10 tips to help clients prevent employee theft

Accountant & Bookkeeper Guides

6 min read

Theft by employees is an unfortunate fact of life for many businesses. Here are some tips to help your clients reduce the risk of it happening to them, and deal with the consequences if it does.

Employee theft is an unfortunate reality

Entrepreneurial small business owners see a lot of financial ups and downs. They naturally turn to their accountant when making major financial decisions, or simply straightening out their bookkeeping.

Most often, this involves getting ready for taxes, preparing for growth, applying for a loan, streamlining processes, or trying to figure out why their numbers aren’t adding up. But sometimes it involves helping find why money, inventory, or business assets are missing.

There are many reasons why the books for a small business might not balance. Usually these are mundane – common errors in posting transactions. Unfortunately, there are also reasons that may be painful to examine, but more dangerous to ignore: employee theft of cash, inventory or business supplies.

As a financial advisor, you have the opportunity to help your clients prevent employee theft.

Small thefts add up – and they’re costing your clients

Employee theft is more common than your clients think. Nearly two-thirds of businesses have been victims – yet only about 16 percent report the crimes.  

The costs involved are not well known but over in the US, the National Retail Federation estimates that employee theft cost their industry $15 billion in 2015. 

As many as 80% of employees could steal

The oft-cited 10-80-10 rule proposes that:

  • 10 percent of people will never commit crime against their employer

  • 80 percent might commit a crime through a combination of opportunity, pressure, and rationalization

  • 10 percent actively seek out ways to steal from their employer

It’s not a very optimistic view of the workforce and, while you may not agree with it, the Association of Certified Fraud Examiners agrees that employees can be swayed by circumstance. They identify three factors that drive workplace crime:

  • Motive: Greed, financial strife, unexpected bills, addictions

  • Opportunity: Weak financial controls, cash management processes

  • Rationalization: Employee has internal excuses, such as “the business won’t notice”, “I deserve a raise”, or “other people do it”.

Nearly two-thirds of businesses have been victims – yet only about 16 percent report the crimes.

10 steps to help prevent employee theft

In extreme cases, theft or embezzlement can lead to the failure of a business, so it’s important that accountants get involved. Here’s some advice that you can give your clients to help them prevent employee theft.

1. Practice proper bookkeeping
To prevent theft by administrative staff, practice good bookkeeping. Ensure that no single person controls too many parts of any financial transaction. Purchases, payroll, reimbursements and other disbursements should require review and signoff by a senior staff member.

Perform bank reconciliations and review business credit card statements each month. Work with a qualified business accountant to ensure that books are properly maintained, transactions are properly posted, and the audit trail shows no suspicious activity.

2. Monitor retail transactions
Managers should know who has access to cash drawers, and small businesses should use modern point-of-sale systems and cash registers that monitor transactions by employee. Some point-of-sale systems even require a passcode or card swipe prior to each transaction, to ensure employees aren’t conducting transactions on another employee’s login credentials.

Employee theft is often accomplished by failing to ring up or scan an item. The customer then pays and the employee pockets the money – or the customer might be a friend who gets the item for free. Consider a policy whereby staff can’t process transactions for friends or relatives.

3. Track inventory closely
Inventory should be monitored daily, particularly high-priced items. Watch out for increases in damaged goods or unexplained drops in sales. Carry out periodic physical inventory audits, including more frequent and random spot-checks. Good inventory management software can make this job a lot easier –– allowing managers to see how much stock they should have on their mobile phone.

4. Count-in, count-out cash
When moving cash, have a process that includes at least two people verifying the amount involved. Also, count the cash in the register at the beginning and end of shifts.

5. Review all petty cash
Many businesses that maintain a petty cash drawer have a single person responsible for managing it. Even though the amount of cash available is generally limited, all transactions from petty cash accounts should be signed off by at least one other employee, preferably a supervisor. The petty cash drawer should also be verified and balanced weekly. This prevents even well-intentioned staff from unauthorized borrowing.

6. Actively participate in the business
Small business owners or managers who work alongside staff and are active in processing customer transactions are more likely to notice mishandling of cash, and employees are less likely to do it when their boss is around.

7. Offer meals and discounts to deter theft and boost morale
Many restaurant managers offer one meal per shift as a benefit to staff. This can help reduce food loss, and also can decrease employee tardiness. Other types of businesses often offer similar perks or discounts for employees.

8. Watch and listen
Business owners should give themselves every opportunity to catch perpetrators. Monitoring will help deter dishonest behaviour.

  • Security cameras now come at a low cost and you can check the footage easily online.

  • Anonymous reporting allows concerned staff members to alert you to suspicious activity.

9. Tune in to employee behaviour 
It pays to be alert and notice if staff members start to act uncharacteristically. Suspicious behavior might include work performance issues or suddenly being more secretive or defensive.

If the tone of your interactions with an employee starts to change, make a note of it and consider a one-on-one discussion to find out what’s wrong. There could be many reasons but it’s worth being aware that fraud or theft could be one of them.

10. Consider a stricter hiring process
If small businesses could only hire the 10 percent of people who never, ever steal, then there would be no employee theft. Unfortunately, that isn’t the case.

So, employers should use the screening tools available, especially for positions involving cash handling or bookkeeping. These include background checks that look for criminal histories and verifying prior employment experience.

To report or not report

Most businesses who discover employee theft don’t report it. Often, the employers consider the amount to be too small for legal action, while others decline to report because of personal relationships with the employee. Dissatisfaction with the judicial system even comes into play.

In some cases, the attorney for the business recommends against prosecution because of the low likelihood of actually recouping the stolen funds. Your clients should take legal advice if they’re not sure how to proceed.

Help your clients be prepared

Employee theft, like employee fraud, is underreported and probably underestimated by your clients. Small business owners often extend more trust to their employees and feel like they’re part of the family. As a result, they can be uncomfortable ‘snooping’ on their staff.

Help them come to grips with the reality that they’ll probably have to deal with employee dishonesty some day. Even if they choose not to report that theft, they should at least try to protect their business from the damage it can cause. Walk them through some of these tips to prevent employee theft and save them from avoidable financial losses.