Understanding and Preventing Occupational Fraud

November 10, 2021

By Hubert Klein

This article was originally published on March 8, 2019 and has been updated to reflect current circumstances and events through November 10, 2021.

Learning that a trusted employee is stealing from the company can be a shocking experience. Owners or management may feel like looking away and hoping the theft is an isolated incident, or they may react emotionally. Neither is a good response as ignoring the issue can encourage further theft and an emotional reaction could get you into legal hot water. Developing and implementing protection against theft, before it ever happens, is the best choice to minimalize occupational fraud.

Understanding why and how employees decide to steal is important to deter and mitigate your losses.

Types of Occupational Fraud

Employees commit various types of theft which are known as occupational fraud. The most common type of occupational fraud is stealing cash directly from cash register, which operates on petty cash systems of cash payments for services. This is commonly referred to as embezzlement.

In general, embezzlement is simply theft or diversion of company resources for the employees own personal benefit. Contrary to what most people believe, money is not the only thing that gets stolen. An employee can commit theft with a variety of methods, some simple and others more complicated. 

Basic examples of occupational fraud include:

  • Stealing cash
  • Using company credit cards for personal purchases
  • Stealing company checks and forging a signature or, if employee is an authorized signatory on the account, writing checks for personal use
  • Falsifying or exaggerating expense reports
  • Lying on time sheets, resulting in the employee being paid for time that they were not truly working.

More sophisticated occupational fraud includes:

  • Creation of fictitious vendors or employees
  • Kickbacks from clients or vendors in exchange for contracts
  • Subordinates coerced into performing services for the thief
  • Filing fraudulent and purposefully misleading financial statements
  • Manipulating inventory to cover thefts that have occurred
  • Unauthorized use and misappropriation of intellectual property through stealing and/or selling internal data files and trade secrets to third parties

Why do Employees Steal?

Like all crime, employee theft requires both motive and opportunity.

Research shows that employees who steal generally have one or more of the following motives:

  • Addiction to drugs, gambling, or another vice
  • Living beyond their means
  • Justifying taking a little from the company to maintain a lifestyle
  • Feels disrespected from being passed over for promotion or being demoted
  • Enjoy the adrenaline rush of the act and trying to prove they are too smart to get caught

Opportunity generally appears when a business owner delegates daily financial responsibilities to one or more employees who are generally considered trustworthy and loyal employees. Often, these individuals work in the following financial departments of a company and are responsible for:

  • Bookkeeping
  • Banking
  • Accounts receivable
  • Accounts payable
  • Custody or supervision of assets

Many times, this financial wrongdoing is due to a lack of supervision of controls results where basic accounting and bookkeeping controls are not properly implemented in new or growing businesses.

Most employees who commit embezzlement justify or rationalize their theft while stealing even larger amounts. Many thieves start by pocketing small supplies and amounts of money. As they get away with these small thefts, the thieves grow emboldened, willing to spend more and more of the company’s money.

Detecting Employee Theft

Employees who steal often provide warning signs that something is amiss. Here are some warning signs that could tell you an employee is helping him or herself to a business’s money:

  • Excessive personal spending beyond what the income would support
  • Employee refuses to take a vacation in case the replacement detects the theft
  • Employee wants to take work home or continually works overtime
  • Petty cash disappears too quickly
  • Employee has an unusually close relationship with one or more vendors or are related to independent contributors who work for you
  • Employee is suffering financial difficulties
  • Employee has excessive control issues

What to Do If an Employee Steals From Your Company

When handling an employee that has stolen from the company, the owner or manager has several options. Termination is usually the preferred step in dealing with the wrongdoer, and many times is your only real choice for employee theft.

To build the case for termination you need to:

  • Gather evidence, including video, digital, and witnesses
  • Audit the computer files and financial records
  • Preserve documents, computer files, and emails
  • Maintain a chain of custody to prove there was no tampering with the evidence
  • Create copies of all evidence to prevent any unfortunate mishaps with tapes or documents disappearing

After employee termination, it is up to the employer to determine if they want to press charges and take the necessary legal action to attempt the theft recovery.

Occupational fraud is a serious issue that is faced by every type of business organization. In addition to causing lost profits and cash flow, employee thefts can have a serious negative impact on the company’s reputation and ability to conduct business. It’s key that organizations preemptively establish controls to prevent and deter any potential thieves and then continue to adapt these controls to grow and advance with technology. With appropriate controls and testing, companies can minimalize fraud.

About Hubert Klein

Hubert Klein a Partner, the Firmwide Valuation Services Leader, and the New Jersey Forensic, Litigation & Valuation Services (“FLVS”) Market Leader, is a nationally recognized expert witness and professional educator in forensic accounting, damages, and valuation topics.