How big a problem is employee theft and embezzlement? Probably much bigger than you think—more than $50 billion annually, according to a recent survey. The actual number is probably higher, because companies don’t always report theft and the perpetrators are rarely prosecuted. And speaking of perps, that same study reports that 75% of employees have stolen at least once from their employer.

I can speak from nearly 40 years of experience working with small to mid-size distributors. Over those years, I’ve witnessed all sorts of clever schemes to steal from employers. In one case I recall from years ago, the actions of a dishonest controller at a building materials supplier were the principal cause for the company’s eventual bankruptcy. Any company can be a victim of employee theft. But there’s a lot you can do to protect your distribution business.

First, let’s speak honestly about who’s dishonest.

Employee dishonesty is a delicate subject. Most business owners want to believe that their employees are loyal and honest, so it’s easy to be in denial—especially when the thief in your midst may be the nicest guy you know, and the person you would least suspect. A model citizen in the community. Someone who's happy to stay late and show up on weekends, someone who seldom takes vacation.

Why do employees steal?

Employee theft requires two conditions: motive and opportunity.

Motives for employee theft

The two prime motives behind theft and embezzlement are financial duress and amorality:

Financial duress can have any number of causes, including gambling addiction, substance abuse, personal financial irresponsibility, or legitimate, unexpected debts. (A gambling addict often reasons, “I’m going to hit it big this weekend, and I’ll put the money back on Monday. No one will know.”)

Amoral personalities lack a moral compass or a conscience. They do not distinguish right from wrong—at least when it comes to stealing from the company. They may also rationalize theft or embezzlement by telling themselves that everyone does it and the impact is insignificant—it’s a victimless crime.

Opportunites for employee theft

An employee who's willing to steal must also find the opportunity to do so. The opportunities I've observed in distrbution businesses include:

• Bogus expense payments or petty cash disbursements
• Pocketing rebates or vendor rewards
• Collusion with customers
• Collusion with vendors
• Kickbacks from vendors
• Inventory theft

A number of positions in your distrbution organization are particularly prone to thievery:

• Your controller disburses hundreds of payments each week. Most of them probably aren't carefully reviewed.
• Your warehouse manager has unfettered and unsupervised access to your entire inventory.
• Your purchasing managers decides whom to buy from and has wide discretion on what he pays for the products he buys.

You trust the people you hire—but any one of them could be a thief. How do you protect your company?

Take these 10 theft-prevention actions:

1. Hire smart. Do your due diligence when you hire. Conduct thorough background checks, especially for sensitive positions. Consider requiring drug testing and running credit reports. Be sure to check references and investigate gaps in dates of employment.
   
   
2. Watch for red flags in the workplace. Be aware of problematic or unusual employee behavior. For example, excessive absenteeism or a habit of disappearing during the workday may indicate a gambling problem, alcoholism, or substance abuse. An employee whose extravagant lifestyle does not match his financial circumstances is also cause for suspicion.
   
   
3. Check yourself. You’ve worked hard to be successful. But the image you project to your employees shouldn’t give them a way to rationalize dishonest behavior. An employee motivated to steal might think, “He’s living large with that pricey car and house. If I steal $10,000 from the company bank account, he won’t even feel it.”
   
   
4. Publish an employee handbook. Documented policies and procedures eliminate “gray areas” in employee behavior. Specifically identify unethical or unlawful conduct warranting termination or prosecution. Establish clear and thoughtful policies on matters like travel and entertainment expenses. Carefully consider what types of gifts or benefits your people are allowed to accept from vendors. (One of the easiest examples of illicit behavior to rationalize is taking kickbacks from a vendor. It doesn’t look like stealing but it really is, because it compromises the employee and can make him or her a blackmail target.) Your company’s attorney is a good resource.
5. Set up "fail safe" staffing. Assign two or more trusted people to share sensitive duties whenever possible. Require them to take regular vacations and shunt their responsibilities to their alternate in their absence. (If an employee never seems to take time off, it may be because he or she fears their theft scheme may be discovered if they go away.)
   
   
6. Tighten your inventory controls. Limit who has access to inventory. Install closed circuit cameras at access points. It’s especially short money if you sell expensive products (like high-end consumer goods) that are easily sold on the street.
   
   
7. Improve your inventory and warehouse systems An effective warehouse automation system allows for speedy, efficient, and frequent cycle counting, enabling you to spot shrinkage and contain loss.
   
   
8. Implement a distribution ERP system with strong internal controls. For example, if your ERP allows a user to delete an order after it’s been picked or shipped, that’s a prime opportunity for someone to offer free product to a customer. Your distribution ERP system should alert you to unusual discounts on sales or unusually high purchase price variances on inventory.
   
   
9. Establish a multi-level approval process for large-cap expenditure items. When a single person has sign-off, conditions are ripe for employee theft.
   
   
10. Consider conducting periodic audits of departments where abuse can happen. Often, a scheme of employee theft may not reveal itself until considerable, possibly irreparable, damage is done.

I think you’ll agree that most of these actions are common sense, as well as common practice in most workplaces today. The big takeaway: Keep watch on your inventory, your finances,and your employees.

This is the second of three articles on security for distribution businesses. The first article discussed check fraud. Next, we’ll explore IT fraud and how your can protect your company. Subscribe at the top right of the page and you won’t miss a post.