and bank accounts reconciled by someone not authorized to deposit or withdraw from them.
If your company cannot provide these risk controls, an insurance company still may provide coverage but would require an increased deductible, letting you absorb more of the loss.
It often is difficult to determine the amount of coverage needed for employee theft because the likelihood of theft is so unknown. The Surety Association of America, an insurance industry rating organization, has a formula for determining proper fidelity insurance limits. Information regarding the association is available at www.saa.org. Your insurance agent also should be able to help you find the right limit and deductible for your company.
A general rule is to carry a large deductible and high limits. A deductible should be set at the highest amount your company can bear as a result of one loss without seriously hurting the company financially. $250,000 should be the lowest amount of coverage purchased; higher limits usually can be purchased. The premium should be reasonable and based on the number of employees.
Fidelity coverages
There are two coverage forms of fidelity insurance: employee dishonesty—blanket and employee dishonesty—schedule. The blanket version covers dishonest acts of all employees (as defined or by endorsement) unless the employees are specifically excluded. The schedule form applies only to specific employees or job titles listed in the policy and primarily is used for small companies that have only one or two people who need to be bonded.
For a loss to be covered, an employee can act alone or in collusion. The employee has to be identified in the schedule form by name but not in the blanket form. The blanket form only requires an act be committed by an employee.
A company's officers, directors and stockholders are not specifically excluded from coverage; however, with closely held corporations, questions about coverage arise when an officer, director or stockholder commits a dishonest act. Directors and trustees are not considered employees except when acting as employees within the scope of their usual duties. Insurance companies often have taken the position that these "employees" are not subject to the insured's control because by virtue of their stock ownership they are stealing from themselves.
Courts have been inconsistent in their decisions about this subject. Situations become more complicated when there are multiple owners, and there should be coverage for innocent stockholders if losses occur because of one dishonest stockholder. An endorsement is available to exclude officers, directors and stockholders from coverage.
Recently, major insurance carriers have enhanced their fidelity coverages. One area of enhancement was deleting the "manifest intent" requirement. The manifest intent requirement stated it had to be proved that an employee meant to cause a loss to his employer and had to financially benefit from the act. Now, just employee theft has to be proved for fidelity coverage to apply. However, some carriers still may have manifest intent coverages in their policies.
Most fidelity carriers also now offer a discovery form rather than a loss-sustained form. With a discovery form, the insurance carrier pays a loss when the loss is discovered.
Risk control
In addition to purchasing fidelity insurance, there are several loss-control procedures you can implement that can minimize the possibility of employee theft.
For example, background checks greatly can decrease the likelihood of hiring undesirable employees. Unfortunately, because of cost concerns, many employers do not conduct background checks at the time of hire. And after employees have been promoted to positions of greater trust and responsibility, few employers conduct follow-up investigations.
Because employment law can be confusing, it often is difficult to remember what you legally can require from employees. However, it is acceptable to do the following at any time during a person's employment:
- Conduct a background check, including calling references
- Perform a credit check if you get written permission from an employee and ask or previous W-2 forms
- Ask whether an employee ever was convicted of a felony
You also should become familiar with applicable state and federal laws regarding polygraph tests and other screening methods you can impose on employees. In addition, know the rules in your collective-bargaining agreements, if applicable, that relate to employee theft.
You should be aware that changes, such as gambling debts or divorce, may have occurred in employees' lives that could cause them to begin stealing. Begin paying more attention to employees' conversations and attitudes if you suspect them of stealing.
To further help decrease theft, develop a control system for the handling and administration of cash, and make sure the system applies to all employees and is monitored periodically. In addition, deposit cash daily, and insist on strict documentation of expense accounts, as well as countersignature of checks.
To protect tools and equipment, weld identification numbers and your company's name to kettle frames; photograph and log all serial numbers of equipment and tools; keep hand tools securely locked and require employees to sign out tools for each job; and avoid keeping mental track of inventory or possession of tools/equipment—write down everything.
Confrontation
If you suspect an employee of theft, be careful how you approach the situation—your actions could lead to a lawsuit. For example, if you publicly accuse an employee of stealing, he can sue you for defamation of character. In addition, if an employee is held against his will, he can sue for false imprisonment.
After you discover a situation that may result in a loss, notify your insurance company and agent or broker just as you would with any type of insurance loss. The insurance company will tell you what to do and/or conduct its own investigation. Within 120 days of reporting a loss, you have to provide the insurance company with a sworn proof of loss. You also may want to call your attorney to make sure you don't do anything illegal involving a suspected employee.
If you suspect an employee of stealing, conduct an immediate, thorough investigation and preserve all original documents and physical evidence while keeping everything confidential. You must be ready to prove beyond a reasonable doubt that a theft took place.
If an admission of theft is obtained in writing, insist on immediate restitution and obtain legal advice before terminating employment or pressing criminal charges.
Keeping it safe
You can lessen your chances of suffering from employee theft by implementing a loss-control program and strictly adhering to it. For losses that circumvent safeguards, comprehensive crime insurance can protect your company's bottom line from the effects of employee dishonesty and theft.
Leslie Kazmierowski is NRCA's insurance programs manager.
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