The Enemy Within

The Enemy Within By Scott Castleman

When it comes to crime, employee theft and fraud are as American as Apple pie. Today's business and industry face an uphill challenge from the moment they open for business. Some areas of theft are easier to detect than others while white-collar fraud can take years to discover. Any way you look at it American business owners lose billions annually to crime. We would like to think that the main perpetrator of crimes would be the shifty criminal, labeled as a "menace to society" that wears a ski mask and robs business owners at gunpoint. Unfortunately, although this does occur, 35% of all business failures are attributed to employee theft and fraud. Although there are literally thousands of ways a business can become victim to their employees, we will examine two of the most common areas-employee theft and fraud.

Employee theft is defined as theft of profits from a business by employees. Every year millions of employees steal billions of dollars worth of merchandise and cash from their employers. Current rough estimates reveal that dishonest employees annually cost businesses and industry twice as much in cash and merchandise as do all the nation's burglaries, car thefts, and bank robberies combined. These astonishing acts are not being committed by "street criminals" whose immoral behaviors are presented daily by the media as a "menace to society." They consist predominately of solid, well-educated, respectable citizens who pay taxes and believe firmly in setting good family values, as well as in the virtues of hard work and honesty. These individuals are also quickly infuriated by the thought of welfare abuse, street thugs, and the literalness of immorality, which they believe is upsetting the established social order. Ironically, these individuals do not regard themselves as criminals.

All instances of internal theft are not the same. Employees have numerous reasons and justifications for embezzling money and stealing merchandise, which is typical in the retail trade. A vast amount of internal theft is committed indirectly by such means as discounts, loans, and acquiring damaged goods.

I was recently speaking with a client who advised me that he has never had any internal theft issues, but shoplifting was a huge concern. I then told my client, "How fortunate you must feel, having the only business in the United States never to have had a dishonest employee." It is this sort of naīve thinking that forces many retailers out of business. In fact, a major insurance company recently reported that one in three small business failures can be attributed to internal theft. Let's face it, dishonest employees steal more before lunch than shoplifters steal all day. It is genuinely naīve to believe that employees, whom you trust implicitly, will not betray you. Not one single employee is above reproach, however difficult this is for you to believe. Internal theft is a time-honored profession in which its perpetrators know exactly what they can and cannot get away with. The easiest way to embezzle money from an employer is to be well liked, perform one's job well, and appear to be above reproach.

Most employees do not start out as thieves. Several symptoms must present themselves in order for an employee to turn dis-honest. A symptom of what? Well, a symptom of what the employee perceives as:

Inadequate pay
Not receiving promised raises
Pressure to achieve unreasonable goals
Unfair treatment by management
Overworked and under appreciated
Favoritism
Lax methods of discipline
Unwillingness of management to listen

To many employers these symptoms may be real or imagined, but to the employee they are real and at this point many employees begin looking for ways to retaliate. In all incidents of theft a triangle is present, known to professionals as the theft triangle. It consists of three elements:

Need or greed
Rationalization
Opportunity

Once the rationale to justify embezzlement is established, all that's needed is the opportunity. Employees generally will not steal from an employer whom they look up to and respect, one who appreciates their efforts, who treats them like human beings instead of puppets, and who sets an example of impeccable integrity. However, they will steal from an employer who allows their frustration and resentment to build up to a boiling point. Commonly, embezzlement is simply a form of retaliation. In order to combat and reduce employee theft you must eliminate the "opportunity" by establishing a solid written loss prevention pro-gram. By doing this you will greatly reduce your risk of theft incidents by your employees.

It is important while establishing these programs to keep in mind the following statistics: 10% of your employees are honest and will remain honest no matter what polices are established, 10% will steal regardless, and 80% are generally honest and will remain honest if you create an environment which discourages and detects theft. As the risk of getting caught increases, the probability of theft decreases.

Detecting dishonesty within the workplace is not always a simple task. However, looking for signs or red flags is the first step to prevention. Red flags to employee dishonesty can either be found in an individual's behavior or through company records. An alert business owner or manager should look for the following signs and should consider further investigation when any of them appear:

Red Flags To Internal Dishonesty

Frequent visits by friends
Excessive use of alcohol or drugs
An abrupt change in lifestyle (living beyond their means)
Close social relationship with suppliers and or customers
Frequent borrowing of money from other employees
Obsessive neatness in work orders and bookkeeping
Refusal to take vacations
Taking long lunch breaks or frequently arriving or leaving late

Confession of a teenage employee told by an eighteen-year-old record store clerk

I got this job at a local record store. It was a big national chain and they made lots of money. I got the job because I was in a local band; sort of the NW grunge thing and I knew a lot about music. It was no secret that all the managers of the store were drunks. So most of the time the employees took advantage of that weakness. Everyone in the store knew they left for lunch at 12:00 and would not return for the rest of the day. It started for me by taking a few bucks out of the till every day for lunch and smokes. An employee taught me how easy it was to make change to customers without even ringing in the sale. The only hard part was remembering how much money to take out. The more I took the harder it was to stop. It almost became addictive...like a drug, I had to do it. Eventually I didn't even look forward to picking up my check on payday because it paled in comparison to what I made out of the till weekly. The funny thing is I was not the only person doing it; just about everyone had his or her hand in the till. I think even the managers were sneaking a few bucks. Sometimes to make a little extra money I would stick a bunch of CD's in the trash, pick them up later from the outside trash, and sell them to other record stores. Yeah, they had undercover security but everyone knew they only made $5.00 an hour, so they were no real threat. It kind of made it more challenging. I guess I really did not need to steal money because I lived at home and had no bills. But it was just too easy. And management was just so stupid. I no longer work at that record store. I got a job that I actually enjoy now and the pay is a little better. -Drew

Prevention Strategies

Conduct Background Checks. Any position you fill within your business should be begun with a complete pre-employment background check. Retain a reliable firm to perform the inquiries. No exceptions should be made.

Set a Policy. Establish a strict internal theft policy and stick with it. It is time to move beyond minor punishment or termination and prosecute your dishonest employees. Your employees must realize that you will not tolerate theft.

Establish Internal Controls. When a lack of internal controls is present, so is the opportunity to steal. Eliminate the opportunity by establishing standardized controls, which provide consistency and uniformity that will reduce incidents of fraud.

Educate Employees. Show your employees how bottom-line repercussions of theft affect the company and encourage their help. Outline procedures for reporting theft, ensure confidentiality, and lay out the consequences of dishonesty. Clear and concise policies provided in writing at the time of hire must be continually rein-forced, and continuing education to all employees is critical to how seriously your employees will take your policies.

Use Covert Investigative Techniques. There is nothing more harmful to employee morale, productivity, and profits than upset-ting loyalty. It is easy to create a climate of suspicion and mistrust by clamping down in highly visible ways that convey a "we don't trust you" image. An effective program must be capable of preven-tion, yet be aesthetically pleasing.

Remember, when employees steal from their employers, the underlying factor is most often some form of injustice, either real or imaginary. An alert business owner works diligently to avoid both the reality and the perception. If you treat your employees like members of a team, they will reward you with honesty and loyalty. Treat them like puppets and they will constantly be looking for ways to outsmart the puppeteer. Most business owners, because ways to outsmart the puppeteer. Most business owners, because they are only human, become a part of the problem. Even after a theft occurs and the employee is identified, the manager typically tends to think of all the "good" things that employee has done and exhibits compassion for the employee.

Acceptance of any form of dishonesty, for any reason, is a mistake. This misled compassion becomes the very base, the underlying cause for most of the corruption it seeks to correct. Compromise has replaced the moral absolutes that have held our society to-gether. And such compromise is the singular reason our society is falling to pieces. Shoplifting, fraud employee theft and disregard for the law are not the problem. They are just a symptom of a generation, which does not stand for anything.

Corporate Fraud

Corporate fraud is defined as a crime committed by an individual in a company with or without the company's knowledge in an attempt to increase profits. These criminals are not your ordinary street thugs. Most are well educated, intelligent, and hard working businessmen and woman who have fallen prey to the criminal element and have seeped into every nook and cranny of American society. White-collar crime and fraud are very difficult topics to dis-cuss, due to the large variety of crimes committed within this category. It runs the gamut of:

Large-scale embezzlement (from 1950-1971 100 banks failed as a result of employee embezzlement)
Bankruptcy fraud (illegally accepting bankruptcy to avoid debt)
Insurance fraud (fraudulent insurance claims or intentional destruction of property for purposes of collecting insurance money)
Medical fraud (doctors and physicians and their staffs taking advantage of medical benefits programs)
Dangerous foods (e.g., Hormel Foods reprocessing spoiled meats)
Deceptive advertising (using advertising to mislead custom-mers about products)
Price fixing (businesses conspiring to keep their prices arti-ficially high)
Illegal or unsafe work conditions (Union Carbide was cited 266 times by OSHA for not providing employees with safe breathing devices)
Theft of public resources
Consumer fraud
Corporate espionage

Although the above examples do not even begin to scratch the surface of the problem, it allows you to understand the importance of identifying and protecting your company from such fraud and deceit. Often high-ranking management personnel are the ones who commit the crimes. This type of crime costs Americans in excess of $500 billion. As far as illegal or unsafe work environments, the loss of life is estimated at approximately 100,000 deaths per year. Homicide and manslaughter are estimated at approximately 20,000 annually.

Top Corporate Criminals:

Exxon Corporation. Crime: Environmental. Fine: $125 million
Bankers Trust. Crime: Financial. Fine: $60 million
Sears Bankruptcy Recvry. Mgt. Crime: Financial. Fine: $60 million
Damon Clinical Laboratories. Crime: Fraud. Fine: $35.2 million
Pfizer Inc. Crime: Antitrust. Fine: $20 million
Royal Caribbean Cruises Ltd. Crime: Environmental. Fine: $18 million
Northrop. Crime: False statements. Fine: $17 million

Fraud can be for the benefit and gain of an individual, a business, or an industry. When an individual commits fraud the benefits may be direct, such as receipt of money or property, or indirect such as promotions or bonuses. When a business commits fraud, the benefits to the business are usually direct in the form of financial gain. Some states have specific laws relevant to fraud. Other states have laws that deal with the fraud on a more specific level, such as larceny, bribery, embezzlement, or some other specific crime. Most business owners have a difficult time discovering that fraud has occurred until it is too late. It is essential that business owners maintain strict internal audit policies and adhere to them. If something does not seem right, contact a private investigation firm, which specializes in corporate fraud. Investigation firms with detectives who are Certified Fraud Examiners will probably be the most suitable. Business owners have an obligation to be alert to the possibility of crime within their business or industry since not being aware could result in the loss of life or of millions of dollars.