Strategies For Reducing Employee Theft - Management
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SECTION: Management

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Strategies For Reducing Employee Theft

Written By Sentry Insurance

Article Date: 10-01-2006
Copyright (C) 2006 Associated Equipment Distributors. All Rights Reserved.

Employee theft can cripple your dealership.

According to the U.S. Chamber of Commerce Small Business Center, 30 percent of all business failures are caused by employee theft? Consider these real-life examples:


A dealership’s warranty clerk was writing fraudulent warranty refund checks to customers who had legitimate dealer warranty contracts. The clerk would then cash the checks. Estimated loss: $125,000


An office clerk employed for more than 20 years embezzled money over a period of two years. Customers would write checks for service work but leave the “payee” field blank. The employee would then write her name in, cash the check and hide the charges in accounts receivable. Estimated loss: more than $750,000


An assistant parts manager wrote false purchase orders to obtain parts then changed internal work tickets to show the parts were used and subsequently zeroed out the inventory in the computer. Estimated loss: more than $200,000



You’d like to think you can trust your employees to always do the right thing, but the sad fact is that one-third of all employees have admitted to stealing from their employers. The Association of Fraud Examiners estimates 6 percent of revenues are lost yearly as a result of fraud. Applied to the U.S. Gross Domestic Product, this translates to losses of approximately $600 billion or about $5,000 per employee.



Employee theft includes everything from an employee pilfering office supplies or dealer merchandise to complicated computer fraud schemes misappropriating thousands of dollars in cash or securities. Losses due to employee dishonesty can generally be grouped into three types: inventory/theft schemes that involve the falsification or alteration of inventory records or inventory theft; scams that originate in accounts payable or receivable; and diversion schemes, such as warranty scams.


Watch For Red Flags

Be on the lookout for employee dishonesty or fraud involving workers, supervisors, managers, consultants and vendors. The following may signal employee dishonesty. This list is not all-inclusive and no one indicator by itself is necessarily suspicious. Even the presence of several indicators, while suggestive of possible fraud, doesn’t mean fraud is being committed. These are ‘red flags’ only, not actual evidence.

  • An employee continually works after hours, comes in frequently on weekends, or insists on taking work home. Fraudulent activities are easier to accomplish when work is unobserved and unsupervised
  • An employee refuses to take a vacation or sick leave
  • An employee avoids or resists having other employees assist or relieve them
  • An employee appears to be under stress without a high workload or has marked personality changes
  • An employee has a sudden change of lifestyle, has unexplained wealth, or is living beyond apparent means
  • An employee spends excessive time away from his/her desk or out of the office
  • An employee appears to have close relationships with vendors or contractors
  • Vendors or contractors insist on dealing with just one individual
  • An employee is responsible for purchases that are regularly recorded as undelivered
  • You notice increases in purchases from a certain vendor that are not justified by competitive bidding or services rendered  
Establish Accounting Controls

To help protect against employee theft, establish internal accounting controls for employees who have access to cash, checks, receipts or other accounting documents. This is the most important action you can take, along with making sure those controls are followed.


Do not confuse accounting controls with the accounting system. Accounting controls are practices that identify and control sensitive or vulnerable points within the accounting system. When you put accounting controls into place and reinforce them, you minimize the opportunity for fraudulent activity.


Some controls you should implement include:

  • Do not allow one employee to handle all phases of a financial transaction
  • Require a countersignature by two officers on all checks
  • Store unused checks in a safe or under lock and key
  • Order pre-numbered checks that are drawn carefully, so there is no opportunity for alteration
  • Implement a procedure that requires all incoming checks to be immediately stamped “For Deposit Only”
  • Take inventory as often as possible, at irregular intervals, by someone other than the employee in charge of inventory
  • Require all invoices for merchandise and supplies be approved by the proper authority, someone other than your bookkeeper, before payment is made
  • Have someone other than the person who prepared the payroll distribute payroll money or checks
  • Require all employees to utilize all or some of their vacation days to provide an opportunity to uncover questionable transactions

Pre-Screen Job Candidates

Conduct pre-employment screening to determine the background and identity of your applicant. Amid security concerns, corporate scandals, workplace violence and employee embezzlement, gone are the days of a simple employee application and reference checks.


Before hiring anyone with sensitive duties or responsibility for handling money and financial matters, thoroughly check references, verify degrees and licenses, and check for criminal convictions.


Prior to performing a background check, it’s important your dealership complies with the Fair Credit Reporting Act and all state and federal employment laws. Laws will vary from state to state in how and what information can be used during your pre-employment screening process.


To help steer through the legal requirements and state and federal regulations, one solution is to employ the services of a background checking company. In any event, be sure to check with legal counsel before you embark on an employee screening program.


Conduct Regular Audits


Audits, particularly surprise audits, have real value in reinforcing the moral fiber of those who might otherwise be tempted. Regular audits by your dealership’s personnel – or better yet, by an outside auditor, such as a CPA firm – can be effective in deterring fraudulent acts, in uncovering them, in showing up weaknesses in your control systems and in reducing losses by discovering them before they grow.


Develop Dishonesty Policy


An employee dishonesty policy should detail your policies and procedures in preventing, detecting and investigating fraud. The policy should include an anonymous reporting process that allows employees to report suspected fraud without fear

of repercussion.


It should also describe the procedures or monitors by which your

dealership detects or prevents internal fraud. Finally, it should include a

statement that you will aggressively pursue criminal and civil charges against any employee who commits

a fraudulent act.


Employee dishonesty can be a real threat to the success of your dealership. Be aware of the risks you face from employee dishonesty, implement effective controls and watch for the red flags described in this article. By doing so, you can help control or eliminate loss from employee dishonesty.


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