Robert A. Bonavito, CPA PC

Why Employees Steal & How to Prevent Employee Fraud

Hi, everybody. Welcome to my YouTube video. Today, we're going to talk about employee theft.

Now, employees, it's an interesting topic, because in the 21st century, the most important asset of any company is human capital, or what is better known as employees. And if you think back to the early 20th century, other things were more important than human capital, right? Capital was more important. Buying machinery and equipment. But now, you know, having motivated, hard working employees is what separates great companies from the rest.

But I'm not sure if you ever realized, if you have anybody who worked in the retail industry, and if you talk to these people about when they went to work at the Gap, or something like that, there was a lot of security around what they did. For example, when you work for one of these retail stores in the mall, there's an actual room you go in, in a lot of cases. And that room, you put your bags there, you can't, you know, that room is like a separate room, and then you walk into the establishment. And the reason they do this is because they know, the employers know, that the largest way they lose money is by employee theft.

In fact, if you look at some of the statistics by the Association of Certified Fraud Examiners, they say that over $50 billion a year is stolen by employees. In fact, 75% of employees steal at least once from their employer. What's shocking to me is the next one, where the U.S. Chamber of Commerce said that 33% of bankruptcies, one of the reasons for that is employee theft. And that's pretty scary. You have a lot of competition out there. And then also, you have to be worried about your employees stealing money.

Now, who are these employees that are stealing money? Fifty nine percent of them are men and 34% have at least a bachelor's. So that's pretty scary. Now, let me tell you about, you know, we testify a lot on employee theft. We've had banks call us, because people stole money from the bank internally.

And we had a case a couple of years ago that, kind of, puts all this stuff together. And it was a good sized manufacturing company and the owner called us. He said, "Listen, Robert." He said, "I have this company for 25 years. Things are going great. We're making money. Sales are going up. Everybody is making money except me. In fact, right now we're going for a line of credit, because we're having some cash flow issues, which I don't understand."

And I said, "Really?" I said, "Well, listen, I'll send a team down there. We'll go through everything." And we were going to do basically a cash flow to find out where the cash is going. You know, is he buying equipment? What's going on? So we went there and, you know, we talked to his accounting people. And basically, he had a very efficient bookkeeper there, which is great for us. And so, we started talking to him and he explained what he does.

And we started the engagement. And the first thing we do is we go through the payroll, make sure people on the payroll actually work there, that kind of stuff. And we got to his salary. We checked the salaries out. His salary was a lot higher than we thought it would be. But, you know, he's a good bookkeeper, okay. And we asked Frank, we said, "Frank, you know, the bookkeeper is paid X amount. I know he's great. You know, what's going on with that?" And he says, "No," he says, "He's paying half of that." I'm like, "No, he's not." So we knew there was a problem right away.

And so, we dug and dug and dug. We found out that there were employees who didn't exist who had credit cards. His mother had a credit card, too, which was quite interesting. There was fictitious companies. He had all kinds of ways of stealing money, not just one. He had like five or six different ways of stealing money. So we actually ended up testifying in court and he actually went to jail.

I mean, I remember that it was a six-week trial. The jury was kind of upset, because most of the testimony during the trial was very dry. And so, we made sure we went into detail, these ways he stole money, and they loved it. They really ate that up, that he stole this money. But he, like I said, he did end up going to jail. Unfortunately, he had no money, because it was all spent.

But let's go and look and see, you know, why do employees steal? And we have two assessment tools that, kind of, help us a lot to understand why people steal. The first one is fraud triangle, opportunity, perceived pressure, rationalization. And the second one is MICE. It stands for money, ideology, coercion, and ego. And it's important to understand the theory behind this stuff, because it makes sense, you know, especially in that one case we just talked about.

Now, when you look at the fraud triangle, it's basically a triangle, right? Rationalization, pressure and opportunity. Why do people steal? Okay, they rationalize, I'm underpaid. That's what the bookkeeper thought. I'm underpaid. I should be running this company. I shouldn't be the bookkeeper, okay.

You know, pressure. You know, he wanted to impress his mom. He wanted to be the big guy. So I guess that's why he put her on the payroll. He told her that he was one of the owners or something. So, you know, that pressure. He had pressure to succeed. He put it on himself.

And opportunity. He knew that the owner was so busy, which in most cases a lot of small businesses. I mean, this was not a small company, but the management's so busy, they don't really want to, you know, look at the checks and look at the payroll. If they have someone competent, they'd rather outsource that, let them do it. And this is what happened.

You know, Frank, he didn't want to be doing this and looking at this stuff. He trusted the bookkeeper. And he's like, I'd rather be getting sales and doing other things. Not realizing that this is a very important thing, because that's why his company was almost bankrupt, because he wasn't doing the small things. So this opportunity, you know, the bookkeeper had the opportunity. He rationalized, he had pressure.

And the second assessment tool we like is, it's heuristic, and it's MICE, money, ideology, coercion, and ego. Now, money and ego are really covered, you know, in the fraud triangle. Coercion is a little bit different. How coercion works is, let's say you owe someone a lot of money, and they come to you and say, "Listen, I know you're working at, you know, Joe's manufacturing company. I want you to pay some money to this company I set up called, you know, Fabrication Loan, okay. I want you to send me $1,000 a week or $2,000 a week. And otherwise I'm going to call the law and I'm going to bankrupt you. Your family is going to be." That's coercion. And it does happen. We've seen that happen

Now, ideology is a little bit different. Ideology is, there's people out there who are conscientious objectors. They don't believe in federal taxes. They don't believe in paying taxes or that kind of stuff. These people have ideologies. It's basically a criminal mindset and it's something they believe. You hire these people, they will ruin your company within a year. But we've only, maybe one case, where there was just that's the way they were brought up, steal money, steal money. So, you know, these heuristics are really helpful to understand. You can go into more detail.

Now, if we look at the formula to stop employee theft, it's pretty simple, right? Theft probability equals what? It's perceived risk of detection plus expected penalties. So if the risk of detection is very low and the penalties are low, there's a high probability they're going to steal. Now, if the risk of detection is high and expecting penalties are high, okay, that drives down probability. Now, you're never gonna get to zero. But I'd like to see it get under 20%, 10%. Because remember, 75% of employees steal from their employer at least once. So remember this formula. This is a pretty simple way to understand what we do.

But the real issue is not, you know, how to catch people when they steal. It's to prevent employee fraud. And it's really not that difficult, okay. Like I said, you're never gonna stop 100%, otherwise we would have nothing to do all day. So the first thing is good hiring procedures is the first line. Hire people, okay. Make sure, maybe they're recommended from people you trust, okay. And this will, kind of, bring the other people on board to make sure this guy's an honest dude, right?

Have a detailed employment application, okay. Have multiple interviews. Have a system set up to catch people. You know, maybe do a background check. You know, in fact, the bookkeeper that was stealing all the money, they actually did hire him from a recruiting firm and they did a background check. But it was not a thorough background check, because we did one. And there were some things in his background that indicated that someone they should not have hired. So, you know, call the previous employer. Why would I call the employer? They may not say anything blatantly wrong about the guy. But if the guy is a crook or not honest, they'll give you some hints, okay. And that's all you need, is a hint.

Copy the important documents. Make copies of stuff. Keep the files secure. You want to know who this guy is. You want to understand, especially now, you know, with all the laws, there's lots of things you have to do and fill out to make sure they're a citizen, that type of stuff. Follow the laws, make copies, keep it secure.

This one is great. And this one works, especially in bigger companies. Have a tip line. Have a suggestion box, because people who steal generally make enemies within the company. And these people will know or have an idea that they're stealing. They may know that he got a new house. They may know that he bought a yacht, you know, whatever. He's living high on the hog. And, you know, when people saw this bookkeeper, they just thought he had a great job. You know, he had a big house, big cars, and all that kind of stuff. His mother was loaded, but they didn't realize he was just a bookkeeper. But inside the company, if people see that this guy has all this stuff, maybe they'll give you a hint. Hey, you know, there's a problem here.

Have a good positive work environment, clean desk policy. Why? Because you don't want people walking around at night seeing documents. You know, tell people, hey, clean up your desk, okay. Positive work, you know, friendly, positive environment. And that will help reduce debt. Focus on the small stuff. I always tell business owners, open up your damn bank statements. Take a look at the checks. Look at the payroll once in a while. You know, ask the bookkeeper, "Hey, give me the W-2s from last year. I want to see the 1099s," you know. And then just go through them. That will increase the opportunity to catch him.

And, you know, we looked at the detection right here, okay. Perceived risk. If you're checking things, that's going to drive the probability down of them stealing money and you need to have high involvement. And I like this no matter what, high involvement management. What are the employees doing? You know, interact with them. Know your employees, see what's going on. And if you do this type of stuff, okay, it's not only going to help you run your business better, but it's going to, you know, make the employees more comfortable, a better atmosphere.

But also, it's going to drive the opportunity, you know, it's going to drive that fraud issue down within your company, and you won't have to call us. Make sure that, you know, you really try to institute these employee theft fraud prevention techniques. Put them in your company.

So, listen, guys, if you have any comments or questions, just leave it below. Somebody in my firm or I will get back to you with an answer. And also, if you want to subscribe to my YouTube channel, I really appreciate it. Let your friends know. We're gonna be posting a lot more now. Thank you for listening and bye.

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