Exposure to employee theft requires attention

Let's get this on the table right away: Employee theft is an uncomfortable subject. But it is a widespread, growing and underreported crime.

How do you prevent, or at least deter, employee theft?

Start with a strong message from the top. Adoption of an ethics statement by your council or board lets your employees, vendors and citizens know that you have a zero tolerance for employee theft.

Review your hiring practices. I am a firm believer that the most important management function is the hiring process.

Incur the cost of performing background checks. Before checking references, make a list of the questions you want to ask. Review this list with your municipal attorney to ensure the information you want does not conflict with any employment or privacy laws.

Consider obtaining a credit report for new hires, especially those who will be responsible for accounting, bookkeeping or other financial activities.

When you advertise for a new position, let those who inquire know that the hiring process will include background checks and credit reports. A person with something they would prefer to keep private will be less likely to submit a resume.

Establish stronger internal controls for existing employees

Our personal financial situation changes over the years. Hopefully it improves, but for many people it does not. Consider ordering credit reports or performing background checks on current employees. It is not necessary for this to be an annual or biannual event. But it won't hurt your internal controls for employees to know that you are aware of how changes in their personal situations can affect their performance in the workplace.

Employees responsible for accounting, bookkeeping and other financial functions should expect to be subject to a different, sometimes higher, level of oversight than their colleagues in other departments. They should welcome the additional scrutiny of your internal financial controls. The opportunity to pass inspection can be personally satisfying for these employees.

Establish written policies and procedures

Procedures should be in place that will document the flow of bills, cash and payments. Procedures should be adequate for the vast majority of your transactions. The need to override a procedure should be infrequent. Don't allow your staff to set unauthorized precedents that become normal operating procedure.

All employees should be required to take an annual vacation. Most frauds require daily attention to avoid detection. Another employee must be assigned the responsibilities of the vacationing employee, especially for financial transactions.

There should be a clear internal procedure for employees to anonymously report behavior they believe is suspicious. Of course, no action should be taken against any employee unless proof of wrong-doing is found.

The same employee should not be responsible for authorizing transactions, collecting or paying bills and maintaining accounting records.

Managers and supervisors in all departments can lead by example. If you have an expense account, treat it like it's your own money. Padding expenses or using your authority for personal gain sends a powerful message that stealing is acceptable.

When you review a list of all the vendors or service providers your municipality does business with, can you identify them? A common area of fraud is to create fictitious vendors or to receive kickbacks or favors from a vendor.

Having a system of internal controls is useless if it doesn't work as intended. Hire an independent, objective individual or firm to review your internal control procedures from a risk management perspective. Weaknesses in your hiring practices and internal controls can be detected and corrected before they become costly mistakes.

Your exposure to employee theft can be controlled but not avoided. Review your insurance coverage and limits with your insurance representative so that both are adequate for the size of your operation. The minimum limits offered in most package policies for crime insurance might be insufficient.

For more information

Employee theft is a loss exposure that requires your attention. If after reading this brief article you still believe it can't happen to you, there is a wealth of information and statistics available from a variety of online sources. Two to start with are www.media3pub.com/usbank/articles and www.chubb.com/library.