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Employee Fraud is UP... in a down economy

Not surprising, the weak economy has triggered an increase in both the frequency and severity of occupational fraud - crimes committed against employers by employees. What is surprising is the number of small and medium-size companies that are underinsured for employee fraud, or worse, not insured at all.

Consider this, according to the Association of Certified Fraud Examiners (ACFE), the average fraud loss for small businesses with fewer than 100 employees is $155,000. That number jumps to over $200,000 for medium-size companies with up to 1000 employees.

We are not talking about a few twenties going missing from the petty cash drawer here. These are some serious numbers. Here's an even more sobering thought - occupational fraud contributes directly to over 30% of all business failures, according to the US Department of Commerce. 30%!

So why are so many companies reluctant to buy crime insurance? Best guess - misunderstanding. Too often owners and managers do not fully realize the risks they are facing, and/or the "...it couldn't happen to me" syndrome is alive and well.

But it can, and, according to the ACFE, here's how it works.

Eighty-five percent of all employee fraud is theft of inventory, cash, or equipment. While theft is the most common form of employee fraud, it is also the least expensive averaging $135,000 per incident.

The second form of employee dishonesty involves bribery, bid-rigging, and kick-backs, and the most serious form of criminal activity is financial statement fraud - "cooking the books." Employees that manipulate the company's financials cost the business an average of $4.1 million per incident.

There are two things that business owners can do to avoid falling into the Commerce Department's 30% statistic.

First, insure - transfer the risk. Insurance pros understand the employee crime risks you face and know how to structure coverage and limits. Crime coverage can usually be added to existing businessowner (BOP) and package policies.

Second, know the fraud warning signs.

Sudden devotion to work and working late is a red flag, as is resistance to procedural changes related to financial, inventory, or supply management. Also, be wary of employees who repeatedly request salary advances.

Finally, put the following employee crime controls in place:

employee fraud image