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Most small businesses don’t know what to do if they experience employee theft. Most don’t even get law enforcement involved when they catch an employee stealing from them.

In fact, FoxBusiness cited a 2014 study from the University of Cincinnati finding that of the 64% of small businesses that have experienced employee theft, only 16% reported the incident!

Internal theft is a significant problem for any small business, and such theft represents a significant financial loss that could put them at risk. The U.S. Chamber of Commerce found that one-third of small business bankruptcies are the result of employee theft.

Why Don’t More Owners Report Theft?

The business owners weigh the loss of time and trouble of reporting such crimes against the actual amount of loss and feel that firing the employee is enough.

Lawyers agree with that assessment, often advising small business owners that the costs to prosecute an employee who steals, say, $200,000 is not worth the effort. If, after an expensive trial, the employee is convicted, put on probation, and ordered to pay restitution at a rate he or she could afford—let’s say, $50 per month—the small business owner would never recoup the stolen funds.

Another thing that complicates matters is that the thief is often a family member or long-time employee. The business owner usually knows the employee’s family and may see him or her on family occasions. They see these situations as the kind you have to put behind you as fast as possible.

Typically, small business owners perceive the police and criminal justice system as ineffective or incompetent. They feel that police officers don’t know enough about business to do much about employee theft. They are too busy with street crime.

Research shows that cash is the most common target of theft. Cash thefts average $20,000, but can range between $5 to $20 million. Some 40 percent of thefts are of cash; 18 percent are products; 14 percent are theft of tools or equipment; and 12 percent are theft of raw materials.

Insurance Against Employee Theft

Small business can obtain Employee Dishonesty Insurance (sometimes called a fidelity bond, crime coverage, or crime fidelity insurance) from many insurers to protect against losses from employee theft. Many small business owners are not aware of this coverage, and are not aware of the fact that costs for this insurance are relatively low.

Employee dishonesty insurance premiums can be added to a commercial crime insurance policy, to a business owner’s package policy (BOP), or purchased separately. The business owner’s lawyer, accountant, and insurance agent can help decide what is the best kind of anti-crime insurance to buy.

Standalone policies are designed to cover:

  • Employee theft, robbery, and safe burglaries
  • Forgery or alteration of signatures
  • Funds-transfer fraud
  • Computer fraud
  • Credit card fraud
  • Money order and counterfeit fraud

Insurance companies may offer coverage for employee theft of money, securities, or property. They can be written with a per-loss limit, a per-employee limit, or a per-position limit. Plans can be adjusted to include losses to the employee retirement income plan in compliance with the Employment Retirement Security Act (ERISA).

Coverage may also be extended to protect outside parties, clients, leasees, or others who suffer losses because of crimes committed by those within your company.

Exactly who is covered by these policies is defined in the policy. They should include everyone in a position to redirect resources, namely all current and former employees (including seasonal and temporary employees), partners, members, directors, volunteers, and trustees.

Getting the Right Checks in Place

Small business owners often don’t have the right checks and balances in place to avoid employee embezzlement and theft. They often don’t screen new hires sufficiently, and hiring is often done on the basis of trust.

Most small business owners will say, “I trust my bookkeeper.” Yet almost every case of employee theft involves a trusted and unsuspected employee: A lifelong best friend steals from her business partner. A man takes money from his brothers and sisters. A CPA embezzles from his client.

Honest money handlers like bookkeepers will demand that credible financial controls be put in place, removing them from any appearance of temptation. Put all money receipts in a checking account. Withdraw any money that leaves the business out of the checking account. Such accounts keep an independent running record of deposits and withdrawals.

A single employee should not establish vendors, approve the payments, and write the checks. There should be at least two employees involved. In one case, a bookkeeper (currently in prison) was found to have set up a fake employer and funnel money from the small business into his own private account.

You, as the business owner, should review statements regularly. At random and unpredictable times, review all bank statements, business credit cards, and company payroll statements. You should also regularly audit the books. Have an independent third-party audit performed in at least a spot-check manner—the cost is minimal and the audit can reveal an expensive money leaking problem.

At the end of the day, your small business is your primary responsibility. While there is always the risk of an employee, even someone you know, being untrustworthy, there are things you can look out for and insurance policies you can obtain in order to avoid a total financial disaster.