The owner of ABC Technology (not its real name) was surfing EBay looking for used equipment and found two new computers for sale across town that matched two she had seen delivered from a customer’s order the day before. Curiosity piqued, she discovered more than $300,000 in equipment sold on EBay by two of her employees. Far from alone, ABC’s owner was part of the two-thirds of small businesses victimized by employee theft, reports the National Federation of Independent Business. Businesses of fewer than 250 employees are considered small businesses. But they represent 51.7 percent of total business revenue in the US.

Employee theft ranges from simple buddy-punching and taking home office supplies to stealing company information and money. Smaller potatoes, time theft and buddy-punching, represents amounts unlikely to do financial damage to a company.

Companies lose around 5 percent of their net revenue to employee fraud and “occupational abuse,” around $4.5 trillion a year annually worldwide. The big losses come from schemes of financial employees. They can bankrupt a small business. The Association of Certified Fraud Examiners reports that about 21 percent (on in five) of employee fraud cases they analyzed in 2020 each caused financial losses of more than $1 million.

Unsurprisingly, 40 percent of embezzlements, the most costly, came from the finance and accounting employees or sectors, reports Hiscox, Inc. How they pull off the financial fraud varies and depends largely on how well irregularity spotting of the accounting system of the company is set up. Small businesses bear the brunt because they don’t usually have the accounting safeguards built in that huge corporations have. Small businesses may also take most of the hits because of company culture. Often they are “close-knit,” like “family” with trusted employees, empowered with responsibilities with little or no oversight for running the company, explains the Association of Certified Fraud Examiners. Hiscox, Inc. reports that 80 percent of all organizations falling victim to embezzlement had fewer than 100 employees with just under half having fewer than 25 employees.

Those employees, explains the Association of Certified Fraud Examiners, “tend to be smart and liked.” They start out taking a one-time loan, intending to pay it back just as soon as their current financial predicament gets resolved. Then they come back for more while rationalizing that they are underpaid or feeling as if there’s no other way to provide for their families. The thefts will keep up until their employers catch them, typically 14 months. They are spotted because 42 percent of fraudsters get caught because they were living beyond their means and 26 percent had been experiencing financial problems.

Some embezzlers get caught because the employer notices that the books seem to be disorganized or confusing. They could be faking vendor payments or padding expense reports, for example.

Fake vendor payments are where an employee makes up fake invoices for never-sold goods or services. They pocket the money in the amount of the invoice they faked. Padded expenses arise when, for example, an employee pays for another person’s meal with a company card in exchange for cash from the person whose lunch they bought. Then they ask the company for reimbursement for the expense and keep the cash their lunch partner paid them.

Accounts payable fraud, something more difficult to detect, can be a “pay and return scheme” where an employee overpays a vendor and asks for a refund from the vendor. The employee keeps the refund.

With personal purchase schemes, an employee creates purchase orders and payments for goods for their personal use, keeping the goods, returning them for cash, or selling them, like the computers and the ABC Company. How that escapes notice by an employer escapes me.

Accounts receivable fraud comes in a variety of permutations with “billing errors,” and delays posting customer payments, though either could be legitimate, and that’s why it’s hard to carch.

Vendor fraud can entail bribery and kickbacks to the employee so a vendor can do business with the company. Difficult to spot, they never appear on the company books. Kickback or bribery fraud can come from selecting only one vendor, payment of unreasonably high prices to that vendor, excessive quantities of goods benefiting the vendor, accepting low-quality goods at higher prices, and delivery of items that don’t meet company specifications and getting kickbacks from the vendor. One-off events may only be suspicious, but continued business with a vendor meeting the criteria above can be cause for suspicion.

That kind of fraud is difficult to spot and even more difficult to prove. Only 16 percent of companies that are ripped off ever call the police.

So what happened with the computers stolen from the ABC Company? The guilty parties, the techs, had submitted purchase orders for the customer’s equipment and the company techs had ordered and installed the equipment without ever checking them against the customers’ purchase orders. Add to that another level of fraud. The head technician discovered the bookkeeper had been engaging in minor receivable theft. He blackmailed her to cooperate in the larger, computer-theft scheme. The bookkeeper got charged and settled for restitution in exchange for not going to jail.

Why are so few fraudsters prosecuted? Most often the business owner wants to recover the stolen money rather than seek “justice.” They may file charges against the perpetrator but negotiate dropping the charges if the embezzler reimburses the company, often signing a non-disclosure agreement in addition to reimbursement.

Unless he or she is prosecuted, which leaves a legal trail, the employer dares not say to a future employer that the individual had been fired for stealing lest the company face a defamation suit. As a result, thieves keep on getting hired by new companies and keep on stealing from their new employers without any suspicion that that employee had been fired for theft.

With thefts often coming from the person you would least suspect, the most well-liked, longest employed, most trusted people, business owners must be vigilant and constantly check the books, the inventory, and the personnel, just to see how the business is doing if nothing else. Running a business is a hands-on job, not a trust everyone project.