Employee Embezzlement Just Got a Whole Lot Easier Now that We’re Working Remotely
There’s a hidden risk facing many businesses across the country — one that oftentimes might go unnoticed for months.
That risk? Employee embezzlement.
“The average embezzlement loss is discovered usually 14 months to 18 months after it starts,” explained Doug Karpp, senior vice president, head of executive risks & cyber, Hiscox USA.
He added that, in one of the company’s most recent studies on embezzlement, 70% of cases went on for more than a year before they were discovered.
“Because of that, we tend to have a lag in the timing of losses,” he said.
The average embezzlement scheme could cost a company hundreds of thousands of dollars. The Association of Certified Fraud Examiners reported an estimated 5% of revenue is lost to fraud and embezzlement each year — that’s about $730 billion in the U.S. alone.
Small organizations tend to see the hardest hits, with median losses for companies with less than 100 employees averaging $150,000. Larger businesses see an average of $80,000.
While many employee embezzlement schemes are conducted in the office setting, right under the noses of upper management, the COVID-19 global pandemic has given way to bigger opportunities for fraudulent activity.
That’s because remote employee behavior isn’t quite as easy to monitor as it is in an office setting: “With a work-from-home environment, there is a lack of oversight,” Karpp said. “Managers are used to having their employees at the office or on a job site and can monitor activity. They can’t do that with work from home.”
A lag in case discovery coupled with a pandemic-induced work-from-home environment could very well lead many companies toward a hard 2021 and beyond as employee embezzlement schemes start to unearth.
Why the Pandemic Might Lead to Embezzlement
There are many factors at play as to why an employee might embezzle money from their company. The COVID-19 pandemic has only exacerbated these factors.
“The key thing to look at is motivation,” Karpp said. Typically, employees cross the line from good worker to fraudulent embezzler when they feel they are at the precipice of a personal financial crisis.
“Think of the high health care costs they fear they might be facing if they or a loved one falls sick,” Karpp explained. “The other part, and I believe it is a unique factor for this pandemic, is the fear that the employee or their spouse might lose their job.”
The latter is a significant factor. Research from the U.S. Bureau of Labor Statistics shows unemployment rates shot up from 3.8% in February of this year to 13% by May. Data from the Economic Policy Institute reports that by July, the number of unemployed U.S. citizens nearly hit 16%.
That number is higher than at any point since the Great Depression.
With the loss of a job less abstract a concept than ever before, it is no surprise as to why an employee might turn to embezzling.
And Still, Opportunity Lurks
Motivation is the deciding factor, for sure, but as mentioned before, opportunity is just as important for an employee to shoot their shot.
“Without the in-office supervision, it becomes a lot easier for an employee to cover up their fraud scheme,” Karpp explained.
Losses often involve an employee either creating false documents or falsifying existing documents to cover up that loss.
“That kind of activity becomes a lot easier when they’re in a work-from-home environment, where the employee can log-on to a personal laptop outside the company’s watch and conduct that activity.”
Whereas, in an office setting, a manager could walk around and be a potential witness to a crime in progress, now fraudulent activity can happen in the blink of an eye with management none the wiser.
Additionally, Karpp said, the current COVID environment has many in managerial positions hyper-focused on the subsequent risks stemming from the virus: “They’re distracted. And distracted business leaders may not be able to key in on this exposure, because they have to focus on and figure out how to remain operational throughout the pandemic,” he said.
What to Watch Out For
In an office, employers can watch for key behaviors to catch an embezzlement scheme before it’s too late.
“Is an employee’s lifestyle out of proportion to their salary?” Karpp gave as an example. “Did they show up to work in a new, expensive car? Before the pandemic, lavish travel could be a red flag. Any sudden change to spending habits could point to fraud.”
Further, Karpp said, in-office embezzlement could be spotted through observation of an employee’s work habits: “They’re often very smart. These are the employees who come in first thing each morning, leave late and rarely, if ever, take a vacation.”
They do this, Karpp explained, to put on a façade of dedication that ultimately covers up their fraudulent activity. Further, “the employees who come in early, stay late and don’t take vacation are actively covering up their scheme by making sure no one else touches their work. They want to be sure that when the bank statement comes in, they’re the one who first sees it.”
Unfortunately, observing an employee’s behavior in the office is not an option during the pandemic. Work from home adds challenge for employers. Visual cues like an early or late start or the addition of expensive, new things can’t as easily be spotted in remote spaces.
How to Prevent Fraud
So, in order to combat the risk of increased embezzlement during the pandemic, employers need to act now.
“The main thing employers can do is continue business as usual,” Karpp said.
Keep internal controls the same and commit to continued, rigorous oversight.
“Make sure that you find a way to continue to do the things that would have prevented losses previously,” Karpp said. “So, if you previously had more than one signature on an outgoing check, make sure that you’re still doing that. Don’t let the same individual process a transaction and then also reconcile that transaction later, no matter how tempting it might be during a work-from-home situation.
“Now more than ever, it needs to be about focusing on making sure that you still have those controls in place,” he said. &