Most Employee Theft in SMB Occurs in Financial Services Industry
Seventeen percent of employee theft in organizations with fewer than 500 employees occurs in the financial services industry, according to a new report.
The 2016 Embezzlement Study utilizes employee theft cases that were active in the US federal court system in 2015, specifically those cases occurring in companies with fewer than 500 employees, which represents 69 percent of all federal cases.
"The impact of employee theft can rock an organization to its very core," said Doug Karpp, Crime & Fidelity Product Head at Hiscox. "There is of course an obvious financial impact, but the ripple effect of employee theft threatens the trust employers place in their teams and damages morale."
Why Good People Go Bad
Perpetrators are often people who are smart, well-liked, and those whom you'd least expect. There are, however, four driving factors that can turn a trusted employee into a criminal, including pressure, opportunity, capability and rationalization(1).
Pressure: An employee is put into a situation which, seemingly, can only be relieved by additional funds. This pressure often results from gambling, investment, or business losses; medical expenses; or significant debt.
Opportunity: Employers should be particularly watchful of employees who have the opportunity to embezzle. More senior, trusted employees, for example, may be more likely to have access to secure files and authority of controls, providing more opportunities to fix the books and cover up their crimes without detection.
Capability: Embezzlers are also often the ones who have the skills and knowledge to commit fraud.
Rationalization: Perpetrators often rationalize their crime by convincing themselves they are providing for their family, feel underpaid or that they were not treated well, or think others are stealing, too.
"Understanding the reason why employee theft happens and the psychology of a potential perpetrator are the first steps to mitigating fraud," said Karpp. "Once you understand that, enacting controls will help manage exposure for businesses of all sizes."
Profile of an Embezzler
Data from the 2016 Hiscox Embezzlement Study reveals several common traits of a 'typical embezzler.' According to the report, the median age of an embezzler was 49, and women represented more than 56 percent of perpetrators.
The data shows that most instances of employee theft involved bookkeepers, which accounted for 11 percent of all cases. A quarter of all employee theft schemes were perpetrated by employees in senior roles within the organization. Senior level executives left the most punishing mark on the organization with their theft, orchestrating schemes with a median loss of $966,000. The healthcare industry has the highest percentage of managers who embezzled, with 65 percent of fraud cases perpetrated by those in a management position. Among municipal governments, there were slightly more managers (63 percent) than employees (38 percent) who embezzled, but the median loss for schemes perpetrated by managers was nearly three times as high.
Every Company is Vulnerable
US organizations with up to 500 employees experienced a median loss of $341,710 per year due to employee theft. Although the sizes and types of theft vary by industry and region, small businesses were found to exhibit higher instances of embezzlement overall. Over 80 percent of thefts occurred at companies with fewer than 150 employees, and just under half had fewer than 25 employees. In both small businesses and large organizations, funds theft is the most common scheme in nearly every industry.
For business owners, Hiscox recommends the following best practices for fraud prevention: 1) Never give one-person end-to-end responsibility for accounting or accounts payable; 2) Pay attention to employee lifestyles; 3) Conduct lawful background checks; 4) Educate employees; and 5) Promote a culture of trustworthiness and integrity.