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Employee theft and fraud cost Australian businesses substantial losses every year1 so protecting against this business risk and understanding insurance protection can provide major savings. Since losses from employee crimes of opportunism and abuse of trust can run to millions of dollars it's important that businesses understand the risks and have appropriate insurance protection.
Specific industries record high employee theft rates and offenders are commonly found to hold certain types of roles and to use particular methods to deploy fraudulent activity.
Which industries and job roles are most commonly linked to employee theft?
In the retail sector employee pilfering2 accounts for about 24% of retail crime and three times the value of other theft: on average, an individual theft incident costs a retailer around $415 compared to an internal theft incident costing around $1200.
Overwhelmingly it's in the financial sector that the biggest sums are stolen by employees most frequently. An Australian employee crime study2 assessed employee theft incidents that exceeded $1 million over 10 years to 2022 and found 102 cases worth $305 million in stolen funds, and in half the cases five years elapsed before the fraud was discovered.
Banking and finance institutions are the most common businesses with employee fraud at play and at risk, not surprisingly given the opportunity for financial theft.
In addition the employee offenders are most likely to hold positions involved with performing finance or accounting functions, giving them opportunity to commit crimes involving preparing and approving payments made by electronic funds transfers, often at management or executive level.
The most common finance job titles held by employees convicted of theft/ fraud were in accounts, bookkeeping, payroll and senior executives such as financial officers, controllers and chief financial officers.
Usually employee theft offenders act alone, although at least one case in the study involved collusion with another employee or an external party, such as a supplier or contractor.
Uncovering employee theft is most commonly detected if there's a change to the employee's routine, such as going on leave or performing new or different tasks, exposing their actions to scrutiny by others who may notice irregularities in how they are being performed. The autonomy afforded to specific employee roles that may give rise to the risk of employee theft is an important area for business risk attention.
Case study — inadequate accounting checks enabled theft of millions
Perpetrator: 50 year old female data entry clerk and administration officer
Amount stolen: $3.79 million
Industry: community housing provider
Method: changed the data on her employer's online banking system, diverting internal transfers and payments to third parties to her own bank accounts. The two managers responsible for entering approval codes for the transactions to proceed simply checked the total value of the transaction concerned.
Motivation: gambling addict
Source: Million Dollar Employee Fraud in Australia 2022, Warfield & Associates
Common methods used by employees to steal from employers
The most prevalent ways in which frauds are perpetrated involve false invoicing and electronic funds transfer fraud. The methodologies used include:
- EFT to own benefit/account
- false invoicing
- multiple frauds used
- trust fraud
- fraudulent loans
- cheque fraud
- stealing from customers' bank accounts
- leasing/finance fraud
- cash theft
- false accounting.
These examples serve as red flags for businesses when considering risk management of internal exposures to theft. In some of these cases the offenders were able to circumvent existing controls (such as signed off approvals or scrutiny of new creditors' credentials) by being opportunistic about gaps in internal security.
In other instances the offenders took advantage of procedural changes or the introduction of new processes, or they used privileged access — either connected to their own role or to a colleague's — to falsify records of transactions, or simply observed where a lack in oversight and checking occurred.
How can insurance protect businesses against employee theft?
Management liability insurance policies typically bundle together several optional or standalone insurances into the one policy to offer protection for a variety of risks or liabilities including crime, theft and malicious damage.
The crime component of management liability insurance protects your business's balance sheet from losses through theft, fraud and dishonest activities carried out by employees. Dishonesty/willful conduct exclusions may remove cover for claims arising from some types of deliberate crimes so it's worth reviewing your management liability cover to check the terms of your policy.
Your broker can assist with determining that you have the insurance protection your business needs.
