Embezzlement of funds by a trusted employee is a crime so embarrassing to some small business owners, they refuse to prosecute the employee—or even tell anyone. “It just couldn’t happen to me” and “No way they could do this” are the comments you’ll hear, even after the employee has been caught.


In a case in Oakhurst, California, the part-time bookkeeper was well-liked, very personable, and seemed very efficient. But shortly after joining the staff of the small business, she started writing herself an extra paycheck, and continued this for four years, eventually taking $685,000.

In another case, a small Meadville, Pennsylvania car dealer went into semi-retirement and hired a manager to help run his business. The manager laid off employees and brought the company to the brink of bankruptcy, all while taking $485,000 through checks to fake vendors.

The Association of Certified Fraud Examiners (ACFE) does a study every two years, and finds that “the smallest organizations tend to suffer disproportionately large losses due to occupational fraud.”

People typically don’t set out to steal, or commit fraud

According to the ACFE study, the majority of employee embezzlers who are caught have no prior history of fraud. When an employee embezzles, it’s usually because something has happened to put stress on his or her personal budget. And then, when an opportunity presents itself, the cycle begins. One small “loan” from the company isn’t noticed, and many people convince themselves that they will pay it back. But then more money is needed for the laid-off husband, the son on probation, the gorgeous designer purse, or a small gambling addiction. And on and on it goes, just a little at a time.

Prevention: You may not want to do these, but you must

It’s hard to set up internal controls, but it’s critical. No one likes extra paperwork. Most small business owners think time spent on paperwork is wasted because they have more important things to do—like run the business. But having internal controls means you and your bookkeeper are both protected.

You know what your financial position is and employees aren’t tempted.

A checklist for setting up internal controls

Review your bank statement monthly, or monitor your account online

Keep an eye on the dollars flowing into and out from your business. At a minimum, sign the bank reconciliation that the bookkeeper prepares and make sure you ask questions.

Sign your checks by hand, or authorize e-payments with a signature on the invoices

Knowing where the money is going and staying in touch with prices are important to keeping your business efficient. They also protect you from fraud by employees and vendors.

Know your vendors

One embezzlement scheme commonly used is setting up fictitious vendor companies with Post Office box addresses. Checks written to the fake vendor don’t go directly to the employee, but are available to them.

Take an inventory of supplies

Just because the Staples order was made doesn’t mean the coffee, napkins, paper towels, etc. were not re-routed when they arrived.

Have an anti-fraud policy

It may surprise you to learn that most perpetrators don’t have a history of fraud or theft— it happens because of circumstances outside the company. Making sure employees are aware you are watching for it can help tip the scales away from theft.

Talk to your accountant and banker about setting up controls

It is better to set up controls  when there is no reason to suspect any embezzlement activity. That way, it sets in place a future where everyone is protected. It protects employees from false accusations—and you may even be surprised at how relieved they are at having that protection.


 Photo: ThinkStock

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