May 20, 2023

Recession May Not Be The Only Thing Driving Employee Theft

AUTHOR

Paul Eckford

As inflation in New Zealand starts to bite and small businesses feel the pressure of rising costs, this naturally trickles down to employees. Increases in the cost of living are very topical right now; with an election looming, people are struggling to make ends meet. The weight of this pressure can cause both employers and employees to make uncharacteristic decisions.

Is your small business under pressure?

Pressure check:

  • Do staff feel undervalued?
  • Is the office vibe off?
  • Does the workplace lack open communication?

If you answered yes to any of those questions, there may be an underlying issue. Employees steal for many reasons. In most cases, theft occurs simply because an opportunity presents itself, and there may be a lack of internal controls. A common rationalisation may be, “The business is making lots of money; I’m only taking what is really due to me for my hard work.” Commonly these types of theft start very small and are almost undetectable and build up over time if they remain undiscovered.

The Association of Certified Fraud Examiners identifies three factors that typically drive workplace crime. These are motive (greed, financial strife, unexpected bills, addiction); opportunity (weak financial controls or cash management processes); and rationalisation (where the employee internalises excuses for their behaviour).

A local example was seen at Te Papa Museum, where an employee defrauded the museum for more than $120,000. This was achieved by falsifying data for more than 100 casual staff time sheets over more than a year. The employee diverted the payments into their own accounts and altered the casual employees’ details, including their email addresses, so they would not receive the fraudulent pay slips.
As a result, Inland Revenue had incorrect earning records for the casual staff affected, potentially affecting their tax bracket, student loan, or KiwiSaver details.

The matter was referred to the police for criminal investigation.

Common forms of theft to look out for

Employee theft can include:

  • Removing cash from the till.
  • Taking home stock.
  • Discounting to ‘friends’ and colluding with others (looking the other way).
  • Fictitious supplier accounts.
  • Fictitious petty cash purchases.
  • Taking cash ‘commissions’ from suppliers.
  • Using business facilities and materials for personal gain.
  • Giving away or using confidential company information or trade secrets for personal gain.
  • Payroll fraud.

6 ways to mitigate risk to your business.

As a business owner, consider the below:

  • Ensure no single person controls too many parts of any financial transaction. Invoicing, payroll, reimbursements, and processing of bank payments should require a review and sign off process by a senior employee or business owner. We have seen the rise of software such as Approval Max become more prevalent in business, providing that approval layer on daily processes.
  • Where businesses deal in cash, have clear tracking of who has access to cash drawers. Furthermore, a modern point-of-sales system that monitors employee transactions (including staff discounts) should be used.
  • Build a strong relationship with your suppliers and customers. They can often be a source of truth if there are duplicate transactions or invoices in your accounting system.
  • Implement a robust HR policy, including reference checks and a thorough recruitment process. As part of the HR policy, encourage or provide a simple (and, if necessary, anonymous) way for staff to report suspicious activity.
  • Perform regular information audits by asking a third party (such as an accountant) to review your records or returns before submission.
  • Monitor your business credit. A decline in business credit scores and ratings can accompany business fraud. If someone embezzles funds meant for a vendor, that company may report the debt to a business credit bureau, damaging your credibility. Such a change could prompt a business to look deeper at its payment practices.

What can you do if you suspect fraud?

If you have suspicions and something doesn’t feel right, you are entitled to take quick action. However, this must be dealt with caution. There must be sufficient information or evidence to justify action. As with any employment related issue, you must act in good faith in any dealings with an employee.

We recommend seeking expert advice immediately before any action is taken. If you suspect theft, contact us, and we will support you. If in doubt, ask.