Employee theft is estimated to cost small business as much as $50 billion dollars every year.

Most of us assume the best in others until circumstances prove otherwise. Whether they are pocketing office supplies or creating fake invoices, it’s all the same and it negatively affects your cash flow. Don’t assume the worst, but also don’t let your perceived relationship blind you to illegal behavior.

We’ll look at the why it happens, how it happens, and what to do about it.

The Why

You may assume that people steal because they are in difficult financial straits – and that may be a compelling reason. But there are many other motives involved.

They resent you.

Employees often have surprisingly juvenile understanding of what it costs to run the company and assume that the difference between their calculation of salaries and revenue is going into your pocket. You go on business trips, have a nice car, frequent restaurants, and generally lead a lifestyle s/he aspires to.

Employees stealing due to resentmentIn addition, you expect too much from him/her and pay too little. You don’t respect him/her and, so the belief goes, they have a right to “acquire” some of what you have by stealing it. From my discussions with employees over the years, their perception that the boss doesn’t respect them, value their input, or have a high regard for their contributions is a motivating factor in a range of regrettable behavior.

They Have Access

An opportunity presents itself. It could be the realization that s/he is only one on the cash register at the moment, allowing for the pocketing of sales, or a vendor may approach your employee promising rewards for guiding more business their way.

Your employees understand a great deal about how you run your business. They know whether the warehouse has cameras (and possibly how to turn them off), how cash transactions are tracked and vendors chosen. They are in a perfect position to appropriate inventory or cash.

You have fewer employees to provide constant, if informal, surveillance. There simply aren’t as many people around and that provides opportunities not available where dozens of co-workers surround you at all times. Also, your employees know all of your systems, unlike a large company where workers are likely not aware of much outside of their own areas.

The How

1.  The Register

This is the most obvious choice since cash is the most attractive item in your business. It’s small, portable and can’t be traced. The methods are many:

Not ringing the sale is a simple. The drawer is opened on “No Sale” or a similar key, the employee takes the customer’s $20, makes change for the $10 sale, and pockets $10. The drawer still balances but this ploy works best when customers are not interested in a receipt.

employees stealingThe regular appearance of friends going to a specific employee’s line or station should alert you to the likelihood that the employee is passing out free product by not ringing the sale or by under ringing it (charging only for the coke, not the sandwich; only scanning the lowest priced item.)

Every employee should have a separate drawer which is checked in and out. No one else may use that drawer. Check register sales reports daily and note an extraordinary or consistently high number of voids, over rings, under rings, no sale or zero sale transactions.

 

Every cash drawer undergoes the same reporting at the end of each shift. A simple sheet is filled out which records the following data:

 

 

Cashier:   Date:
Cash
Credit Card Sales
Checks
Store Credits
Gift Cards
Other
SUBTOTAL
Starting Cash
TOTAL SALES

Subtotal minus Starting Cash.

 

Voids

Returns

 

Other Paid Out Cash
SUBTOTAL: PAID OUT CASH  

 

TOTAL: SALES PLUS PAID OUT CASH

 

REGISTER TOTAL

 

 

AMOUNT OVER or SHORT

 

 

 

Cashier Signature__________________________________

Ideally, someone other than the user of the cash drawer should do the report with the employee standing by. In that case, both employees sign it. If that’s not possible, all records, cash, credit card receipts and other from each drawer are placed in separate envelopes, put in the safe and checked the next day.

One practice in small businesses which causes me to cringe is the owner casually taking cash from the drawer and pocketing it. It may be perfectly legitimate – it doesn’t matter. If you take money out of the drawer two things happen:

  1. You have no way of checking on the employees, and
  2. They get the message that cash is not closely monitored.

It’s a bad habit. If you are going to take cash fill in a receipt and put it in the drawer.

No cash, whether from a register drawer, petty cash or the safe, should ever be removed without a receipt. Period. In a separate article we discuss controlling cash.

 

2.   Inventory

If an employee suddenly begins coming in early or staying late when previously s/he had not exhibited that behavior (and there is no work or home related reason for it) you should consider whether your inventory is going out the back door for private sale.

One client of mine had a business which distributed frozen food to restaurants and schools. Her sales were stable but her profit had taken a serious hit. Nothing in the business had changed.  The answer was in her delivery person – he was selling the products to his own customers right off her truck.

Another plot involves employees “accidently” throwing out merchandise so that their cohorts can retrieve it from the bins.

On a smaller scale, employees might damage packaging and steal the contents. They may take items out of inventory before they reach the floor. The assumption is usually that a customer took it. They may intentionally damage crates or boxes, take some or all of the contents, and blame the shipping company.

Your business should invest in the best security you can afford including cameras which are not accessible to employees.

If you have an employee who has suddenly shown an interest in working while alone, you should periodically show up very early or come back after you have left. Come in through the back door or a side door so that your entry is not noticed.

Keep track of what has come into the business. If four boxes of widgets, a months’ supply, arrive on Tuesday and there are only three on Wednesday you need to find out where that box went. Onto the floor? Or out the back door?

I know it’s a pain, but you need to do inventories and they need to be done by someone who does not regularly have access to your inventory. If you ask the thief to count your inventory you are not likely to learn much of value. There are companies you can hire, you can coerce your adolescent children, or hire a temp worker. For the most part they are just going to be counting and recording numbers of units. Someone who can accurately identify items will need to be on hand. This will provide you a critical tool: an accurate count of what you have (as opposed to what your books say you have – which can be way off). If you have any suspicion that your inventory is disappearing, you must know exactly where you are now.

Once you have that count, you can begin to try to resolve disparities between the actual count and your book inventory. Maybe it’s theft.

 

3. Checks

Checks and deposit slips should be kept in a safe. It happened to me: an employee who said he was taking a vacation lifted checks from the back of the book so no one noticed they were missing. Our first indicator was a call from a bank in another state where he was trying to cash a large check.  Fortunately, it got their attention. If it hadn’t he could easily have written checks for a month before we knew about it.

Deposit slips present another opportunity: a person walks into a bank with a fake check and one of your deposit slips. S/he “deposits” said fake check and asks for cash back. As long as the perpetrator doesn’t get greedy, the bank will likely not question it.

Checks are reasonably easy to safeguard as they can be put in a safe – but that assumes no one else has access to the safe. If someone else has access to the checkbook, you need to be vigilant about verifying that all the checks written went to legitimate places.

Many small businesses use a single bookkeeper who writes and signs the checks, balances the checkbook and records cash. NO! The person who writes and signs the checks must not be the one who balances the checkbook. That’s encouragement for to the employee to embezzle. I don’t care if the bookkeeper is your sister. Don’t put anyone in that position.

4. Invoices

Employees stealing by issuing invoices to fake vendor accountsInvoices present a way to steal over time: Usually a fake vendor account is created (let’s say it’s an office supply company called ABC). Periodically the ABC Company invoices your business for amounts not large enough to get your attention. Since the company doesn’t exist, no product is delivered, of course. The check probably goes to a PO Box where it is retrieved by your employee and deposited in an account set up under the ABC name.

Another scheme involves making a deal with real vendors: the employee pushes business to the vendor and, in return, the vendor charges you an additional amount which is kicked back to the employee.

If you have a common arrangement whereby someone writes checks and gives them to you for signature, do you have the invoice attached? Do you actually look at it? Do you enquire if you don’t recognize the vendor? Or if there seems to be a lot of money going to a particular vendor? Why not? It’s your money.

5. Expense Accounts

You don’t really need a tutorial on this, right? The dinner with a client which never happened. The car rental receipt which is submitted three times. Supplies actually purchased for use at home. It’s endless.

Even otherwise honest people seem to believe padding their expense accounts is normal procedure. It is not acceptable and it is stealing. Insist that each item be backed by an original receipt and check the dates in addition to the amounts on each receipt.

On your side, be clear about what is – and is not – allowed on expense accounts. Include any dollar limits you have imposed and do it in writing. If you are not going to pay for 5 star hotels, you had better notify your people before they check into one for a week. Be clear, be consistent.

6. Stealing Data

Do you have data worth money? Employee records including social security numbers, addresses and other personal data? Customer records? Proprietary information? It may be worth money on the open market.

Who has access to any given computer in your business? Can any employee log on? Do people, such as customers and visitors have access? How many legitimate accounts do you have with access – and how many belong to employees who left two years ago?

Discontinue those dead accounts and force everyone to change passwords frequently. Restrict access on a “need to know” basis. For instance, warehouse personnel should not be able to access accounting records.

7. Falsifying the Books

There are such a large number of potential ways of stealing by falsifying your financial records it would take a book to list them. Popular methods involve checks to non-existent vendors, paychecks to dead or otherwise non-current employees, faking cash reports,

This is perhaps the most dangerous method as people with access to the accounting records can extract large amounts of money – sometimes over years – if they are clever about it. Of course, you should be auditing your own books regularly.

We discussed above some of the safeguards you should have in place with regard to checks and cash, but having your books audited by an outside auditor (with no connection to any employee) is the single biggest deterrent. If you can’t manage a full audit, even having an outside eye audit parts of your business (payroll this year, inventory next with no advance announcement of what it will be) will keep people nervous about taking what isn’t theirs.

 

What to Do About It.

And finally, when you believe you have a thief you will need to tread carefully, both for your own sake and that of the suspected thief. We all have a need to believe that people we like, who we have trusted and who are close to us in some fashion will not steal from us. This very human blind spot may lead you to suspect an employee with fewer ties to you. So move very cautiously to collect data.

Investigating employees stealingBegin by identifying your suspicions as specifically as possible. You believe that last Thursday was a good day, but sales don’t support that belief. Or you believe that the number of widgets ordered far exceeds sales, yet there are none in the warehouse. Take your supposition and run it through every test you can find.

1.    Thoroughly document every case of suspected theft including all the available information (date, time, who was working, what was taken). Can you tie the missing items back to your books? Will a vendor or shipper support provide original documentation? Should you consider hiring an outside specialist in employee theft problems? Do you have video monitoring? Look for patterns in loss.

2.     Talk to employees. Have an interview with every employee, one-on-one, in your office with the door closed. Tell them you have evidence that theft occurring and ask what they know about it. Don’t go into detail. Observe their behavior. Do not accuse anyone. This serves to put all employees on notice that the theft has been noticed and they are being monitored. It may make the thief very nervous – even nervous enough to quit.

3.   Decide how you want to handle the problem. Will you call the police? Will you just fire them without providing a reference? Will you create a payback plan and keep them on? Decide in advance what you will do and how you will handle the behaviors you may face (denial, tears, violence, etc.)

4.   Call your lawyer for advice on how to handle the situation. This could be create long term problems for you so be certain you are approaching the employee in the correct way. Document everything throughout the process.

5.   When you can prove that an employee is the guilty party, meet them behind closed doors with another person in the room. You may need protection if the employee becomes aggressive. It is imperative that you maintain control of yourself and the situation.

6.   If you are firing the employee, have him or her escorted to their workspace to pack any personal belongings. Collect all keys, fobs, computers, ID badges, and any other company property. Promptly change all access codes, eliminate the employee’s computer access…protect yourself from further incursion by a person who may be very angry. You may want to consider changing locks if you suspect s/he may have duplicated keys.

7.   The other employees will know immediately, so be prepared to make a statement to them before the rumor mill gets underway. Be measured and cautious in how you describe the problem: there were “problems with transactions” or “inaccuracies in the warehouse”. If your employees may be put the position of explaining the departure to vendors or customers your choice of words will help guide them in theirs.

8.   And then fix your security problems.

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