Internal fraud, also known as employee theft or embezzlement, is a growing problem that can not only cripple companies but also drive up prices for consumers. The Association of Certified Fraud Examiners (ACFE) defines internal fraud as “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets.”

In terms of general theft, the “Annual Retail Theft Survey” by Jack L. Hayes International found some shocking stats for 2012: 

  • 71,095 dishonest employees were apprehended.
  • Over $50 million in assets were recovered from employee apprehensions.
  • On a per-case average, dishonest employees steal 5.5 times the amount stolen by shoplifters.

Whether or not your business is currently being affected by fraud or employee theft, implementing the following 10 tips can ensure your business’ assets stay protected. 

1. Set the Tone at the Top 

Management sets the example for employees, not the other way around. So if employees see their managers deceiving vendors, customers or other employees, they will be much more likely to rationalize doing the same thing for their own benefits. As a manager, you have a real opportunity to build an honest workplace through your own behavior. Another thing managers should take into account is their general demeanor and conduct with employees. If you are a “yeller” or treat your employees with disrespect, they may take that as a green light to disrespect you in return, perhaps by stealing. 

2. Run Background Checks 

Employees with a history of fraud tend to jump from company to company with ease. This is because too many employers skip the background check during the application process. Companies like HireRight provide nationwide background checks that prowl a myriad of databases. Using one of these services might cost you now, but it can potentially save you a lot of cash and headaches down the line. 

3. Check References 

Make sure you contact the references provided by prospective employees. But don’t stop there. Applicants with something to hide may only supply contacts of friends or their closest allies at previous jobs. Dig deeper into their resume and employment history, and find at least one more supervising figure you can reach out to. 

4. Random Drug Testing 

ACFE’s Fraud Triangle labels “three components which, together, lead to fraudulent behavior.” The first leg of the fraud triangle represents “perceived pressure.” This is what potentially motivates a crime and is the result of an individual having some financial problem, which in some cases may be the need to pay for a drug addiction. Random drug testing can give an employer insight into his or her employee’s lifestyle, which can then be used to determine the precautions needed to protect a company’s assets. At its most superficial level, drug testing will signal to your employees that you are a stickler for good behavior. 

5. Keep an Eye on Your Most Trusted Employees 

Although it’s nice to have established and trusted employees, the longer someone has been at a company, the less supervision they tend to have. They also have time to gain an institutional knowledge of how your business works, and they can have access to assets that other lower-level employees lack. Therefore, employees with a longer tenure have the opportunity to commit more expensive types of fraud than newer hires. Along the same lines, employees that are in a position of power may also find it easier to commit fraud or steal. Make sure to check and understand how money flows through your business. Some crimes occur not because of a criminal’s sophistication, but simply because no one bothered to see how the money flows. Be cautious and don’t overlook trusted employees, as they may be the ones costing you the most. 

6. Be Involved in Your Business 

As a business owner, it is important to be present at the workplace. If you can’t be there all the time, then attempt to make frequent unannounced visits. Not only is it a good idea to be available to your team, but your very presence signals to them that you’re serious about the business, which can stop fraud in its tracks. Having a good manager helps, but the influence an owner holds is unparalleled. Engaged owners have the opportunity to practice and perfect internal control, and this practice is extremely important, especially since deficiency in internal control is one of the top reasons fraud occurs. 

7. Install a Surveillance System 

With changes in technology, especially the switch from analog to digital video, investment in a good surveillance system should be considered by all businesses. Employees will be cautious of watchful eyes hovering above sensitive areas, which will almost certainly reduce theft. Camera footage can provide valuable evidence for investigations into ongoing fraud, and it’s also beneficial for many other reasons, such as reviewing a questionable transaction or protecting you from liability in the event of a serious crime or accident at your business. In addition to cameras, another popular method of tracking employees is to use an exception-based reporting (EBR) system at your point of sale. EBR will flag possible fraudulent transactions, such as excessive refunds or voids. 

8. Implement a Buddy System

Similar to the risks associated with trusted employees, theft commonly occurs when one employee is left alone in the store or at a register. Putting a buddy system in place, in which more than one employee is always present, is a simple solution to help deter thieves. Mark Doyle, president of Jack L. Hayes International, suggests having two employees work for both opening and closing, and to always have a second employee or manager witness refunds and voided transactions. As these actions will limit opportunities for theft, the price is worth the payoff. Additionally, frequently rotate these pairs, and do your best to not pair friends. 

9. Regulate Trash Removal 

Theft via trash removal is not just a tactic used in movies. Stealing merchandise by placing it in outgoing trash and then taking it from the dumpster later is a very common means of thievery. This is an example of the necessity of having sufficient internal controls. Though it’s a dirty job, owners and managers should have controls in place to make sure it works. Here are three rules to implement: 

  • Use clear plastic bags.
  • Flatten all boxes.
  • Lock the dumpsters. 

10. Establish an Informant System 

Among any group of corrupt employees are many good ones, and it’s the good ones and their tipoffs that are the best sources of fraud detection and prevention. You should establish methods for employees to anonymously deliver tips about suspected fraud to their superiors. Options include a locked suggestion box or an anonymous hotline. Email can work, but submissions will not be anonymous unless everyone sends tips from the same email address. If you’re interested in implementing a hotline, information and tips for its setup can be found on ACFE’s website. Though tips are typically offered in good faith, if it’s feasible, you could even offer a reward to employees who help stop organizational theft. 

Implementing these 10 tips should drastically decrease the likelihood of employee theft, freeing you from one concern to help you focus on running your business. If you need help discerning the type of fraud occurring at your company, use the ACFE-developed Fraud Tree to identify employee schemes.