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Is Your Small Business at Risk of Employee Theft?

November 14th, 2011 ::

By Rieva Lesonsky

While I hate to put a negative spin on such a positive time of year, the holidays can be a time when employees need extra money and might be driven to extremes—including embezzlement. You probably don’t believe embezzlement can happen to your small business, but it can, and the results can be devastating.

Worldwide, businesses lose an average of 5 percent of their annual revenue to internal fraud, according to a study by the Association of Certified Fraud Examiners (ACFE) reported in MarketWatch. Nearly one-third (30 percent) of companies affected by embezzlement have under 100 employees. And companies that size lose an average of $150,000 to the crime. Could you afford a loss that big?

Here’s some more sobering news from the ACFE: As many as one-fourth of embezzlers had been at the company for a year or more. The average time before fraud was detected was 18 months, which means the perpetrator has probably spent most of the money.

How can embezzlement happen in a small company where everyone’s rubbing elbows all day long? If you think about it, there are some simple reasons. First, you know and trust your employees since you work closely with them in a “family” atmosphere. Second, you’re busy, with little time to monitor your business finances (unless that’s your “thing”, and for many of us, it isn’t). And last, but not least, many small businesses lack formal controls or procedures, operating on an ad hoc basis that makes it easy for a thief to operate under the radar.

So how can you prevent embezzlement from happening in your business? According to the ACFE, the top fraud tactics in small companies involve billing, tampering with checks, skimming cash and fraudulent expense reimbursements.

Prevent these problems by instituting policies that create checks and balances. One person should never have responsibility for all of your accounting. Involve two people in every transaction—for instance, you can have your bookkeeper print checks, but require that you have to sign them.

Encourage employees who are involved with your business finances to take all of their vacation time. Sadly, many a fraud has been discovered when a trusted bookkeeper finally goes on vacation and years of embezzlement come to light.

It’s also worthwhile to investigate insurance. While typical business insurance has limited fraud coverage, MarketWatch says you can get policies specifically to protect against employee theft. These are usually called employee fidelity or dishonesty policies. Talk to your insurance agent and figure out how much coverage you need by assessing your maximum exposure and how much you can afford to lose.

Image by Flickr user Richard Heaven (Creative Commons)


The views expressed here are the author's alone and not those of Network Solutions or its partners.

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