Your Online Guide on Employee Fraud and Employee Theft Coverage

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They say that businesses should invest in physical controls like the best security camera for business, police alarms, and impenetrable gates and fences to protect their assets from theft. But, what most employers forget is that thieves are not always outside. They are sometimes working with you for eight hours a day.

I call this phenomenon “employee theft.” Are you familiar with the story of the Trojan horse? If not, I will summarize the whole story for you.

So, the Greeks have been trying to penetrate the city of Troy, but they fail miserably.

However, the Greeks built a giant wooden horse and left it at the gates of Troy. Thinking the horse is a sign of retreat, the Trojans brought the horse inside their walls and declared victory over the Greeks.

But on the dark of night, arise are the Greek warriors hiding within the wooden horse. The Greek army attacked Troy while at slumber, and Greece won the war.

The same is right about employee theft. You’ve accepted people under your employ without knowing their true intentions. Little did you know that they have plans of stealing from you. And with that threat in mind, I think that employee theft coverage plans are vital for businesses prone to thievery.

Employee

Definition of Important Terminologies

Before we start talking about employee theft coverage, let’s define the essential terms that will appear in further discussions.

  • Employee theft

It is a fraudulent activity performed by an employee to misappropriate the employer’s assets.

  • Misappropriation of Assets

It is a type of fraud wherein an entity’s asset is used for purposes not related to the entity’s industry or taken away for the personal consumption of the person performing the fraudulent act.

  • Employee theft coverage

It is an insurance policy designed to protect employers from financial losses due to employee theft. This also helps a business recover from financial losses incurred as a result of employee theft.

  • Loss

In financial accounting, a loss is a non-operating item in the income statement that negatively affects financial performance due to decreases in assets and net income as a result of circumstances not related to the entity’s industry.

In simplest terms, a loss is an event that decreases the earning potential of the business.

  • Fraud

In business, fraud is a deceptive act to conceal in order to gain access or possession of a particular item without the permission of the owners.

Common Business Thefts

Business

Before we talk about employee theft coverage, let’s first talk about fraud. Fraud is everywhere. It can exist in different fields. Your business can be subject to fraud.

Remember that fraud has three elements. Knowing the elements is the key to detecting where it could exist. If you don’t have a nose for fraud, then it’s time to learn these elements. Behold, the fraud triangle:

  1. Pressure (or Incentive) — it is the motivation to commit fraud.
  2. Opportunity — it is the moment when the person who commits the fraud believes that internal control can be overridden.
  3. Rationalization — it is when the person committing the fraud rationalizes his (her) doing.

With the three elements presented, here are common fraudulent activities that you might face in the future.

  • Embezzlement

It involves stealing cash by manipulating receipts and records in order to hide the missing amount (e.g., skimming, kiting, lapping).

  • Theft of physical assets including intellectual property

It involves taking the employer’s assets outside of business premises without the intention of returning it.

  • Payment of goods not received

It involves payments to fictitious vendors and employees and kickbacks by vendors to purchasing agents.

  • Use of business assets for personal use

It involves using business assets such as office supplies, access to web services, or office amenities solely for personal use.

Acts Covered by Employee Dishonesty Insurance

Insurance

Now that you know the different kinds and sources of employee fraud, it’s time to know how you can protect your business in case this happens to you.

Below are the usual acts covered under employee theft coverage plans:

  1. Embezzlement
  2. Forgery and alteration
  3. Credit card fraud
  4. Unauthorized electronic funds transfer
  5. Computer fraud
  6. Counterfeit currency coverage

However, the following acts are usually not covered under employee theft coverage plans:

  1. Acts of owners, directors, or principal
  2. Litigation expenses
  3. Inventory shortages
  4. Trading losses

Proving Employee Theft

Employee

Insurance companies won’t just release your claims without concrete proof that you’re eligible for the claim. Below are several ways on what to do when you caught your employees stealing.

  • Establish hard evidence against the employee or group of employees.

A CCTV footage is hard evidence against the suspect. Inspect the books for possible traces of inconsistent transactions. Conduct a lifestyle check. Don’t forget to document.

  • Do not terminate the suspect.

The first thing you might want to do is to terminate the employee. That’s a big no. Let the suspects feel that they’re not being watched. Keep on gathering evidence.

  1. Observe how they performed fraud.

Study how the conniving parties perform the fraud. This personal investigation may help authorities in their investigation.

  1. Notify the authorities.

Insurance companies require a police report in order to assess the legitimacy of the claim.

  1. Optional: Hire a fraud auditor

Complex fraud schemes are hard to detect. Hiring a fraud auditor can help you unmask the fraudulent act by means of examining financial records and observing employee practices to conclude the existence of fraud.

Crime Policies

Usually, employee theft coverage and crime policies are bundled in a single insurance package. Businesses may avail crime policies in order to protect them from business-related crimes.

However, a crime policy may constitute other crimes aside from theft. It may involve the selling of illegal substances and the likes.

Suing Employees for Theft

According to the general penal law, theft is a criminal act. And yes, employers may sue employees for theft. But, since you have an employee-employer relationship, the litigation process may involve other laws applicable in your area, particularly the labor code.

It is best to consult a lawyer to know how the legal proceedings will pursue.

Final Words

Employee theft coverage is best for companies whose assets are at risk of theft. However, proper internal control is the best safeguard to protect your assets from theft. Now, “should I get an employee theft coverage plan?” you might ask. It depends. If the risk of theft is high, get a plan to protect you from financial losses. In the end, you want to keep the business running.

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