Is Your Business at Risk for Embezzlement?

By Maria Valdez Haubrich

As a small business owner, you spend most of your time thinking about how to make more money and keep more of the money you make. But money could be leaking out of your business bank account without you even being aware of it – if your company is the victim of employee embezzlement.

Do you think that embezzlement can’t happen to you, or that your business is too small to be a target? Consider this: Employee theft, including embezzlement, costs businesses an estimated $100 billion annually. And even if your sales aren’t astronomical, for an employee in need of extra cash, any amount of money can be a temptation—especially in this economy. To protect your business from loss, here are some steps you can take.

Carefully investigate job candidates. Of course, you should check any employee’s references thoroughly—but especially if that person will be handling money or managing your accounts. Call all references; before you make a job offer, run a background check.

Create strict policies. You should have a written policy for how bookkeeping and accounting will be handled, and who is authorized to sign checks, withdraw or transfer funds and disperse petty cash. Make copies of all financial records, including checks (including voided ones), petty cash receipts and bank statements. Finally, make sure everyone in the company knows the policy. Awareness is the best protection against fraud.

Use checks and balances. If one person has authority over all of your bookkeeping, you’re asking for trouble. Just as the government uses a system of checks and balances, your business should have at least two employees who are cross-trained to handle accounting functions including banking, accounts payable and receivable and entering data into your system. This way, anything suspicious that one employee does can be a red flag for the other employees.

Understand your finances. Of course, it’s not unheard of for more than one employee to be involved in embezzlement, so cross-training employees won’t necessarily keep you safe. That means even if you’re not a numbers whiz, you need to understand the basics of business accounting and keep regular tabs on your accounts. Let employees know you’ll be checking up on them regularly (and also do surprise checks at unscheduled times). You need to have full access to the accounting system on your computer, and correspondence and e-mails from your bank should come to you, so you can have an eye out for anything that doesn’t add up.

Don’t be too trusting. It’s sad but true: Many cases of embezzlement are the work of that seemingly dedicated employee who never goes on vacation and works late into the night. Make sure all your accounting staff takes regular vacations. You may even want to have an outside auditor go over the books during that vacation.

Know the warning signs. A recent study by the Association of Certified Fraud Examiners found that a lavish lifestyle, financial distress and an unwillingness to share duties with others were the three most common signals that employees were misusing funds or otherwise engaging in fraud. So keep an eye out for that employee who seems to be living above his or her means…and the one who always complains about being broke.

Take action. If you have reason to suspect embezzlement, don’t delay. Take the actions that you’ve outlined in your employee handbook. Since you’ll be accusing the person of a crime, you should have your attorney and/or tax preparer with you when you confront them. You may even want to alert police and have an officer on site.

However, if you put the right controls in place, hopefully your business won’t come to that point and your finances will be safely and well handled.

This entry was posted on Tuesday, October 12th, 2010 at 10:30 am and is filed under small business, Workforce. You can follow any responses to this entry through the RSS 2.0 feed.


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