Curbing Employee Theft

From Human Resource Executive Online
By Sally Still and Meghan Lehner

Employee theft affects both large and small employers, and is on the rise. Employee theft takes many forms and is a significant source of loss for employers, and surveys suggest that such theft is increasing. But companies do not appear to be taking increased action to combat the problem. HR must play an influential role in this area to reduce, if not eliminate, losses.

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According to a report by i4cp Inc., more than one-quarter (27 percent) of respondents in large companies -- those with 10,000 or more employees -- said theft in the workplace has risen during the current economic crisis, while 15 percent, regardless of company size, reported that it stayed the same.

"Employers are hot targets for theft because workers know their systems, controls and weaknesses, and they can bide their time waiting for the right opportunity," according to a Dec. 11, 2008, Wall Street Journal article.

U.S. organizations lose about 7 percent of their annual revenues due to fraud, according to the Association of Certified Fraud Examiners, which attributes most of that fraud to accounting departments and upper management.

Indeed, the U.S. Chamber of Commerce estimates that employee theft may cost American businesses as much as $50 billion on an annual basis. The Chamber has also reported that 30 percent of small business failure is caused by employee theft and estimates that 75 percent of all employees steal once, and one-half of those steal a second time.

The things that employees steal generally falls into two categories -- tangibles and intangibles -- and employees generally steal one of three ways: directly, by manipulation or by siphoning.

Tangibles includes both the company's inventory -- for example, the widgets and the parts or resources that go into making the widgets -- and the items the employer keeps on hand to help it conduct its business, from postage stamps and envelopes to telephones and gasoline fueling company cars.

For example, the plumbing contractor's employees steal copper pipes from the job site to sell for scrap; the security guard removes items he is supposed to be protecting; and the office worker uses the employer's postage meter for his or her own benefit.

Typically, these tangible items are stolen directly by the employee or employees acting together.

Intangibles include money, time and information. These intangibles are often stolen electronically. Commonly understood as embezzlement, the employee manipulates company data in order to steal money indirectly.

For example, the payroll manager places a "ghost" employee on the payroll and keeps the money herself; the sales clerk takes the employer's customer's credit-card information to make purchases for himself; or the AP/AR clerk creates fake vendor invoices and then prepares checks to pay the invoices, and keeps the money for himself.

Sometimes the theft is seemingly obvious. In one case, a bookkeeper (who prepared all the checks for the business) embezzled from the company and used the cash to buy expensive gifts for her fiancée, one of the company's principals. The principal did not understand how his fiancée managed to afford such extravagant gifts on her salary.

In another case, an attorney's assistant purchased so many clothes with money she embezzled from the firm that she had to convert her second bedroom into a closet. Her employer did not understand how she could afford to wear a new outfit every day.

While these employees' thefts were discovered by audits, such examples also illustrate the importance of recognizing when things just don't add up.

Thefts of Time or Intellectual Property

Theft of time is another form of intangible theft. This form of theft is accomplished by siphoning or slowly wasting the employer's assets over time.

For example, employees take long or frequent paid cigarette breaks; spend excessive time on non-work related internet activities such as Facebook (which may be considered both theft of company time and misuse of company property); or engage in work off the books for another employer while on paid workers' compensation leave for a workplace injury.

In one case, an employee was on workers' comp leave for a back injury when he was discovered running a furniture-moving service on the side. Then there was the painter who drove a company vehicle, complete with GPS and an automatic highway toll pass, to different locations as he attended to personal activities, yet charged the employer (and the employer's client) for his time.

In these last two examples, the employees' activities were discovered through a form of surveillance. The first was discovered by the workers' compensation carrier's investigator, who videotaped the employee moving furniture; the second employee was discovered by comparing the toll pass log reports and GPS signals with the work orders the employee completed purporting his location.

In industries in which client names are particularly valuable, such as financial services, employees may misappropriate client lists or clients' personal information.

Other intangibles include intellectual property, and the employer's proprietary ideas, methods, and processes are all forms of property that are at risk.

Concomitantly, employees are ever more technologically savvy and some are using that knowledge to gain access to their employer's financial information, client lists and other propriety information. For example, a recent lawsuit filed by Microsoft alleges that an employee sought and obtained employment with Microsoft for the sole purpose of stealing information to support a patent-infringement case he planned to bring against the corporation.

The employee, who owned a start-up company, believed Microsoft had stolen his ideas. Once the employee gained access to Microsoft's propriety information, he began downloading files. The employee thought he was covering his tracks by using software that deleted traces of the downloading, but Microsoft caught on and filed suit against the employee for theft of confidential documents, fraud and misappropriation of trade secrets.

In another case, a bank alleged that five former employees took confidential information about wealthy clients when they left for new jobs with a competing brokerage and investment banking firm for the purpose of stealing the clients. The bank's lawsuit alleges that, before the employees quit, they transferred confidential customer information from their company computers to their personal e-mail addresses.

HR's Role

Employers need to proactively respond to the issue of employee theft, or they risk becoming a statistic.

One of the most effective ways human resource leaders can play an influential role in by make sure the organization is hiring the right employees. That's obvious, of course, but it is also easier said than done.

A good start is by using pre-employment tests specifically designed to predict and forecast potential theft problems, performing criminal-conviction checks, drug screenings and reference checks in an attempt to minimize employee theft. Therefore, HR's role in creating procedures and processes for performing thorough and effective background checks is critical.

Another way of reducing, if not eliminating, employee theft is for the employer to create a perception of detection. Generally speaking, employees who fear they will be caught stealing are less likely to steal.

Internal controls and procedures created by HR, such as anti-theft policies requiring employees to report instances of theft or even rewarding such reports, let employees know that other employees, managers and executives are actively seeking out information regarding internal theft.

Audits, job rotations, and employee education are additional ways employers are taking a proactive approach. Especially in large companies, it is important that HR collaborate with management and loss-prevention experts to document all potential sources of employee theft.

Anecdotally, it appears that employers are better able to address the theft of tangibles. Such acts are both easier to detect (by its nature) and easier to curb.

Surveillance cameras are frequently used. Some states, such as Florida, prohibit audio recording without permission of both parties, but permit the video recordings. Other states differ. Personnel policies may also provide for locker searches.

Likewise, company cell phones, GPS devices installed in company vehicles, and electronic highway toll passes each provide opportunities to monitor employees. HR should work with the employer's legal counsel when developing such policies and procedures to ensure the employer is complying with federal and state laws when engaging in such surveillance.

Theft of intangibles, especially when accomplished electronically by manipulation of data, is difficult to detect and difficult to curb unless certain proactive measures are instituted.

Certainly, good checks and balances are required. For instance, cash-reconciliation forms should be utilized; the AP and AR positions should be separate and the persons filling those positions should not be related; payroll and accounting audits should be performed regularly and randomly; employees should execute enforceable nonsolicitation and nondisclosure agreements to help prevent employees from taking valuable proprietary information to new employers; and IT departments should monitor computer usage and e-mail traffic and dispose of consumer reports data properly.

Generally, and based upon informal surveys of a cross section of employers, it does not appear that employers are engaging in more or heightened surveillance at this time. In light of the companies reporting an increase in theft, this is probably short-sighted.

Employees' theft of employers' property is a significant source of loss each year. Any property that the employer values is at risk. HR leaders should understand both what is at risk as well as where their organizations are vulnerable. In doing so, they will be better able to implement measures to reduce, if not eliminate, losses.

Sally Still is a partner and Meghan Lehner is an associate at Buckingham Doolittle & Burroughs, LLP, both based in the West Palm Beach, Fla., office. Still has experience in all phases of employment and labor-related litigation from administrative actions (EEOC, NLRB and local deferral agencies) to federal and state court litigation (discovery, motion practice, summary judgment and trial), arbitration and appeals. Lehner practices in the area of employment law, labor law, employment discrimination, and civil rights and specializes in litigation relating to Title VII, ADEA, ADA, FMLA, FLSA, LMRA, employment contracts, whistleblowing, and retaliatory discharge.

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