Protecting Your Small & Mid-Size Business from the BIG Problem of Employee Theft

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Small and mid-size businesses are the backbone of the American economy. As owners, you spend most of your time innovating, problem solving and leading your company. However, while you are focused on growing your company, you may also become the victim of employee theft. While all businesses have some exposure to employee theft, according to the Association of Certified Fraud Examiners, companies with fewer than 100 employees disproportionately bear the brunt of this problem.

The consequences of employee theft can be crushing, from loss of reputation and productivity to impact on profits. In fact, the financial toll can be staggering with the average commercial crime loss estimated to cost the owner $140,000, with many losses totaling more than $1 million. While most companies survive this kind of fraud, many do not. The U.S. Chamber of Commerce says one-third of all small business bankruptcies are the result of employee theft.

Being aware and putting some proven prevention processes in place, plus having crime insurance protection can significantly reduce your risk – giving you more peace of mind.

It Won’t Happen to My Business

Many of you will be tempted to stop reading right here. Thinking…this could never happen to me. I trust my employees—they’re like family. I’m too small. No one would steal from my business…

The truth is more than half of employees who commit fraud have worked for the company they defrauded for more than five years.

Five Common Business Crime Schemes

So, what should you be on the lookout for when it comes to employee theft? Based on an in-depth study of claims experience, The Hanover Insurance Group has identified five common employee-related crimes.

  1. Billing and vendor schemes where employees set up false vendor accounts and bill a company for non-existent parts or services.
  2. Check tampering schemes where employees use company checks to pay themselves or reissue the company’s old outstanding checks and change the payee to themselves.
  3. Payroll schemes where employees manipulate the amounts on their checks, or create duplicates of their checks to cash them more than once.
  4. Expense reimbursement schemes where employees submit additional expenses never incurred, or not of a business nature, and are then reimbursed for those bogus expenses.
  5. Social engineering schemes where honest employees receive a fraudulent email and move money into fake accounts. While these employees are not complicit, the results are the same for the company – loss.

Reducing Your Risk

Fortunately, there are a number of steps you can take to protect your business. First, get expert insurance advice to assess your business and align with the appropriate protection. Too often, coverages have not been updated or even considered. A local independent insurance agent can provide counsel, giving you an understanding of the coverage your basic insurance policy may provide and addressing the additional coverages you may need.

While most basic business policies provide some employee crime coverage, it may not be enough. Typically, a small business policy will cover employee theft only up to $25,000, and policies for mid-size companies may cover somewhere between $50,000 and $100,000. But, with $140,000 being the average employee theft loss, basic coverage can leave you with a big gap.

That is why it is important to consider a stand-alone crime policy that covers you should money, goods, property or securities be stolen by an employee. An entry-level crime policy can cost as little as $200 a year, providing very affordable coverage for a potentially big problem.

Depending on the kind of business you run, you may also want to consider a third-party off premises policy. Should your employee steal from a client while working at the customer’s location, this type of policy could provide protection. Third-party off premises coverage is crucial for technology, consulting, accounting and manufacturing companies, along with businesses that deliver, install, or repair items at a customer’s location.

In addition to putting the right insurance protection in place, you should look at your internal processes and procedures. Here are some best practices to help protect your business:

  • Perform thorough background checks (in accordance with law) 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 in the organization and that no position has broad enough power to authorize payments without the consent of another individual.
  • Set up a tip line for the organization, guaranteeing anonymity, in order to allow for the reporting of any suspicious activity or business practices. Tip lines are one of the top ways business owners are alerted to fraud.
  • Encourage all employees who handle accounting and payment functions to take vacation time, with another person handling their work in their absence. This fresh set of eyes may detect questionable practices or trends.
  • Communicate often and clearly about the company’s policy on employee conduct.
  • Establish clear processes for vendor acceptance and set up, inventory control and expense reimbursement.
  • Do not allow discrepancies to be attributed simply to the cost of doing business. Be sure to conduct a thorough investigation of discrepancies.

The Bottom Line

From inventory theft to falsified expenses, payroll fraud and more, no business – small, medium, or large – is immune to employee theft. While you cannot prevent the possibility completely, you can be better protected.

Take steps now within your business to thwart employee theft and reinforce a culture of honesty. With the help of a local independent insurance agent identifying the right kinds and amounts of crime insurance protection, your company can be better positioned to prevent and withstand the financial blow of employee theft.

About Helen Savaiano 1 Article
Helen Savaiano is president of president of management liability at The Hanover Insurance Group (, a property and casualty insurance group based in Worcester, Mass., represented by independent insurance agencies nationally.

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