What’s the most embarrassing thing that has ever happened to you? How about the thing that angered you the most. For a business owner, theft by an employee has got to be right up there. Couldn’t happen to me you say. A quick search of the internet reveals otherwise. For instance, one site states: “The chamber of commerce reports that 75% of employees steal from their employer; an article in the Denver post indicated that US companies lose over $400 Billion per year due to employee “time theft”; and the American Society of Employers estimates that 20% of every dollar earned is lost to employee theft.” Still think is can’t happen to you?
Where is the risk for employee fraud? I suggest that it is employERs. Edward Demming, the guru of Total Quality Management, stated that management is 80 percent of the problem in business. Sound a little harsh? I contend that employee theft largely occurs due to the absence or failure of internal controls and that is the fault of management. Perhaps the company has grown from a small startup to a company of significance, yet the knowledge and implementation of a system of internal controls has not kept pace. Maybe management wants to create an environment of trust and therefore certain internal controls are avoided. There may be a belief that management has a firm handle on the company and that any employee fraud would be easily detected. There may be a host of reasons that a system of internal controls are not implemented, often to the detriment of the business.
Who’s the culprit? An Association of Certified Fraud Examiners study revealed that 67.8% of those committing fraud were employees, 34 percent were managers, 12.4 of which were owners. While men age 40-50 committed the highest number of frauds, college educated older men cause losses four times higher. Women create as many frauds a men, but the amounts are considerably less. Because management is so often involved in the fraud, it is especially hard to detect. Also fraud is most often initiated by persons that do NOT have a pervious criminal history. Clearly, fraud is not easily detected.
Why do employees commit fraud? In his article, Other Peoples Money, Donald Cressey presented the Fraud Triangle which depicts the three elements that every fraud had in common – Pressure, Rationalization and Motivation.
Pressure suggests that there is something that has occurred in a person’s life that has caused such a significant need for money that they are willing to consider stealing to relieve the stress. Rationalization is the employee’s means of justifying their actions. They are only borrowing. No one will get hurt. The company wastes far more money than I am taking. They deserve it. Opportunity is reflective of the knowledge that employees have of the company’s operation such that they know how to circumvent whatever internal controls do exist. The one factor that employERs can control is “Opportunity.” A strong system of internal controls will minimize the opportunity for employees to commit a crime.