The U.S. economy is bouncing back from the COVID-19 recession faster than anticipated. But the recovery is uneven. While some businesses are already seeing pre-pandemic levels of activity, others continue to face uncertain economic times. As businesses continue to contend with the effects of the pandemic, they may be at greater risk for an unanticipated threat — employee theft — as employees themselves continue to contend with the financial stress of the recession. And while all businesses have some exposure to employee theft, small businesses are particularly vulnerable as they feel the impact much more than larger organizations, especially considering small businesses had the highest median loss of companies of all sizes at $150,000, according to the Association of Certified Fraud Examiners (ACFE).
What are some of the ways independent agents can help their clients mitigate potential employee theft-related losses? By building awareness of common crime schemes, encouraging clients to take proactive risk management measures and ensuring they have adequate insurance protection in place.
4 top employee crime schemes
What should you tell your clients to watch out for when it comes to employee theft? Business owners should be especially mindful of the following four common types of employee crime schemes:
- Billing and vendor schemes: employees set up false vendor accounts and then bill their companies for non-existent parts or services
- Check tampering schemes: employees use company checks to pay themselves, or reissue the company’s old outstanding checks and change the payee to themselves
- Payroll schemes: employees create “ghost” employees, add them to the payroll and direct-deposit their salaries into a fraudulent account they set up; or, employees fraudulently increase their salaries within payroll or human resources systems, triggering payments in excess of their actual salaries
- Expense reimbursement schemes: employees submit reimbursement requests for expenses never incurred or not of a business nature, and are then reimbursed for those fraudulent expenses
Preventing employee theft
The consequences of employee theft can be crushing, from loss of reputation and productivity to impact on profits. But the good news is the presence of anti-fraud controls is associated with lower fraud losses and quicker detection according to the ACFE, which is critical since the average crime scheme lasts about 14 months.
In addition to securing proper insurance protection, encourage your business clients to review their internal processes and procedures and implement best practices, including:
- Perform background checks. In accordance with law, perform thorough background checks of all potential hires. Do not take shortcuts or make assumptions.
- Set up a system of checks and balances. Make sure there is clear accountability for every position and that no position has broad enough power to authorize payments without the consent of another individual.
- Set up an anonymous tip line. Having a line where employees can report suspicious activity or business practices is a top way for business owners to be alerted to fraud.
- Have a clear employee conduct policy. Communicate often and clearly about the company’s employee conduct policy.
- Establish clear vendor processes. Set processes for vendor acceptance and setup, inventory control, and expense reimbursement can help avoid potential theft.
You also can partner with insurance carriers that provide guidance and services to help clients address their risks. For example, Hanover policyholders can take advantage of discounted background check services to help screen applicants, answer questions about a candidate’s integrity and help select the right individuals for their team.
Protecting businesses from loss
While most standard business insurance policies provide some crime coverage, basic coverage may not be enough — even for a small business. Employee theft losses have been known to put small businesses without enough coverage out of business. In fact, The U.S. Chamber of Commerce attributes nearly one-third of all small business bankruptcies result from employee theft.
Agents should consider a stand-alone crime policy that offers higher limits on employee theft and a broad range of additional coverage. Partnering with a carrier like The Hanover who offers an online quote-and-issue capability for stand-alone crime coverage can give you a significant advantage in the market. Through TAP Sales, you can easily and conveniently provide small businesses with a stand-alone crime policy, include coverage as part of a broader management liability package or pair with standard lines for an account-focused solution.
From inventory theft to falsified expenses, payroll fraud and more, no business is immune to employee theft. But independent agents can identify effective crime insurance solutions, putting their business clients in a better position to withstand and prevent employee theft.