The Risk of Employee Dishonesty
One of the greatest risks to small business is uninsured or underinsured employee dishonesty. An uninsured or underinsured loss can put a small firm out of business, but frequently this risk is overlooked.
In 2015 Allstate Insurance published some statistics on employee dishonesty. I have inserted additional comments.
- An average of 5% of business revenue is lost to fraud. (Put another way, the loss is $50,000 for every $1 million of revenue.)
- Median employee dishonesty loss is $145,000. (Compare this to your policy’s limit.)
- Median time to detect fraud or dishonesty is 18 months.
- 85% of employee dishonesty involves stealing or misappropriation. Many cases involve multiple types of dishonesty.
- In 2012-13, 28.8% of small businesses were victims of dishonesty. (This is more than one in four businesses. Compare that to the odds of a property damage loss or liability claim.)
- The biggest threats to small business are corruption (33% of cases), billing fraud (28.7%) and check tampering (22.1%).
- 58% of businesses victimized by employee dishonesty don’t recover any money. (Presumably they are either uninsured or don’t prosecute the criminal.)
- Although 64% of small businesses have suffered employee dishonesty at some time, only 16% of cases were reported to police.
- Only 18% of fraudsters were fired or disciplined. (When combined with previous statistic, this shows that employer or criminal background checks will not necessarily identify perpretrators.)
- Only 48% of small businesses have a code of conduct.
Tips are the most common method for detecting fraud. All businesses should have a way to report dishonest conduct anonymously. Other controls include dividing finance and accounting duties; requiring two signatures on large checks; and requiring all employees to take vacations.
Even with controls in place insurance is needed as a backup. Businessowners policies include employee dishonesty as additional coverage; sublimits are usually $25,000 or $50,000. Property policies or coverage parts with “enhancement” endorsements often include employee dishonesty, but not always. Except for small “mom and pop” stores the limits are not adequate. There is no simple formula to determine an adequate limit. As a rule of thumb, consider this worst case scenario: if your most trusted employee were stealing from you, how much could he or she take and how long would it take you to detect the theft?