Employee Theft

Abstract

Employee theft is a global problem that affects businesses of all sizes, draining their financial resources, creating hostility among employees, lowering employee morale, promoting distrust among shareholders, fostering distrust among investors, and destroying business reputations. Employee theft may involve taking money, property, ideas (intellectual property), or any other asset without authority; perpetrating contract fraud or procurement; engaging in payroll theft; or issuing incorrect financial statements. In the United States, employee theft accounted for $18 billion in losses, some $2.3 billion more than was lost to shoplifters.

Overview

Not all researchers agree on what constitutes employee theft or on the extent to which it occurs. While it is generally agreed that employee theft involves illegal and immoral activity, some experts differentiate between petty theft and grand theft. Legally, each state sets its own determinants of what constitutes misdemeanor (minor) or felony (major) crimes, basing definitions on the dollar amount involved. In 2014, a study of American newspapers undertaken by Curtis Verschoor found two hundred cases of embezzlement occurring over a 30-day period, and twenty-three of those cases concerned thefts of more than one million dollars. Determining what constitutes employee theft is also complicated by the fact that some employers report thefts from coworkers, customers, and suppliers as employee theft, while others consider that employee theft occurs only when something is taken from an employer (Sauser, 2007). Additionally, some employers only report thefts that have been discovered, but others estimate how much is lost to employee theft. Most employees who engage in theft on the job do not start out with the intention of cheating their employees. For instance, an employee might inadvertently carry a tool home in a pocket and forget or neglect to return it. Other instances of inadvertent theft include failing to report being overpaid by a small amount or a supervisor overestimating hours worked.

The United States Chamber of Commerce reported in 1974 that in 30 percent of all businesses that failed, the failure was motivated by extensive employee theft. In 1997, it was estimated from a review of the literature that estimates of global loss from employee theft ranged from $6 billion to $200 billion annually, accounting for 70 percent of business losses and 30 percent of business failures (Sauser, 2007). Globally, costs related to employee theft have continued to rise. In 2007, it was estimated that employee theft was responsible for more than $100 billion in losses, a growth of 5 percent over the previous year. Three years later, some experts estimated that employee theft losses might be as high as $2.9 trillion globally (Peters & Maniam, 2016). In 2014, it was reported that losses from employee theft ranged from $20 to $50 billion in the United States alone. That same year, the Marquet Report on Embezzlement identified more than 2,100 cases of embezzlement, and two-thirds of the crimes were committed by female employees. Because employee theft is so widespread, researchers and businesses are concerned with understanding all aspects of the problem, identifying its extent, determining how it occurs, understanding employee motivations, and finding ways to reduce occurrences and minimize impacts.

Employee theft occurs most often among small to medium-size companies, and thefts that become public knowledge may lead to wide news coverage by local media. The aftermath of employee theft may be felt far beyond an individual company. The impact may be overwhelming in a company that is considered essential to a local economy. When national and international corporations are involved, the consequences may be devastating for large numbers of people, such as when Bernie Madoff’s elaborate Ponzi scheme fell apart in 2008. He had cheated investors, pension-holders, and charities of some $17.5 billion. In 2009, Madoff was sentenced to 150 years in prison after being convicted of securities fraud, wire fraud, mail fraud, perjury, and money laundering.

Numerous studies have shown that customers are less likely to trust a company that has been publicly identified as having dishonest employees. In one study, six percent of those surveyed declared that they never do business with any company that has been involved in employee theft at any point. If a major scandal breaks, board members may also begin resigning in order to avoid having their personal and financial reputations ruined. In cases where large sums of money are involved, when CEOs and CFOs are the perpetrators, and when financial assets are misrepresented, the Securities and Exchange Commission (SEC) may initiate investigations as authorized under the Sarbanes-Oxley Act of 2002. Guilty verdicts may lead to major business losses, and companies may be forced into bankruptcy. Even in minor cases, companies may be forced to spend additional sums in replacing lost items, and time needed for carrying out normal business activities is spent in discovering losses, identifying perpetrators, and dealing with the aftermath.

Employee theft may be so widespread in some companies that it is taken for granted that it will occur. Numerous studies have found that most employees do not consider it theft to take general supplies. In the medical field, many employees see no moral problem with taking over-the-counter medications or non-narcotic medicines without reporting such actions. In a 1974 employee survey, approximately half of respondents reported that they had taken at least one item from their employers. Among those who admitted to taking an item, 67 percent did not consider it theft, and 84 percent said they did not feel guilty about taking the item(s). In 1983, the Department of Justice (DOJ) reported that one-third of Americans regularly took home company property. Four years later, DOJ conducted an extensive survey in forty states, using three hundred interviews and two hundred questionnaires, finding that 37 percent of Americans admitted to committing petty theft while on the job and 28 percent admitted to major theft.

Estimates of the extent of employee theft range from 9 to 75 percent. Such thefts are more likely to occur in some businesses and among certain positions than in others, but they occur in virtually all businesses. Perpetrators have been found among the clergy, the legal profession, bankers, and religious and charity organizations. Overall, the most common characteristics of individuals who commit employee theft are being white, being male, being young, having never married, and being part of a high-income household but contributing less than 20 percent to household expenses (Sauser, 2007). Perpetrators are also likely to experience low pay, low status, few benefits, poor working conditions, lack opportunities for job advancement, and have limited job security (Greggo & Kresevich, 2010). Employees who commit theft are also likely to have significant concerns about finances, careers, or the high costs of education. They may also have a gambling, drug, or alcohol addiction (Laner & Gee, 2015). Having easy access to money and merchandise increases opportunities for employee theft, and sales clerks, cashiers, and managers are frequent perpetrators. Work environments that are believed to foster increased instances of employee theft are those in which employees are dissatisfied with their jobs, have employers who rarely praise them, and/or feel underappreciated by their employers.

Applications

Employees often seize on opportunities to engage in theft, and they devise myriad strategies for carrying out their offenses. Actual cases involve employees from a range of companies. Healthcare and pharmaceutical workers steal drugs by replacing narcotics with non-narcotics. Warehouse workers steal through package tampering or falsely reporting shortages. Cashiers pocket cash from a customer transaction. A bookkeeper writes a vendor check correctly but mails it to another address where it can be collected and deposited to an account to which the employee has access. An executive pads an expense account. A service worker takes an item home, asserting that it is “broken” and needs to be fixed. A retail employee wears clothes out of the store or hides an item in a purse or bag. A grocery store worker takes a food item off a shelf and eats in during his/her break. Studies show that the retail business is regularly victimized by both employees and shoplifters, with losses estimated at $36.6 billion annually. Convenience stores report that employee theft is responsible for 50 to 70 percent of losses. The greatest deterrent to employee theft may be that most employees are afraid of getting caught.

The Association of Certified Fraud Examiners reported in 2015 that some 75 percent of American employees admit to stealing from their employers at some time. Females were more likely than males to see employee theft as immoral (Pedneault, 2010). The most common forms of employee theft involved an employee reporting more hours than actually worked, taking money or merchandise, selling research ideas to competitors, corporate theft, and breeching company databases. Studies indicate that employees who steal from their employers are good at rationalizing their behavior, convincing themselves that the behavior is justified because the employee “deserves” it or that it is not really stealing. Signs of potential trouble are often clear, even though they may be ignored. A 2014 report revealed that 43 percent of perpetrators were living beyond their means, 36.4 percent were having financial difficulties, and 22.6 percent demonstrated an unwillingness to share duties.

Most cases of employee theft are discovered through employee tips (26.3 percent), accidental uncovering of crimes (18.8 percent), internal audits (18.8 percent), and external audits (11.8 percent). New technologies have provided dishonest employees with a plethora of opportunities for theft, with employees using the Internet and electronic transfers to commit fraud in a matter of seconds. Employees might also use online access to steal personal information on customers, coworkers, and job applications in order to commit identity fraud. For instance, in 2005, four bank employees in New Jersey obtained information from 676,000 accounts and sold that information to outside parties. New techniques for committing employee theft call for careful employee monitoring of employees’ online activity. Regular employee training is considered one of the best deterrents of employee theft. Such measures might include watching videos about employee theft and taking integrity tests that measure employee attitudes and responses to various scenarios.

In the late 1990s and early 2000s, corporate fraud was widespread in the United States, resulting in a number of public scandals, involving Waste Management (1998), Enron (2001), World Com (2002), Tyco (2002), and Health South (2003). Between 1998 and 2007, the SEC reported that in 98 percent of cases under investigation, CEOs or CFOs were involved in thefts. A 1998 report by Fraudulent Financial Reporting revealed that in 347 cases, 72 percent of perpetrators were CEOs and 65 percent were CFOs. However, the average American business has around ten employees, and small businesses are particularly vulnerable to employee theft by money managers because owners may not understand the financial aspects of a business. As a result, they may provide increased opportunities for tapping into company funds by hiring one individual to carry out financial transactions such as writing and depositing checks and neglecting to oversee their actions. Alternately, small business owners who do not understand the financial aspects of their own business may depend on computer programs like QuickBooks to store sensitive information, making company records vulnerable to dishonest employees and computer hackers. Despite increased vulnerability, large companies are more likely than small companies to have established policies designed to deter employee theft.

Issues

Because employee theft is so widespread and because it is sometimes accepted as an employee benefit, most companies have instituted policies defining what constitutes employee theft and establishing fines for violations that range from disciplinary action to being fired. Despite the widespread use of anti-theft policies, not all companies enforce them equally. Furthermore, only employees who are caught stealing are punished. In addition to establishing policies and punishment, experts on employee theft have developed a number of strategies for discouraging employees from stealing company assets or property. Segregation of duties is considered a major step in the process because it prevents a single employee from having numerous opportunities for theft, and opportunity to commit theft is a major indicator that employee theft may occur.

A second deterrent strategy is constant observation in the workplace. That observation generally involves security cameras and/or security guards. It may be provided by contracting with outside companies, hiring off-duty police officers, or using internal loss prevention experts. Observation also encompasses supervisor monitoring of employees, which might be as simple as noticing an employee opening a till when no customers are present, conducting internal checks on daily transactions, illegally accessing computer systems unrelated to job duties, or recognizing that a particular employee seems to be living beyond his/her means. Regular auditing, both internal and external, is known to discourage employee theft. Even before an employee is hired, some companies set the stage for future problems by failing to carry out adequate background checks on potential employees.

Greggo and Kresevich (2010) suggest a number of strategies that create a working environment that discourages employee theft. First of all, employers should serve as leaders, providing employees with positive role models and encouraging company loyalty. They should nurture good relationships with their employees so that all employees feel that their efforts are recognized and appreciated. Employees need to be provided with opportunities for advancement and personal growth. All job duties should be explained, and objectives should be clearly stated. All employees need to be aware of company policies on company theft, and punishments should be open knowledge. Employers should also establish a pattern of enforcement of company policies on employee theft, absences, tardiness, and drug or alcohol abuse.

If an employer believes that an employee has committed theft, there are legal issues that must be considered. No employee should be questioned about possible thefts outside of working hours. It is recommended that no employer confront an employee outside the presence of a witness such as a supervisor or co-manager. If an employee demands to be released from interrogation, he/she must be allowed to leave; and if an employer tries to physically restrain an employee, he/she may be charged with false imprisonment. Courts have most often sided with employees in cases of illegal employer searches and seizures. The burden of proof remains with the employer. Employers need to acquire written permission for conducting a search of employee lockers when an employee is hired. No employer may search the car or home of a suspected employee without compelling legal evidence. It is recommended that interrogations of employees be videotaped (Laner & Gee, 2015).

Terms & Concepts

Contract Fraud: Occurs when one party signs a contract with another party or parties that contains information that is false, misleading, or confusing. Legally, contract fraud is defined according to whether the fraud occurred through inducement or through misrepresentation of facts. Contract fraud occurs by inducement when an individual is tricked into signing a contract or by factum when a party signs a contract thinking it says one thing when it actually says something else.

Fraud: Occurs in the business environment when an individual or group of individuals has knowingly made false statements about a company’s assets, engaged in illegal acts designed to cheat clients and/or investors, set out to deceive stakeholders for individual financial gain, or caused damage to victims.

Identity Theft: The practice of illegally using the personal information of another individual to steal money, purchase items, or obtain credit. Corporate identity theft occurs when an individual misrepresents a company’s identity.

Internal Controls: Employer-instituted measures put in place by businesses to prevent employee theft and other illegal activities through policies and enforcement, training, monitoring, deterrence activities, segregation of jobs, checks on employee behavior, and internal and external auditing.

Ponzi Scheme: A criminal activity in which an individual or group engages in fraud by collecting large sums of money for personal use. It is carried out by using funds paid by new investors to pay returns to existing investors so that the scheme can be kept going as long as possible.

Sarbanes-Oxley Act (SOX): Congressional act that applies to all publicly traded companies. It was passed in 2002 in response to a series of corporate scandals, and it mandates such measures as internal controls, audits, and the establishment of company policies against employee theft. Its chief purpose was to enhance corporate responsibility and curtail accounting fraud.

Bibliography

Bagley, C. F. (2011). Managers and the legal environment: Strategies for the twenty-first century. Boston, MA: Cengage Learning.

Greggo, A., & Kresevich, M. (2010). Retail security loss and prevention solutions. Boca Raton, FL: CRC Press.

Laner, R. W., & Gee, S. R. (2015). Employee theft: Practical and legal concerns. HR Focus, 92(4), S1-S4. Retrieved January 1, 2019 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=102663649&site=ehost-live

Pedneault, S. (2010). Preventing and detecting employee theft and embezzlement: A practical guide. Hoboken, NJ: John Wiley and Sons.

Peters, S., & Maniam, B. (2016). Corporate fraud and employee theft: Impacts and costs on business. Journal of Business and Behavioral Sciences, 28(2), 104–107. Retrieved September 14, 2018, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=120458301&site=ehost-live

Sauser, Jr., W. I. (2007). Employee theft: Who, how, why, and what can be done. SAM Advanced Management Journal, 72(3), 13–25. Retrieved September 15, 2018, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=27271025&site=ehost-live

Sulsky, L., Marcus, J., & MacDonald, H. (2016). Examining ethicality: Judgments of theft behavior; the role of moral relativism. Journal of Business and Psychology, 31(3), 383–398. Retrieved September 15, 2018, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=117418787&site=ehost-live

Verschoor, C. C. (2014). A month of embezzlement stories. Strategic Finance, 96(10), 11–61.

Youngblood, J. R. (2016). Business theft and fraud detecting and prevention. Boca Raton, FL: CRC Press.

Suggested Reading

Burke, R. J., Tomlinson, E. C., & Cooper, C. L. (Eds.). (2011). Crime and corruption: Why it occurs and what to do about it. Burlington, VT: Ashgate.

Goh, E., & Kong, S. (2018). Theft in the hotel workplace: Exploring frontline employees’ perceptions towards hotel employee theft. Tourism & Hospitality Research, 185(4), 442–455. Retrieved January 1, 2019 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=132002575&site=ehost-live

Kennedy, J. P. (2016). Shedding light on employee theft’s dark figure: A typology of employee theft nonreporting rationalizations. Organization Management Journal (Routledge), 13(1), 49–60. Retrieved January 1, 2019 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=114015852&site=ehost-live

O’Brien, K. E., Minjock, R. M., Colarelli, S. M., & Yang, C. (2018). Kinship ties and employee theft perceptions in family-owned businesses. European Management Journal, 36(3), 421–430. Retrieved January 1, 2019 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=129588097&site=ehost-live

Palmer, D. A. (2012). Normal organizational wrongdoing: A critical analysis of theories of misconduct in and by organizations. New York: Oxford University Press.