We’ve all heard the fact that employee theft is one of the leading causes of rising prices of merchandise in the private sector. This fact also crosses the board into the public sector as well. Private sector companies simply have to raise the prices of merchandise to offset the costs of their losses. Municipalities do not have the option to raise prices or taxes to offset their losses. Employee theft is an uncomfortable subject. But it is a widespread, growing and under reported crime.
Establish policies and procedures to prevent, or at least, deter theft.
Start with a strong message from the top.
Adoption of an ethics statement by your council or board lets your employees, vendors and customers know that your municipality has a zero tolerance policy for employee theft.
Review your hiring practices.
One of the most important management functions is the hiring process. Incur the cost of performing background checks. Before checking references, make a list of the questions you want to ask. Review this list with your municipal attorney to make sure the information you want does not conflict with any employment or privacy laws. When concluding conversations with references, ask each reference for two or three other people who know the applicant. Contact these ‘sub-references’ and ask them the same questions asked of the original references.
Consider obtaining a credit report for new hires.
This is a critical step particularly for those who will be responsible for accounting, bookkeeping or other financial activities. When advertising for a new position, let those who inquire know that the hiring process will include background checks and credit reports. A person with something they would prefer to keep private will be less likely to submit a resume.
Establish stronger internal controls for existing employees.
Personal financial situations change over the years. Consider ordering credit reports or perform background checks on current employees. It is not necessary for this to be an annual or biannual event. It will not hurt internal controls for employees to know that you are aware of how changes in their personal financial situations can affect their performance in the workplace. Employees responsible for accounting, bookkeeping and other financial functions should expect to be subject to a different, sometimes higher level of oversight than their colleagues in other departments. They should welcome the additional scrutiny of your internal financial controls. The opportunity to pass inspection can be personally satisfying for these employees.
Establish written policies and procedures.
Procedures should be in place that will document the flow of bills, cash and payments. Procedures should be adequate for the vast majority of your transactions. The need to override a procedure should be infrequent. Don’t allow your staff to set unauthorized precedents that become normal operating procedures.
All employees should be required to take an annual vacation. Most frauds require daily attention to avoid detection. Another employee must be assigned the responsibilities of the vacationing employee, especially for financial transactions.
There should be an internal procedure for employees to anonymously report behavior they believe is suspicious. Of course, no action should be taken against any employee unless proof of wrongdoing is found. Again, consult with your municipal attorney in matters of this nature.
The same employee should not be responsible for authorizing transactions, collecting or paying bills and maintaining accounting records.
Managers and supervisors in all departments can lead by example. If you have an expense account, treat it like it’s your own money. Padding expenses or using your authority for personal gain sends a powerful message that stealing is acceptable.
When you review a list of all the vendors or service providers your municipality does business with, can you identify them? A common area of fraud is to create fictitious vendors or to receive kickbacks or favors from a vendor.
Having a system of internal controls is useless if it doesn’t work as intended. Hire an independent, objective individual or firm to review your internal control procedures from a risk management perspective. Weaknesses in your hiring practices and internal controls can be detected and corrected before they become costly mistakes.
Employee theft is generally excluded in General Liability insurance policies because it is an intentional and criminal act. However, OMAG offers protection to municipalities through Public Officials and Employee Dishonesty Bonds. For more information on bonds contact OMAG Plan Services at 1-800 234-9461.
Employee Theft Requires Attention was written by Gary Cauthen, Loss Control Specialist. You may contact the author at: gcauthen@omag.org. The information in this bulletin is intended solely for general informational purposes and should not be construed as or used as a substitute for legal advice or legal opinion with respect to specific situations, since such advice requires an evaluation of precise factual circumstances by an attorney. The Oklahoma Municipal Assurance Group does not represent or endorse any group, site or product mentioned in the article.
