When a small retailer approached him with suspicions that an employee was stealing money, Randy Nelson, president of PROAM Civil Recovery and Security Solutions, a Mississauga, Ontario based security and private-investigation company, set up surveillance cameras at the firm’s three locations.

For a month he monitored the company, before zeroing in on one employee. Eventually the employee confessed to stealing $60,000 over a two year period,  and was charged and convicted.

Though the company received partial restitution, Mr. Nelson says the emotional fallout was more devastating than the financial losses.

Why would someone do this to a company? Recent reports suggest that employee theft has become a growing problem for small and medium-sized businesses, with serious results that can harm companies not only financially  but also take a toll on their relationships with clients and employees.

Small businesses can suffer huge consequences: Employee theft played a role in the bankruptcy of one out of ten failed small to medium-sized businesses, according to a 2010 report by TD Bank Financial Group.

Another 2011 study by the Certified General Accountants Association of Canada found that at least one quarter- 26 percent of Canadian small- and mid-sized firms had been the victims of at least one instance of workplace fraud the previous year, losing at least $3.2 billion. The most common types of fraud were “misappropriations” of inventory, assets and cash.

The CGA report notes that the risk is likely to rise in a slower economy, as more employees face more financial difficulties.

Employees may also be driven to undermine their employers if they feel underappreciated, says Eduard Goodman, chief privacy officer at Identity Theft 911 LLC.

Also, many small businesses might unconsciously help to bring on the issue themselves with relaxed internal policies and procedures and by failing to perform sufficient background checks on employees.

Here are some suggestions from experts on Keeping Employees Honest:

– Build awareness

– Control access

– Pre-employment screening

– Establish clear practices

– Keep on top of operational records

– Beware of moonlighters (watch for missing inventory)

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