How Big of a Problem is Employee Theft and Fraud?

How much does employee theft and fraud cost U.S. businesses each year? Estimates range from $20 billion to $50 billion, making it one of the most costly and widespread challenges faced in today's business world. In this first installment of our two-part article, we'll give you an idea of the scope of the problem, including some statistics on how it affects companies in all industry segments. The second part will include suggestions from experts on how to protect your business from employee theft and fraud.

Types of Employee Theft

Never underestimate the opportunities for theft and fraud in your business! From taking home office supplies to devising elaborate embezzlement schemes, the possibilities for dishonesty are endless. Here are a few of the most commonly recognized types of fraud. See if your company is at risk for any (or all) of these:

• Larceny

  The taking of cash or property from the business. This category covers everything from taking cash out of the cash register to stealing inventory from the loading dock.

• Embezzlement

  The theft of cash or property by someone in a position of trust, like a bookkeeper or senior executive.

• Billing Schemes

  Setting up a false vendor account and paying the vendor (actually the employee) for nonexistent goods or services.

• Payroll Schemes

  Falsifying timecards to receive compensation for a greater number of hours than actually worked, or writing payroll checks to "phantom employees."

• Expense Reimbursement Schemes

  Padding expense reports by adding items that were never incurred or were not business-related.

• Time Theft

  This is one of the most common forms of employee theft. This crime is committed by using paid company time to conduct personal business.

• Information Theft

  Supplying proprietary information such as customer lists or trade secrets to a competitor.

How much does employee theft and fraud cost U.S. businesses each year? Estimates range from $20 billion to $50 billion!

• How big is the problem?

  The Association of Certified Fraud Examiners (ACFE) 2012 Report to the Nations on Occupational Fraud and Abuse gives a broad overview of how this problem is affecting companies around the world. Here is a sampling of their findings:

  The typical organization loses 5% of its revenues to fraud each year. The median loss in the cases in their study was $140,000. More than one-fifth of these cases caused losses of at least $1 million. The frauds lasted an average of 18 months before being detected. The smallest organizations suffered the largest losses because they typically employ fewer anti-fraud controls. In addition, fraud affected small businesses disproportionately because they have fewer resources to act as a financial cushion.

  Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds committed by owners/ executives was $573,000, the median loss caused by managers was $180,000, and the median loss caused by employees was $60,000.

  The longer a perpetrator had worked for an organization, the higher fraud losses tended to be. Perpetrators with more than 10 years of experience at the company caused a median loss of $229,000. By comparison, the median loss caused by perpetrators who committed fraud in their first year on the job was only $25,000.

  Most occupational fraudsters are first-time offenders with clean employment histories.

  Occupational fraud is more likely to be detected by a tip from another employee than by any other method.

  Nearly half of victim organizations never recover any losses due to fraud. In the 2012 Marquet Report on Embezzlement, Marquet International, Ltd. analyzed 528 cases of employee theft in the U.S. in which at least $100,000 was misappropriated. Declaring that "2012 was a blockbuster year for employee theft in the United States," and "employee theft is alive, well, and thriving in the current business climate in the United States," Marquet issued the following conclusions:

• The average embezzler in this study stole nearly $25,000 per month from their employer.
• About 68% of the incidents were committed by employees who held finance, bookkeeping, or accounting positions.
• The average scheme lasted 4.7 years.
• The most common embezzlement scheme involved the issuance of forged or unauthorized company checks.
• Only 4% of the cases involved perpetrators who had a prior criminal/fraud history.
• Nearly three-fifths (58%) of the incidents involved female perpetrators.
• However, male perpetrators, on average, embezzled nearly 3 times as much as females.
• People aged 40 - 49 years were the most frequent culprits.
• While another recent study surveyed losses in the retail industry, its findings could apply to many other types of businesses as well. The 2012 Retail Theft Study conducted by loss-prevention consulting firm Jack L. Hayes International asked 23 large retail companies to assess the impact of employee theft and fraud. The stores reported that one out of every 40 employees was apprehended for theft in 2012, up 5.5% from the previous year, and thefts totaled more than $50 million, an increase of 7.0%.
• They found that employees with less than a year on the job, and part-time employees with no vested interest in the company, were most likely to steal from their employer. Interestingly, the average theft by a dishonest employee was more than 5.5 times the amount stolen by a shoplifter ($715.24 vs. $129.12).

• What can we learn from this data?

  According to the study by the ACFE, "The nature and threat of occupational fraud are truly universal." Since the average fraud scheme is not detected for 18 months, you may be a victim right now without even realizing it. Can you afford to lose 5% of your revenue to dishonest employees? In Part 2, we'll discuss some of the controls you can put in place to help protect your company.

Employee Theft and Fraud: Part 2