Legal Trends

By Kevin M. Hart Apr 1, 2008

HR Magazine, April 2008 Not Wanted: Thieves

It’s not just ne’er-do-wells who are stealing.

Employee theft is something many businesses are aware of but believe does not apply to them— that is, until it is discovered. All too often, businesses fail to take appropriate steps to deal with this problem until it is too late. The fact that theft at your company is not readily apparent does not mean it does not exist. It just means that it has not been discovered.

Studies by the U.S. Chamber of Commerce, U.S. Justice Department, Association of Certified Fraud Examiners (ACFE) and other organizations confirm the existence and scope of employee theft. Some common findings in these studies show that the problem is large in terms of dollars, crosses all boundaries and is increasing at an alarming rate:

  • On average, companies lose 5 percent of their gross revenue to occupational fraud each year, according to the ACFE’s 2006 Report to the Nation on Occupational Fraud and Abuse.
  • Approximately 30 percent of all employees admit stealing from their employers, according to Common-Sense Measures Preventing Employee Theft, a U.S. Small Business Administration report.
  • 41.2 percent of the perpetrators of employee theft are managers, 39.5 percent are employees, and 19.3 percent are owners or executives, according to the ACFE. Sixty-one percent of employee thieves are male, while 39 percent are female.

Challenge the Myths

Human resource professionals can help educate managers to face this problem squarely by challenging several myths, such as the following, that managers frequently believe to be true:

Employee theft is rare. Studies have shown that virtually all employees are susceptible in varying degrees to temptations to steal if the opportunity presents itself. If an otherwise honest employee believes other people are wrongfully taking things from the company without consequences, the worker’s judgment may become clouded.

The loss isn’t material. The ACFE estimates annual losses at $50 billion to $70 billion. In the most extreme instances, a theft problem can have devastating consequences affecting the very survival of a company. The impact is even more pronounced on small businesses.

Most thefts go undetected. Studies show that most thieves eventually become careless and are discovered. Most are reported by co-workers (34 percent), discovered by accident (25 percent), or revealed by internal controls or audits (20 percent), according to the ACFE.

High wages prevent theft. Studies reflect that there is no direct correlation between wages paid and the presence or absence of a theft problem.

Crime does not pay. An employee that begins to steal rarely considers the consequences of being caught and instead focuses on theft’s more instant gratifications and gains. In addition, studies show that often companies are not willing to prosecute.

Why Are They Stealing?

The reasons employees steal from employers can generally be divided into two categories: the rationalizations of basically honest employees and the immorality of bona fide thieves.

Rationalization is the method otherwise honest individuals use to convince themselves that an act they know is wrong can be justified. We each have a personal code of ethics to determine right and wrong. A person normally should not steal, and, faced with a situation or an opportunity to steal, he or she should make the correct decision.

As evidenced by the size and magnitude of this problem, many employees do not make the correct decisions but instead rationalize their behavior to justify acts contrary to their fundamental sense of right and wrong.

Some of the more common rationalizations are:

  • Equity. Employees believe that they have not received what they are entitled to in compensation or credit for their job performance and contributions to the company.
  • Retaliation. Employees think they have been slighted or treated unfairly and seek to get even with the company by stealing from it.
  • Financial difficulty. Employees have personal financial difficulties and believe that “borrowing” from the company can solve the problem. If they are successful, the need to repay becomes less prominent until it disappears altogether.
  • Frustrated ambition. Employees believe that they are not appreciated for their contributions or loyalty. Often this occurs when an individual is passed over for a promotion he or she believes is deserved. If the employee is not going to be promoted, why put the good of the company ahead of personal enjoyment?
  • Low-risk opportunity. Employees proficient in their positions realize how the company’s system of checks and balances can be circumvented. Knowing how the system works, risk of discovery appears minimal.
  • Company attitude. Employees believe that the company is big and impersonal and that managers do not care about individual employees. In addition, employees convince themselves that the items taken are of no significance to the company.
  • Management example. Employees observe that managers steal. This can take many forms, but it sends a message to all employees that theft is not wrong or is tolerated.

Common Problem Areas

Handling of cash is one of the most common areas where theft occurs. Analyze how bank deposits are handled, who has control over them and how the deposits are monitored. Petty cash is also subject to abuse; however, the scope of this problem depends on the size of the pettycash allowance.

Other problem areas are accounts receivable and accounts payable, including lack of controls or central responsibility in one person.

If the same person is responsible for both accounts payable and accounts receivable, no one is able to check that person’s work to determine whether accounts are being properly recorded. Make sure that these responsibilities are separated.

In the accounts payable area, the primary concern is purchase orders and reconciliation of existing bank accounts. Have a different employee or an independent person such as an accountant review all bank account balances and reconciliations monthly.

A company cannot rely only on its annual independent audit to identify these types of issues. Most annual independent reviews do not include an analysis to determine whether the employees are correctly handling the company’s accounts. More important, it is normally the dishonest employee who provides the company information to the outside auditors, providing an opportunity to cover up any fraud.

In sales, shipping and receiving, the employer should look at how orders are placed and whether kickbacks are possible to purchasing managers for the purpose of influencing orders.

Theft Prevention

The best way to prevent employee theft: Hire the right people. It is easier and less expensive to prevent potential thieves from joining an organization than to apprehend criminals once they have been hired.

Probe and ask the types of questions that allow the interviewer to determine whether there are any problems in the background of the potential candidate. Large gaps between jobs or unexplained reasons for leaving a previous position should be explored.

In performing reference checks, learn the reasons someone left previous positions and identify other problems that may have occurred at previous jobs. Ironically, because of potential employment liability issues, many companies will not disclose specific instances of employee theft unless it was actually documented.

It is not uncommon for a company to terminate an employee for a theft but officially list a different reason, essentially passing this employee on to another employer to be victimized.

Credit checks determine whether a potential candidate has financial difficulties. This can be a major cause of an employee deciding to steal from an employer.

Besides hiring honest people, a company should establish and manage the climate of the organization. It has been said that theft is a state of mind. Prevention and control are merely states of awareness and caring.

Physical security cannot solve the problem alone because physical acts are not at the root of the problem; it is the mental attitude behind the acts that must be confronted.

It is important for a company to establish a series of values and beliefs. Every company should create a climate that supports and reinforces values such as honesty and integrity. Effective communication with employees is critical in this regard. Give employees an understanding of the company’s objectives and strategies.

Employees should have the perception that the company is well-run and that the owners and managers care about ethical conduct. Many companies have written codes of conduct that set forth right and wrong in a clear and unambiguous manner. A code of conduct should establish responsibility for all employees to report violations of the code, usually with anonymity.

A code of conduct should be distributed upon employment and reviewed with employees periodically. Compliance with the code of conduct should be a part of employees’ evaluations. This will motivate employees to adhere to company values.

All members of the management team should adhere closely to company values. If managers are seen to deviate from the values even slightly, employees may conclude that the values are mere window dressing. Creation of an appropriate climate in the company is a necessary precondition for the effective implementation of internal controls.

Define Theft

While thwarting dishonest employees is an important task, educating honest employees may be even more important. Every organization should define theft according to its own needs and circumstances. Employees must understand what the company considers theft and, more important, what the consequences are.

Most owners and managers naively assume that all employees know what theft is and that employees all see things as they do. This is simply not true. So, defining what theft is becomes a critical first step in developing an effective theft-reduction strategy.

The process used to define theft should include participation by a representative group of employees. In smaller companies, include as many employees in the process as possible. The more involved they are, the more committed they should be to the decisions made.

Internal Controls

Once parameters of the plan have been decided, institute a series of internal controls. Internal controls minimize errors and mistakes in transactions and recordkeeping. Internal controls can safeguard easily misappropriated assets such as cash and inventory. Good internal controls also reduce the work of external auditors and decrease their costs.

Virtually all internal controls involve dividing employee responsibility in three ways:

  • The authorization of transactions.
  • The physical custody of assets.
  • Timely recordkeeping with supporting documentation.

If a single employee has two or three of these responsibilities, the opportunities for theft and concealment are significantly increased. Therefore, when designing internal controls, the responsibilities should be separated, if possible.

First, study the company’s operations thoroughly. The flow of assets, particularly liquid assets like cash, securities or some inventory, should be traced.

Second, the flow of documentation and recordkeeping must be carefully identified. Once that is done, scrutinize particular weaknesses. Ask:

  • How could a theft take place?
  • How could a theft be hidden?
  • What could go wrong?

Threat of Prosecution

Threat of prosecution represents a major factor in deterring employee theft. While prosecuting may seem easy, it is a difficult and serious decision for managers.

A dishonest employee is likely to be a long-term employee with established friendships among co-workers, including managers.

The company will receive negative publicity, and will incur the inconvenience and time of assisting in the prosecution.

If the theft was motivated by the employee’s financial difficulties, prosecuting the employee will impose substantial financial and societal hardships on the employee’s family. The embarrassment to the family extends into the community, children’s schools, and organizations or religious institutions the employee belongs to.

However, if a company is not likely to prosecute an employee caught stealing, other employees may potentially be encouraged to steal. It is important that consistency, not sympathy, be the benchmark for a company policy to prosecute.

Open Eyes

Good and faithful employees are a company’s most valuable asset. To maintain that asset requires concerted effort to put into practice a philosophy encouraging a theft-free workplace. Managers have the responsibility to create the climate, to implement the systems and, most important, to lead by example.

Employee theft is an expensive and growing problem. Controls, all involving common sense, effectively prevent employee theft. However, managers must open their eyes, get out of their offices and show an interest in what occurs at the company. An involved manager will make the company better aware of clues that there may be a problem. Managers should not hesitate to use professionals for independent confirmations.

Much like protecting your home from burglaries, no matter how sophisticated a security system is, it will not keep out professional thieves. Such a system, however, will keep out amateurs and discourage professionals because they will pursue easier targets.

Kevin M. Hart, is an attorney at Stark & Stark law firm in Lawrenceville, N.J. He is a former deputy attorney general with the State of New Jersey, where he focused on white-collar crime.

Web Extras

SHRM web page:
SHRM Online Workplace Law Focus Area 

Online sidebar:
Make Sure Before You Accuse 

2006 Report to the Nation on Occupational Fraud and Abuse
(Association of Certified Fraud Examiners)

Research summary:
Small Businesses, Big Burdens: The Nature and Incidence of Crime Within and Against Small Business and Its Customers and Employees, Their Causes, Their Effects, and Their Prevention
(U.S. Small Business Administration) 

SHRM articles:
Investigating Security Breaches, Workplace Theft and Employee Fraud
(Legal Report) 

Risky Business
(HR Magazine)

The Five-Finger Bonus
(HR Magazine)

SHRM toolkit:
Preventing Identity Theft
(HR Magazine)


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