An Inside Job: Combating Employee Crime for Lawyers

Apr 15

We provide this material for informational purposes only. Before taking any action that could have legal or other important consequences, confer with a qualified professional who can provide guidance considering your unique circumstances.

Lately, we see the attention to the rise in criminal activities targeting manufacturing and service companies, both large and small. Criminals worldwide are attacking businesses with highly sophisticated computer techniques such as ransomware, phishing, and other electronic “weapons.” Meanwhile, intruders also target companies with vandalism, arson, and other destructive actions during sparks of civil unrest. The headlines and news flashes paint a disheartening picture for business owners just trying to make a living by offering needed products and services.

As troublesome as these acts of theft and destruction may be, there is a whole other category of crime that makes business owners cringe: employee fraud. The thought that employees of all ranks and occupations are pilfering company money, stealing company goods and equipment, or otherwise robbing the company blind is almost, well, unthinkable.

Yet, employee crime occurs every day. The scope of the problem, clearly illustrated by a landmark study recently published by the Association of Certified Fraud Examiners (ACFE). For the past 25 years, ACFE published its Report to the Nations, which studies the cost of occupational fraud to businesses and government agencies across the globe. The ACFE defines occupational fraud as “fraud committed by individuals against the organizations that employ them.”

The latest edition of the ACFE’s Report to the Nations, The 2020 Global Study on Occupational Fraud & Abuse, serves as a wake-up call for business owners, executives, and managers. Here are some of the most pertinent findings from this latest study:

The typical organization loses 5% of its revenues each year to occupational fraud.
The median per-case loss caused by occupational fraud is $125,000. The average per-case loss due to occupational fraud is $1,509,000.
21% of the fraud cases have losses of $1 million or more.
It typically takes 14 months to discover that occupational fraud is occurring, with an average monthly cost of $8,300.
In approximately 33% of the cases, the perpetrator is committing multiple forms of fraud.
Small companies suffer a disproportionate amount of significant losses, primarily from billing, payroll, and check payment fraud.
The three major types of occupational fraud are asset misappropriation, corruption, and financial statement fraud. The most common asset misappropriation schemes represent 83% of fraud cases. The median loss of such cases is $100,000.
Corruption was involved in 43% of occupational fraud cases, with typical losses of $200,000. Financial statement fraud occurred in 10% of the cases, with typical losses of $954,000.
The higher the level of the perpetrator’s authority, the greater the fraud losses. Owners/executives commit only 20% of cases of occupational fraud, but losses average $600,000. Fraud losses committed by managers average $150,000, and those committed by employees average $60,000.
By company department, employees in operations committed 15% of fraud; accounting, 14%; executive/upper management, 12%; and sales, 11%.
Tips from others reveal 43% of fraud schemes. In half of those cases, the tipster is a company employee.
In 33% of cases, tipsters use emails or telephone hotlines to report possible fraud.
Companies who set up telephone or other types of hotlines to report fraud had median losses that nearly half of those without hotlines — $198,000 versus $100,000.
Other top tools for detecting employee fraud include internal audits (15% of cases) and management reviews (12%).

Types of Employee Crime at Law Firms

The types of employee crime to which a company is most susceptible largely depend on its industry. Manufacturers, for instance, are very susceptible to theft of materials and finished goods. At the same time, law firms are also vulnerable to embezzlement, theft, and other types of fraud, resulting in the loss of financial resources.

Here are some examples of employee crimes that typically hit law firms:

Manipulation of company financial statements
Falsified billings from a perpetrator’s shell company
Check forgery or tampering
Purchasing or sale schemes that funnel funds to the perpetrator’s bank account
Manipulated time records
Payroll schemes, such as “ghost” employees or falsified wages or withholdings
Expense reimbursement schemes
Bribery or illegal gratuities
Invoice kickbacks
Theft of cash on hand.

Steps to Combat Employee Crime

Fortunately, there are several steps law firms can take to reduce the likelihood of becoming a victim of employee fraud. Consider these actions:

Employee fraud awareness. Make it clear to all employees that the company is alert to the potential of employee crime and has a no-tolerance policy.

Anti-fraud training. Teach employees the basics of how to prevent crime in the workplace. Implement an employee awareness training program. Other risk management tools may be available from your property and casualty insurer or legal association.

Management fraud awareness. Teach managers the warning signs that employees may be committing fraud. These may include working late without supervision, taking a lot of work home, living beyond their means, and signs of potential gambling or drug/alcohol abuse. Also, stress to managers the importance of adequate employee supervision.

Employee hotlines. Make it easy for employees to anonymously and confidentially report suspicious activity that may indicate occupational fraud by their superiors or coworkers. These can include telephone, web-based, or email hotlines.

Vendor and client hotlines. Some companies go so far as to provide anonymous hotlines for outside parties such as clients or vendors. These outside parties can often be excellent resources to spot unusual activities or missing equipment or inventories.

Job redesign. In small companies, in particular, employees perform essential job functions from start to finish with little if any management involvement or oversight. For instance, one employee may handle all accounts payable and receivable and prepare, receive, and pay purchase orders. Look into redesigning job functions so that critical financial functions are segregated and involve two or more individuals, preferably a trusted member of management. Also, rotate financial duties among the accounting staff and subject financial transactions to periodic management review.

Internal or external audits. Consider having all financial activities, and inventory counts audited by internal management or external accountants regularly. Surprise internal audits by trustworthy managers equipped with formal financial review procedures can be very effective. Quickly and thoroughly investigate anomalies revealed by audits require quick and thorough investigation.

Computer security measures. Have an expert examine your computer network and software, looking for methods intruders might use to divert funds or other valuables. Emphasize the tried-and-true methods of maintaining security, such as regularly updating passwords and strengthening user authorization techniques.

Office security measures. Advanced security and surveillance systems for your offices and other facilities are quite affordable these days. Keeping facilities and expensive equipment secured and having entrance/exit activities recorded on camera can provide a powerful deterrent to employees with crime on their minds. Limiting employee access to financial records and shredding outdated papers is also highly recommended.

Background checks. Conducting background checks on new hires, particularly those with financial responsibilities, may be advisable. But remember, most perpetrators are first-time offenders without a criminal record, and these background checks can be costly.

Important note: Take extreme caution before confronting an employee suspected of crime or fraud because a false accusation against an employee can lead to an expensive lawsuit.

Get advice from your legal counsel versed in employment law before taking any action against or voicing any suspicion about an employee. Have local law authorities, forensic accountants, or private investigators handle any investigations or formal accusations. Ensure you have solid evidence of a possible crime before taking any actions such as suspending or terminating employment.

Fidelity and Crime Insurance

Regardless of the safeguards your company may take, you can never eliminate all threats of employee crime. That’s why many companies purchase fidelity and crime insurance to minimize potential losses due to theft, embezzlement, forgery, fraud, or other types of criminal activity.

Today, fidelity and crime insurance are readily available for companies of all sizes. Smaller firms can often purchase fidelity and crime coverage as part of a commercial package policy, with coverage limits typically up to $500,000. Larger firms needing higher limits can purchase fidelity and crime coverage as a monoline policy with $1 million or more limits. Monoline fidelity and crime policies offer greater customization of coverages.

When shopping for fidelity and crime insurance through a commercial package policy, look for dedicated limits for employee theft exposure. Also, look for policies with multiple insuring agreements that provide fraud protection for exposures to employee criminal acts such as:

Theft
Embezzlement
Forgery
Counterfeiting
Credit card fraud
Loss of money, securities, and other property while on your premises, off-premises, or in transit
Computer fraud, including losses caused by malicious software
Funds transfer fraud.

Many crime policies provide reimbursement for claim expenses. Some protect against certain fraudulent acts of non-employees, such as vendors or board officers and directors. This third-party coverage can protect the client if one of the law firm’s employees steals funds or assets or otherwise commits fraud against the client.

As specialists serving law firms, we can help you secure fidelity and crime insurance that fits your particular needs.

Never an Easy Discussion

Addressing employee crime with your workforce is never easy. But bringing the topic into the light of day is often the first step in reducing the chances of criminal activities in your workplace. When employees know you take a no-tolerance approach to employee crime, monitor company finances, and encourage coworkers to be vigilant to suspicious activities, you’ve already decreased the chances of fraud, embezzlement, and theft. Secure the added layer of protection that fidelity and crime insurance provide, and you’ve taken a large bite out of the potential losses you could suffer from rogue employees. We’ll be happy to help you review your options.

Finally, one of the most effective ways to prevent employee crime is to maintain a positive workplace. Often, employees who commit fraud justify their criminal activities by saying the company “owes” them because of poor working conditions, low pay, etc. Employees who feel appreciated, well treated, and well-compensated are less likely to steal from their employer.

Can We Be of Assistance?

We may be able to help you by providing referrals to consultants, providing guidance relative to insurance issues, and even to certain preventives from construction observation through the development and application of sound human resources management policies and procedures. We’re a member of the Professional Liability Agents Network (PLAN). We’re here to help.

Please call on us for assistance.

We’re a member of the Professional Liability Agents Network (PLAN).