All businesses have some exposure to employee theft, but according to the Association of Certified Fraud Examiners (ACFE), companies with fewer than 100 employees disproportionately bear the brunt of this problem.

The consequences of employee theft can be crushing, from loss of reputation and productivity to impact on profits—and the longer a fraud scheme goes undetected, the greater the loss. The ACFE reports that the average crime scheme lasts about 18 months, while a third of all fraud schemes continue for at least two years. And the financial toll can be staggering—the average commercial crime loss costs an owner $150,000, and many losses exceed $1 million.

While most companies survive this kind of fraud, many do not. The U.S. Chamber of Commerce says one-third of all small business bankruptcies result from employee theft. Statistics from the ACFE suggest most employees who commit fraud have worked for the company for more than five years. Employees who stay for longer periods of time often take on more responsibilities and, in turn, have more opportunity to commit larger frauds.

October is National Crime Prevention Month. Are you prepared to help your commercial clients mitigate potential employee theft-related losses with the right insurance and proven prevention processes?

Top 5 Employee Crime Schemes

What should you tell your business-owner clients to watch out for when it comes to employee theft? Based on an in-depth study, The Hanover identified these five common employee-related crimes:

1. Billing and vendor schemes: employees set up false vendor accounts and then bill their companies for non-existent parts or services
2. Check tampering schemes: employees use company checks to pay themselves, or reissue the company's old outstanding checks and change the payee to themselves
3. Payroll schemes: employees create “ghost” employees, add them to the payroll and direct-deposit their salaries into a fraudulent account they set up; or, employees fraudulently increase their salaries within payroll or HR systems, triggering payments in excess of their actual salaries
4. Expense reimbursement schemes: employees submit reimbursement requests for expenses never incurred or not of a business nature, and are then reimbursed for those fraudulent expenses
5. Social engineering schemes: one of the most prominent types of losses to impact companies within the past 20 years, these schemes intentionally mislead unsuspecting employees to send money or divert payments to imposters who impersonate vendors, clients, customers, senior executives or business owners

Reducing Risk

While most basic business policies provide some crime coverage, basic coverage may not be enough. Consider placing a standalone crime policy that offers coverage in the event that a commercial client’s employee steals money, securities or property. Even an entry-level crime policy can provide affordable coverage for a potentially big problem.

Depending on the type of business, it may also make sense to also consider a third-party off- premises policy, which can provide protection in the event that an employee steals from a client while working at the client’s location. Third-party off-premises coverage is crucial for technology and consulting companies, contractors, janitorial firms, health care providers and employee placement firms, along with other businesses that deliver, install or repair items at clients’ locations.

In addition to securing proper insurance protection, encourage your business clients to review their internal processes and procedures and implement the following best practices:

• In accordance with law, perform thorough background checks of all potential hires. Do not take shortcuts or make assumptions.
• Set up a system of checks and balances. Make sure there is clear accountability for every position and that no position has broad enough power to authorize payments without the consent of another individual.
• Set up an anonymous tip line where employees can report suspicious activity or business practices. Tip lines are one of the top ways business owners are alerted to fraud.
• Encourage all employees who handle accounting and payment functions to take vacation time, with another person handling their work in their absence. This fresh set of eyes may detect questionable practices or trends.
• Communicate often and clearly about employee conduct policy.
• Establish clear processes for vendor acceptance and setup, inventory control, and expense reimbursement.
• Do not allow discrepancies to be attributed simply to the cost of doing business. Be sure to conduct a thorough investigation of all discrepancies.
• Implement a call-back procedure to protect against social engineering-related losses. When a change in vendor bank account information is received or requested, or when a nontraditional internal wire transfer is received or requested from a purported owner or senior executive, employees should call the requester back using a predetermined phone number on file.

From inventory theft to falsified expenses, payroll fraud and more, no business is immune to employee theft. But independent agents can identify effective crime insurance solutions, putting their business clients in a better position to withstand and prevent employee theft.

Steven Vardilos is vice president of fidelity and crime at The Hanover Insurance Group, Inc. This material is provided for informational purposes only and does not provide any coverage.