Employee Dishonesty Insurance Guarding Against An Increasing Risk
Employee fraud and dishonesty currently cost American businesses $400 billion each year. Seven years ago, the U.S. Department of Commerce reported the cost at a mere $50 billion. The risk has increased eight-fold in less than a decade.
Unless your company is an exception to the average, your dishonest employees are likely causing your organization to lose six percent of its total annual revenue each year. That’s $9 a day per employee.
Here is one more statistic that runs counter to most employers’ perceptions: When workplace crime occurs, 80 percent of the time it’s an “inside job” committed by one or more employees – usually by someone who is highly trusted. Trust is the essential element in employer/ employee relations, but it also creates situations that test the character of staff.
Perpertrator Profile
Since the Recession began, the financial woes of employees (and employers) have worsened and the frequency and financial impact of employee dishonesty have risen. Midsize companies are particularly at risk. According to a 2010 report by the Association of Certified Fraud Examiners, in nine out of eleven categories in which fraud was committed, companies of 100 or fewer employees suffered more fraud and abuse than those with more than 100 employees. That includes crimes in billing, check tampering, expense reimbursement, skimming and payroll – to name a few.
Smaller firms often lack internal controls and small-business owners regard their employees as trusted family members who would never cheat on them. One in four perpetrators has been on the payroll for more than 10 years. The largest losses may take place over years.
Here is another unpleasant surprise. The profile of the perpetrator is not necessarily what you might expect. The 2010 Marquet Report on Embezzlement shows the three highest categories of employees likely to commit crimes against their employers are:
- Finance and Accounting - 66%
- Manager - 14%
- Executive - 13%
Employer Prevention
Experts in protecting employers from employee theft recommend two essential measures. First, establish and enforce a loss- prevention program. Second, purchase and be prepared to use Employee Dishonesty Insurance.
An effective loss-prevention program removes the opportunity for dishonesty by controlling how financial matters are handled. For specific advice in this area, turn to your Certified Public Accountant, independent accountant (not part of your staff) or your trusted insurance broker. They may advise you to include the following measures:
- Hiring employment policy with background investigation
- Written honesty policy for employees to sign
- Counter-signatures for checks
- Separate deposit/withdrawal responsibilities from reconciliation
- Full annual independent audit
- Computer security safeguards and restricted access
Insurance Protection
Low-cost crime insurance is available to help employers recover losses in these situations. This type of insurance provides protection from financial loss caused by an employee’s fraudulent activity. Limit of coverage depends on potential for loss. Generally, broad blanket coverage with a limit high enough to cover maximum exposure is recommended. If a company has access to the money, security or property of others, third-party coverage can be added. Employee Dishonesty Insurance may be added to another insurance policy.
Criminal Minds
Employee dishonesty is one of the most difficult claims to prove. Records of accounting and inventory are critical to convincing insurance carriers that a loss has occurred. When loss is suspected, the insurance carrier should be notified. But evidence must be verified and proof of loss provided before filing a claim.
It is never an easy thing to discover dishonesty among people you have trusted. Recognizing that it is an increasing risk in business and dealing with it through prevention and protection helps secure the jobs of your honest employees and sustain the life of your business.