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Home>Business Resource Center >Financial Articles >Business Insurance

Prevent Employee Embezzlement: Employee Theft Can Cost You Your Business

Employee dishonesty is a challenge for companies of all sizes, but small businesses are especially vulnerable because they lack large financial staffs and sophisticated controls employed by larger companies to protect against employee theft of equipment, data and even money.

Because financial duties, such as records keeping and bill paying, are often handled by a single bookkeeper, many business owners run the risk of being victimized by a person they trust – maybe even a long-time employee, or member of the family business.

The U.S. Chamber of Commerce estimates $50 billion is lost annually to employee theft or fraud. According to the FBI, nearly 22,400 people were arrested for embezzlement in a single year, and the problem typically becomes more severe during economic downturns.

Although business owners may be tempted to let their bookkeepers handle company finances with minimal oversight, investing time and effort into understanding where the company’s money goes pays dividends, not only in detecting employee embezzlement, but also in preventing it.

Checks and Balances

One of the easiest ways to prevent employee embezzlement, or other forms of internal theft, is to establish procedures that ensure that the same person doesn’t control the company’s entire financial system. For example, if a single bookkeeper is writing checks, making deposits and reconciling bank statements, an important opportunity to identify potential fraud or embezzlement is lost through lack of oversight.

Financial fraud experts suggest the following measures to help reduce the chance of your business being victimized:

• Have monthly bank statements sent to your home or accountant. Review all outgoing checks and deposits to make sure checks are sent to pay legitimate company expenses. A quick scan of the detailed statements from your bank indicate discrepancies. Ask your commercial bank representative to review statements for signs of impropriety.
• Control your checks. It’s a common scheme for unscrupulous employees to steal high-numbered checks from the back of unused checkbooks. This scam often remains undetected for a long time – until it’s too late, in some cases.
• Avoid signature stamps. Unguarded blank checks and signature stamps are a temptation and bad business practice.
• Institute a policy that requires bookkeepers to take two-week vacations annually. Financial employees who are reluctant to take vacations may appear dedicated or loyal, but in reality, these employees may not want to disrupt on-going schemes.
• Have your company’s financial records audited annually. The additional cost will be offset by reduced fraud and the peace of mind that financial accounts are in order.
• Retailers should have more than one person counting and handling cash, or should make sure that the person who counts the cash doesn’t also make the bank deposits. This reduces the risk of someone preparing one deposit slip in your workplace and a different, fraudulent deposit ticket on the way to the bank.
• If your business offers group health insurance, periodically check with your carrier to make sure your bookkeeper or other employee hasn’t added ineligible family members to the company’s policy. Some employee theft is more subtle than the theft of an unattended laptop.
• If your bookkeeper starts driving a pricey car, it might be time to talk to your accountant.

Conducting oversight activities takes time that you’d otherwise devote to business development, but if employees know that you’re keeping an eye on the books, the temptation to cut corners, or to help themselves to company funds or equipment is greatly reduced.

Hire Carefully

The importance of a bookkeeper to your company’s financial health makes this a critical hire. Review the qualifications and work history of all employees carefully.

Conduct criminal background and credit checks on any candidates for bookkeeping positions. While criminal charges are an obvious red flag, a series of civil complaints from creditors is a warning signal that the candidate is involved in inappropriate activities, or is careless in managing personal financial affairs. In either case, it’s best to consider someone else for the position.

Similarly, a bookkeeper who changes jobs frequently should be avoided. Many former employees won’t admit to being victimized (most are concerned about a defamation lawsuit, or are embarrassed at being cheated) so a lack of employment stability is a strong warning signal that this applicant poses a potential risk.

Double-check references to make sure potential hires are who they claim to be, since an unscrupulous bookkeeper could easily have friends pose as former supervisors. Instead of using the telephone number supplied by the job candidate, call the main number of a former employer and reach the reference that way.

No small business owner likes the thought of a trusted employee stealing from the company but it happens all too often.

Take charge of company financials, work with your bank representative to identify red flags and check and double-check the background of every new employee – especially those in the financial area of your business.

You never know who’s a thief and, as a small business owner, you need to watch the store – even with long-time, trusted employees who suddenly find themselves with personal financial problems.

Only you can prevent employee embezzlement and theft so protect what you’ve got. After all, it is your company. Know who’s working alongside you every day.