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Crime Insurance Protects Small Business against Fraud in the Workplace

Occupational Fraud is on the Rise. Is the answer crime insurance?

Who would have thought so many companies would look at crime insurance to protect against fraud in the workplace? Even though crime insurance is widely available at relatively low cost to protect companies from employee theft and dishonesty, many smaller and midsize businesses do not buy it—or, when they do, they often don't file claims because recovery requires that they prosecute the perpetrators.

According to a survey of more than 500 fraud examiners conducted by the Association of Certified Fraud Examiners, more than half indicated that employee theft had increased in frequency during the past few years. Additionally, 49% reported that the sums lost also grew over the prior-year period. Moreover, such fraudulent activity could proliferate, because many employers have cut their workforces, leading to reduced internal controls and fewer fraud prevention measures, and leaving them more vulnerable, suggests ACFE's report, “Occupational Fraud: A Study of the Impact of an Economic Recession.”

Another report by Boston-based investigators Marquet International Ltd. dubbed 2010 “a banner year for employee theft in the United States.” The “2010 Marquet Report on Embezzlement” cited a 17% increase in employee-perpetrated fraud cases over 2009. “Employee misconduct and internal corporate fraud will continue to be problems as the U.S. economy struggles and unemployment hovers at levels nearing 10%,” the report predicted.

Why the increase in employee theft and fraud now? No doubt it is due to the combination of tough economic times and increased access that technology gives employees is making it easier for them to steal. The “Global Fraud Report” published by Kroll Consulting found that in fraud cases where the perpetrator was identified, 55% were “an inside job.” In all likelihood, middle-market companies will become more vulnerable because they have fewer resources than large companies to prevent and detect such activity.

The incidence of employee fraud is generally higher in small and midsize businesses, according to experts, because such firms often don't have adequate internal controls in place. A lot of times smaller companies don't have the number of employees needed to put controls in place.

The recession also has exacerbated the situation for many mid-market companies. Employees now wear multiple hats as the stagnant economy and growing uncertainty about additional regulations negatively affects companies’ willingness to take on more employees. Internal controls suffer because the same person now may be doing two or three jobs that would have been separately assigned when the economy was thriving. The lack of a separation of duties makes it all that much easier to commit fraud in the workplace.

So, how does crime insurance help to exacerbate the problem? Crime policies respond to loss of money, securities or other property resulting directly from dishonest or fraudulent acts perpetrated by employees either acting alone or in collusion with others, said Chris Gilman, a managing director at Aon Risk Solutions in New York. The policies also cover loss of money or securities from their destruction, disappearance or theft while on the employer's premises or in transit. Depending on the business operations, crime policies also may be extended to cover employee theft of a client's property when in the custody of the insured. Some crime policies also cover telephone toll fraud, computer virus remediation and software licensing violations.

In light of the financial crisis, we can expect to see more interest in buying crime insurance among financial institutions and private equity firms. Despite increasing losses attributable to the recession, the annual cost of crime coverage is competitive, brokers report. For example, “if you're a private, middle-market company with $100 million in revenue and you want a $1 million policy with a $10,000 deductible, you could probably get it for $3,000 to $4,000,” said Matthew Crooks, assistant vice president at Willis Executive Risks in Pittsburgh. And, “as the limits go up, the rates get cheaper.”

Once again our society is forced to deal with corporate crime albeit committed by employees. What is it about these institutions that seem to feed on criminal behavior whether in the form of occupational fraud or fraud in financial statements? It is that we, as a society, have lost our moral compass and now look to satisfy our own self-interests without considering the consequences of our actions on others. It’s a recipe for disaster and one that is already partially cooked. I shudder to think what the next few years will look like as we go on a scavenger hunt to find that compass.

Blog posted by Steven Mintz, aka Ethics Sage, on October 21, 2011