Protect Your Small Business From Fraud and Embezzlement

Date posted: August 22, 2012

Is your small business at risk of financial fraud and embezzlement? Yes–and it can happen more easily than you think. In today’s guest post, David Worrell explains why–and how to protect yourself from fraud and embezzlement.

These days, “white collar crime” evokes images of billion dollar banking scandals and ponzi schemes, but the most prevalent finance crime — and the real danger to small business — remains financial fraud and embezzlement.

Small business embezzlement and fraud are tough to spot, but the consequences can be devastating. In 485 cases of corporate theft in 2010, the average embezzler stole — ready? — $17,656 per month from their employer. Ouch!

Ready for a surprise? A Marquette International study found that employee embezzlers were more likely to be:

  • Female (64%)
  • Working in finance, bookkeeping or accounting (66%)
  • Acting alone (84%)

Looking like any other mild-mannered accountant in a cubicle, these thieves can destroy your company before you even spot them. And missing the warning signs may spell the end of your entrepreneurial career. Statistics confirm that only 20% to 40% of companies will recover any of the embezzled money.

Want to spot it before it starts? Watch for the four warning signs: Debt, divorce, drugs and simple disgruntlement are the “4 D’s” that push employees toward embezzlement and theft. Even if you know about employees facing these pressures, you can’t monitor them every minute of the day. †But you can make fraud more difficult — and more obvious.

No matter the size of your company, take the following steps to prevent fraud and embezzlement:

  1. Separate the Financial Duties: This is a big issue for small business. If your receptionist opens the mail, writes checks to pay the bills, and mails the checks… you’ve got a problem. Divide each side of the accounting duties (paying bills, writing payroll and issuing invoices) between at least two people. The person who enters the bills, should not write the checks. Likewise, the invoice entry and deposits should go to two different people. In addition to reducing the opportunity for an individual to defraud you, this “check-and-balance” system will greatly reduce mistakes and oversights.
  2. Look at the Bank Statements. The bank is your partner in avoiding and uncovering theft. Be sure you’re looking at the original statement straight from the bank. Have it sent to your home if necessary. This is the single best strategy to avoid theft … if anything on that statement looks funny, make it your job to track it down. Ditto with credit card bills.
  3. Open a Depository Lock Box at your Bank. Did you know that your bank will accept checks directly from your customers and deposit them for you? By putting the bank’s address on your invoices, you can have customers send payments directly to the bank. Deposits are made more quickly and accurately. Nobody has to leave their desk to take checks to the bank. And there is much less opportunity for an employee to steal or misappropriate a customer’s payment.
  4. Set up “Positive Pay” Notification. Ask your bank about this. Positive Pay means you send the bank a list of the checks you write each day or week. The bank then compares every check to this list before cashing it. With a Positive Pay arrangement, an embezzler trying to slip extra checks into the weekly run will be tripped up at the teller window long before you discover the odd entry in your ledger. Even easier is “Reverse Positive Pay”, which means the bank sends you a list of all checks presented for payment. Both of these are part of your bank’s “Treasury Management Services”.
  5. Be the Last Person to Touch the Checks. When you sign the checks (and you should), don’t hand them back to someone for distribution. Mail them or, in the case of payroll checks, pass them out yourself. Payroll is one of the most often abused systems, so be sure you know exactly who is working and who has left. You may be surprised to find that a long-gone employee is continuing to be paid.
  6. Make it Everybody’s Job. Protecting the company from fraud should be everyone’s job. Involve multiple people in sensitive financial and inventory processes – have them double-check each other’s work in the name of preventing mistakes. Let salespeople audit their customers accounts. Give warehouse workers the full story about what is (or should be) on the shelf. Use the power of the crowd to verify that your company is not “leaking” money. Just having these checks in place will be enough to deter some cheaters.

When the Worst Happens
Discovering employee theft is just the beginning of the nightmare. Dealing with it can involve audits, police and of course HR.  Be careful not to accuse the wrong person, but when the jig is up, swift and certain action is the best course. Personally, I have lived to regret giving someone a “second chance”… in the future, my first call will be to the police. Law enforcement is a sad move but ultimately the safest for you and your other employees.

Prevention, Not Cure
Prevention is still the best remedy. Start with a thorough audit of your own. Look at the policies and procedures you have in your accounting department. Find the concentrations of power and break them up.

Then turn to your bank and make use of as many of their cash management services as you can. There are some great services you might never think of, like electronic check handling, armored car services, and account reconciliation (which works great with Positive Pay).

Finally, put yourself in the most critical role of approvals or signatures… and stay vigilant.

David Worrell is a finance consultant and part-time CFO who has uncovered, corrected and prevented fraud at several companies. David can help you dig deep to root out problems, then set the kinds of policies and procedures you’ll need to prevent fraud in all departments. Contact David to learn more.



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