Employees are the life blood of an organization. While the best among them inspire trust and confidence, the worst ones can destroy a business through incompetence or willful corruption.

Experts say the question employers must continuously ask themselves is whether their workers fall into that first category or the second. Occupational theft or fraud affects companies of all sizes, and it is particularly devastating for small to mid-sized businesses.

The challenge is identifying employees likely to commit fraud, putting safeguards in place to prevent it and having policies that regularly seek to determine whether fraud has been committed. Every company can implement strategies that will protect their assets – and maintain positive relationships with the workers that help run the organization.

“Small to mid-sized businesses are the most frequent victims,” said Daniel DiBardino, founder of Bingham Farms, Mich., Recon Management Group. RMG provides local, national and international security services to public and private organizations.

“These types of businesses often have no checks or balances. They think everything is just fine until they get plastered. They wonder, ‘How could this happen to me?'” DiBardino said. “They take no proactive stance to reduce the threat to these kinds of exposures.”

Perhaps the most seminal work on occupational fraud and abuse comes from the Association of Certified Fraud Examiners. The industry group in Austin, Texas, created the standard for anti-fraud research in 1996 with its first “Report to the Nations on Occupational Fraud and Abuse.” Its 2010 report studied 1,843 cases of worldwide occupational fraud that occurred between January 2008 and December 2009.

One reason the report is so well-respected is the eye-opening data it contains. For example, survey participants say the typical business loses 5 percent of its annual revenue to fraud. This fraud, which lasts a median of 18 months before being noticed, usually costs a company $160,000. About 25 percent of cases involved losses of more than $1 million.

The ACFE reports that most cases are asset misappropriation schemes. These are defined as situations in which the perpetrator steals or misuses the company’s assets. This can range from skimming cash receipts to falsifying refunds or expense reports to forging or stealing company checks.

These incidents start small, with one stolen check or office supplies, said Zana Tomich, an attorney with the Bloomfield Hills, Mich., firm of Dalton, Tomich, Pensler PLC.

“It often begins with the intention of paying it back. Then, it becomes greater and greater. It becomes almost a cycle where they are reliant on it,” Tomich said. “That leads to a second mindset: They feel a sense of entitlement to this money or whatever they’re taking or doing.”

The most common industries attacked are banking/financial services, manufacturing and government/public administration. More than two-thirds of all frauds were committed by employees in one of six areas: accounting, operations, sales, executive or upper management, customer service and purchasing.

Those who commit fraud tend to be first-time offenders, so a criminal check typically will not find any history of this behavior. Many will display warning signs, such as living beyond their means or admitting they are experiencing financial difficulties. Tomich said her firm also has noticed a long-term trend of perpetrators addicted to gambling, which creates large debts.

So how do you identify fraud if it has occurred?

One of the most effective methods is empowering employees through a tip system, Tomich said. Having a hotline for employees to call if they have suspicions of fraudulent activity is extremely effective in catching and stopping theft. These lines should allow employees to leave anonymous tips and provide confidentiality for those who step forward.

“There are good people in organizations, and they put a lot of hard work into a company,” Tomich said. “They don’t want to see it taken advantage of by an embezzler, and that’s why these reporting systems work.”

Companies that hold educational seminars on fraud and its long-term effect also help prevent occupational fraud, DiBardino said. Training should focus on fraud definitions, the impact of fraud on the company’s bottom line, and how to report suspicious activity. Companies should encourage a culture of ethics and accountability, he said.

“I tell employees, ‘They’re stealing from your future. The first people to go out the door are not the top people. Stand up and take some action,'” he said.