Newswise — Businesses making resolutions for a more profitable New Year can begin by looking inside to analyze and address the growing problems of employee embezzlement.
While the Enrons of the world have made the biggest headlines over fraud-related losses, Creighton University accounting professor Mark Taylor says it's also a concern in small companies, where employee theft - not management fraud " can also lead to business failures.
For example, Taylor says three out of every 10 business that fail do so as a result of employee embezzlement.
According to studies, an estimated 30 percent of employees actively look for ways to steal from their employer. Further, fraud costs businesses an average of $9 per day, per employee and businesses lose an average of 6 percent of their revenue to fraud.
"It's massive," says Taylor, who holds Creighton's John P. Begley Endowed Chair in Accounting. "Fraud is rampant."
Retail businesses are used to taking measures to reduce losses from shoplifting, but employee theft can be even more damaging and it is often more difficult to discover.
"The likelihood of employee fraud is inversely proportional to company size, meaning smaller companies are the most vulnerable, What makes smaller companies more vulnerable is the lack of emphasis on internal control," Taylor says. "Smaller companies don't often realize that they may have allocated or assigned conflicting job responsibilities to employees. That gives dishonest workers the opportunity to commit fraud."
There are still plenty of things smaller businesses can do to help reduce the risks of employee fraud.
"Once they know what the risks are and understand some basic controls, most employee fraud can be prevented," Taylor says.
The first thing business owners needs to understand is that they - not their employees - are primarily responsible for preventing theft and embezzlement.
Taylor says some training or study may be needed to prepare the small business owner to address the problem. That can begin with a simple understanding of what he calls the fraud triangle.
The first piece of the triangle requires that the individual be under some sort of pressure to commit the act, Taylor says. That can come in the form of actual financial pressure to meet needs or the person's desire to "have it all."
Secondly, the person committing the fraud must have the opportunity to commit the crime. The individual may be in a position of handling money or disbursing payments, such as payroll or paying bills, according to Taylor.
The third element of the triangle requires that the thief is able to rationalize the act. Taylor says studies indicate that 40 percent of Americans are honest virtually all the time, 30 percent are situationally honest. Thirty percent are frequently dishonest.
By its very nature, since fraud is deceptive and involves an effort to conceal the act, it can be difficult to detect.
Incidents of robbery are confrontational by nature and burglars often leave signs of their work allowing those crimes to be quickly discovered. But theft by fraud can take place over an extended period of time, sometimes over several years, with the perpetrator typically getting greedier over time.
Taylor says that is why it's very important not only to have prevention systems in place, but also early detection systems to stop any fraud that is not prevented from becoming much larger.
Depending on the specific act, fraud can involve multiple individuals, inside and outside the company or on different levels of the corporate structure. "Fraud can be greatly reduced by hiring honest people," Taylor says. The use of background checks, if done properly, can screen dishonest people out of the employee pool and reduce fraud."
Taylor says another way to reduce employee theft and fraud is for employers to prosecute offenders once they are discovered, owners too often fail to prosecute employees who steal from them and simply fire the individual.
"That individual will eventually obtain another job, and immediately look for ways to embezzle from the new employer," Taylor says.
Creighton is an independent, comprehensive university operated by the Jesuits. Creighton has been ranked at or near the top of Midwestern universities in the U.S. News & World Report magazine's "America's Best Colleges" edition for more than a decade.
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