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How to Spot Employee Theft and What You Can Do About It


Trust is the cornerstone of all successful organizations. As a business leader you invest in your people and trust them to do a good job – and the majority of employees do just that. You can feel confident leaving your business in their hands, knowing they’re working for the good of the company.

But not always. Employee theft is on the rise – it runs the gamut from stealing office supplies and padding time to committing fraud. Knowing how to deal appropriately with these delicate situations is vital and will depend on the scope of the situation. Actions can vary from updating your employee handbook to employee termination and legal intervention.

Many times theft can occur out of opportunity.  One of the biggest mistakes small business owners make is putting one person in charge of the finances.  The person paying the bills should never reconcile the bank statement.  Having a check and balance system in place can make it harder to blur the lines when it comes to the money.

These are three tasks that need to remain separate:

1. Authorization – The person who approves the vendor bill or sends a customer invoice
2. Recordkeeping – The person who produces or gets the check signed or who creates the invoice
3. Custody of related assets – The person who reconciles the bank statement or credits/edits the invoice

If sufficient staff isn’t available, consider outsourcing some tasks to provide a system of checks and balances.

Warning signs of employee theft

Detecting employee theft can be difficult, especially if the person is adept at hiding it.  Be alert to these red flags that could indicate your business is at risk:

  • discrepancies of cash amounts
  • missing merchandise or supplies

Watch the employee’s behavior for:

  • refusal to turn over job tasks to others
  • unusual working hours
  • poor work performance
  • unjustified complaints about employment
  • defensiveness when reporting on work
  • an unexplained close relationship with, or unjustified favoritism by, a supplier or customer
  • a personal lifestyle that doesn’t match salary

Follow the tips below to help safeguard your organization against employee theft.

Start before you hire

Investing time in the hiring process can help weed out potential problem employees. In a Career Builder study, 69 percent of employers reported they made a bad hire in the last year, with 24 percent saying this mistake cost them more than $50,000. Conducting pre-employment background checks is a must, especially for small businesses that many times don’t invest in pre-employment screening and set themselves up as targets for potential employees seeking to fall under the radar when applying for a job.

According to a study by the Association of Certified Fraud Examiners, companies with fewer than 100 employees lost an average of $147,000 from occupational fraud as compared to $100,000 for companies with 1,000-10,000 employees.

Avoid the costly mistake of bringing on a risky new hire by conducting a comprehensive employee background check.  By being proactive in the hiring phase you can lower the odds of being affected by unsavory behavior in the future.

Define company guidelines and policies

Providing your employees with clear company guidelines in the form of a company handbook is an important tool in protecting your business.  It outlines your company policies and procedures and can serve as valuable documentation in case of a lawsuit. By defining your company’s expectations, ground rules and what is and is not acceptable behavior, you are providing yourself and your employees with a framework in which to operate. The handbook should be regularly reviewed and updated with any new laws and regulation changes. Each employee should be given a copy of the handbook on their first day and sign an acknowledgment that they have received it. This helps to hold employees accountable and sets the stage for open communication in regard to company expectations.

Corporate leadership leads by example. Research conducted by the Society of Human Resource Management shows that employees look to corporate leadership to set ethical standards. Remember that by demonstrating your company values in your day-to-day work you’re setting the bar for what your employees view as acceptable and unacceptable business practices.

For example, if your company has a strict time and attendance policy don’t be lax about your own time away from the office. Likewise, if a work/life balance is part of your company’s culture, encourage your employees to take advantage of flexible work schedules and consider their schedules before planning meetings, projects, etc.

Determine if an investigation is warranted

So you’ve had a report of a potential employee theft in your company. What are the first steps you need to take?

You will need to get the full story and look at the facts. Is this an isolated incident with one person accusing another or is it ongoing with several people witnessing the behavior? Are there other people that you need to speak with to get more information? Sometimes what appears to be theft might be miscommunication or unclear employee practices.

Say that Mike sees Mary leave early. Their timesheets are easily viewable, and Mike sees that Mary has padded her time. He reports her and says she is “stealing time”. Is this employee theft? Not necessarily. First you need to weigh the situation:

  • How much time is being added? Is Mary simply rounding up 10 minutes or is she adding extra hours?
  • Is it a one-time event or ongoing?
  • Is Mary simply making an honest mistake?
  • Is she going by past employer practices, where it was acceptable to round up 10 minutes on her timesheet?
  • Is your company policy clear on how to handle time and attendance?

With so much to consider it’s important to look carefully at all aspects of a reported incident prior to launching a full blown investigation.

Report and document

Once you’ve determined that you have enough evidence to move forward with an investigation, how do you proceed?

  • Talk to the accused employee. Ask for an explanation. This doesn’t have to be done in a confrontational manner. You can let employees know that some concerns regarding their behavior have been brought to your attention and you need their help to understand what’s going on.
  • If you have captured a theft on a video camera or you have a significant number of witnesses to the theft then most likely there’s no explanation and the employee is terminated for misconduct.
  • Alert law enforcement if legal action is required.
  • Regardless of the final outcome, it’s important to document all conversations related to the incident – the initial report, witness accounts and employee explanation. Proper documentation protects everyone involved.
  • If you decide to move forward and terminate an employee after an investigation, it is best to use “misconduct” instead of “theft” as the termination reason to avoid defamation claims from the former employee.

Promoting an honest work environment

To cultivate a work atmosphere that promotes honest, ethical behavior it’s important for all employees to have a clear understanding of your company’s code of conduct. This can be accomplished by holding training seminars on ethics to inform employees of the guidelines and expectations that are specific to your company. Actively involving your workforce in group activities that focus on best practices, such as role playing, webinars and town hall meetings, is a great way to teach proper behavior in a positive way.

Ethics can mean different things to different people. Be proactive by helping your employees align their ethical thinking with the expectations of the company.

When it comes to employee theft, having provisions in place in the event of a problem and communicating your expectations to your employees all play a major part in safeguarding your business.

Are ineffective HR practices hurting your business? Get our free e-book, 7 Most Frequent HR Mistakes and How to Avoid Them to find out where your policies and procedure may be falling short.