Kevin Ian Schmidt

Tips to Identify Internal Theft

Retail theft Chart
Retail Loss Chart

Whether it’s downloading and sharing company confidential information (a hot topic these days), manipulating expense reports, or stealing merchandise- employee theft and fraud is a serious issue for business owners. In fact, studies show that occupational fraud now results in the loss of five percent of an organization’s annual revenue.

Here are some tips for preventing and managing employee theft or occupational fraud.

  1. Use Pre-Employment Background Checks Wisely

One of the first steps to preventing fraudulent employee behavior is to make the right hiring decision. Basic pre-employment background checks are a good business practice for any employer, especially for those employees who will be handling cash, high-value merchandise, or have access to sensitive customer or financial data.

This Guide to Pre-Employment Background Checks outlines the types of information that you can consult as part of a pre-employment check, and the laws that govern their use. I’s worth noting, that the law varies from state to state on whether a private employer can consider an applicant’s criminal history in making hiring decisions. Check with your local EEOC office for the laws in your area before going down this path.

  1. Check Candidate References

I’m always surprised how very few employers reach out to check candidate references’ often assuming that a reference will never be anything but glowing. However, it’s good practice to check references’ particularly those of former employers or supervisors. If your candidate has a history of fraudulent behavior’ then you’ll want to know about it, before you hand them a job offer.

  1. Proactively Communicate Conduct Guidelines

Every business needs an employee code of ethics and conduct – while it won’t prevent criminal or fraudulent behavior, the standards it outlines will set a clear benchmark for employee behavior and guidelines on how to do business based on a series of principles that promote ethical and lawful conduct.

Once developed, the code of conduct should be documented and agreed to by all new employees (and existing employees if you haven’t put a code in place yet). You can find many templates for basic codes of conduct on the Internet, but as a rule of thumb you should include policies that cover the protection of company data, the avoidance of conflict of interests, and of course, obeying the law.

Use employee orientation as an opportunity to go over the code of conduct and explain any areas that are unclear.

Then, revisit the code each year and be sure to add any new considerations that may have materialized – for example, if you do business with certain suppliers, contractors, or government agencies who require you and your employers to agree to new codes of conduct as part of your business relationship.

  1. Don’t be Afraid to Audit

Auditing always has a big brother feel, and in a small business environment this is especially true. However, conducting regular audits can help you detect theft and fraud. Audits can also be a significant deterrent to fraud or criminal activity because many perpetrators of workplace fraud seize opportunity where weak internal controls exist.

As a rule of thumb, identify high risk areas for your business and audit for violations on a 6-12 month basis – these could include business expense reports, cash and sales reconciliation, vacation and sick day reports, violations of email/social media or Web-use policies, and so on.


  1. Recognize the Signs

Studies show that perpetrators of workplace crime or fraud do so because they are either under pressure, feel under-appreciated, or perceive that management behavior is unethical or unfair, and rationalize their behavior based on the fact that they feel they are owed something or deserve it.

With this in mind, some of the potential red flags to look out for include:

  • Not taking vacations – many violations are discovered while the perpetrator is on vacation
  • Being overly-protective or exclusive about their workspace
  • Prefers to be unsupervised by working after hours or taking work home
  • Financial records sometimes disappearing
  • Unexplained debt
  • Unexpected change in behavior
Have you read: 5 Common ways employees steal
  1. Set the Right Management Tone

One of the best techniques for preventing and combating employee theft or fraud is to create and communicate a business climate that shows that you take it seriously . Here are some simple steps you can take to keep your finger on the pulse:

  • Reconcile statements on regular basis for fraudulent activity
  • Hold regular one-on-one review meetings with employees
  • Offer to assist employees who are experiencing stress or difficult times
  • Encourage open-door policies giving employees the opportunity to speak freely and share their concerns about potential violations
  • Create strong internal controls
  • Require employees to take vacations
  • Treat unusual transactions with suspicion
  • Trust your instincts

How have you encountered workplace theft or fraud? How did you deal with it or what preventative measures do you use? Leave a comment below.


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