‘Tis The Season For Employee Crime
December 2006
IN THIS ISSUE
— Not so Sweet Charity Begins at the Office: How to Avoid Employee Crime
— What you can do to curtail employee crime among your clients
— In the next issue
GREETINGS!
Welcome to the December edition of our newsletter. In this issue, we’ll focus on the problem of employee fraud, financial crimes and misconduct, and how best to both resolve existing problems and to prevent them from happening in the future.
NOT SO SWEET CHARITY BEGINS AT THE OFFICE: HOW TO AVOID EMPLOYEE CRIME
A busy dental practice depends as much on the skill of its support staff, particularly the secretaries and bookkeeper, as it does the dentist’s years of experience. Yet a trusting dentist in Washington, D.C. found that his faith in his bookkeeper would cost him dearly – at least $130,000 within a two-year period. The bookkeeper had claimed she worked 50- hour weeks and given herself a $20 per hour raise without his knowledge.
In another instance, a marketing manager in a Dallas Home Depot ordered company-issued gift cards to be used for “legitimate Home Depot business and marketing-related purposes.” In fact, the manager sold or intended to sell nearly 2,400 gift cards through an online auction site, carrying a total value of $269,350.
In an era where the economic landscape is affected by a wide range of factors beyond an employee’s control, the portion of the population that feels the effects of a downturn most often are working employees. The gap between average wage increases and the rate of inflation is expected to narrow further in 2007 – most employees’ raises were expected to increase by 3.5 percent in 2007, the same rate as in 2006; the rate of inflation, meanwhile, is expected to rise from 3.1 percent in 2006 to 3.3 percent in 2007, according to The Conference Board.
Faced with the prospect that their stagnant wages will buy fewer goods, what do some employees do to recoup the shortfall? This holiday season, they may well look to the “Scrooges” in the executive suite and decide to give themselves an early holiday present, courtesy of their employer. While many may think of the looting of large corporations by their top executives when they think of employee crime, nearly two thirds of all employee thefts analyzed by the Association of Certified Fraud Examiners involved amounts of less than $100,000. While the type of fraud perpetrated by top executives in attention-grabbing scandals – most often financial statement fraud – was responsible for the highest median dollar loss ($2 million), misuse or theft of an organization’s assets by employees was present in an astounding 91.5 percent of cases, resulting in the smaller – but far more frequently occurring – median loss of $150,000.
The size of businesses affected most often by employee asset misappropriation also defies the conventional wisdom that Fortune 500 companies most often fall prey to such schemes. In fact, organizations with fewer than 100 employees were victimized 36 percent of the time, nearly double the rate at which companies with more than 10,000 employees fell victim to employee theft.
At other times, the asset being misused is not a tangible item, but the employee’s time itself. In the past, we documented how an employee used his company’s resources – and the business hours during which he should have been working – to operate a wide-ranging real estate business.
WHAT YOU CAN DO TO CURTAIL EMPLOYEE CRIME AMONG YOUR CLIENTS
Whether you represent a Fortune 500 company or a Silicon Valley startup, one thing is clear: employees must receive proper training on use of company assets and be aware of significant penalties should violations occur. Maintaining a clearly stated written policy that is reinforced verbally in appropriate situations, such as at new employee orientation meetings, is a good first step toward curtailing employee crime.
Most important, however, is the need to engender a culture where employees are rewarded for disclosing any instances where they see others misusing or stealing assets. This can be best done through an anonymous employee hotline. Once thought to be too cost-prohibitive, hotlines can now be staffed for 24 hours a day, seven days a week at very reasonable expense.
Human nature is a very fickle thing, however, and some employees may always feel that they aren’t paid enough, acknowledged enough or given enough responsibility. As a reaction to this perception, they will thus feel a need to “take something back” from their employer to gain confidence and reassert their intelligence and self-worth. If your clients have become the victims of employee crime, despite their best efforts, there are several measures they can take:
• Analyze the delegation of duties. If one person has responsibility for complementary functions, such as purchasing and accounts payable, these duties should be split among two people who have not had a long-standing working relationship, so that one party makes a request and the other must sign off on it.
• Encourage openness among the staff. Loose lips have sunk ships for ages – while this holds true for companies of any size, it is also a fact of life for employees. If assets are missing or misused, make further efforts to encourage dialogue between middle management, employees and executives.
• Hire outside experts to discreetly determine culpability. While establishing clear, strict rules and creating an environment where infractions can be discussed are two key elements, once a crime has been committed the most important step is to determine the extent of the crime and also uncover the perpetrator(s.) As Certified Fraud Examiners, we have witnessed many cases where an employee, seeking to right some perceived wrong committed by the employer, works on his own or with others to “make things right” by filing bogus expense reports for business meals where no business transpired; created dummy corporations to “buy” inventory from the employer for which it never paid, and which the employee also sold to reap pure profit; and skimmed cash from retail operations to increase his own income. Whether through surveillance cameras, employee interviews or electronic record analysis, each of these schemes can be detected, the perpetrators prosecuted, and damage minimized before a difficult problem becomes a business crippling one.
Employee crimes can be large or small, but all can significantly disrupt your clients’ business. While preventive measures like those described above are critical, after a crime has occurred the most essential goal for any organization is to minimize the damage caused and identify the offender before he can strike again.
IN THE NEXT ISSUE
In January’s issue, we’ll look at the skills forensic accountants bring to an investigation and analyze how they can add value to your investigations.