6 Tips to Avoid Embezzlement in Your Small Business

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Embezzlement is a scary topic. You probably don’t want to think about it at all, but knowing warning signs to watch out for and taking steps to protect your business can go a long way.

What is Embezzlement?

Embezzlement is theft by employees or other trusted individuals in the business. It usually involves diverting company funds to the employee, but it could also include theft of merchandise, office supplies, or even information.

Tips for Protecting Your Small Business from Embezzlement

Most embezzlement happens to small businesses because they usually lack the checks and balances that larger companies have in place. When you’re first starting out, your employees are often your family and close friends, so you trust them with customer information, inventory, the checkbook, the cash drawer – just about everything. Since your employees are your friends and family, what could go wrong?

They might be your friends and family, but they still go home every day and deal with financial pressures and family issues. Maybe one day, they’ll be a little too tempted and skim a little off the top.

Protecting your business doesn’t mean you don’t trust your employees; it just takes the temptation away. Check out these six tips for protecting your small business:

1. Separate Financial Duties

By separating financial duties, you’ll decrease the opportunities someone has to steal from you. Separating financial duties means that

  • whoever cuts the checks should not sign them;
  • someone who doesn’t run payroll should hand out the checks, if you’re not using direct deposit; and
  • whoever handles the accounting should not open the mail, especially anything related to bank statements, credit card statements, the IRS, or state tax agencies.

2. Have a Pre-Screening Process for New Hires

When you’re hiring a new employee, take your time to make sure you can trust them. Check out their social media accounts, call references, and even consider running a background check.

3. Deposit Cash Daily & Reconcile Monthly

If you have cash sitting around, it can be too tempting for some employees. So, deposit cash every day, so there’s not too much lying around.

You should also reconcile your bank statement at least once a month. By reconciling your bank statement regularly, you’ll be able to catch potential issues more quickly.

4. Track Petty Cash

Petty cash can often be an easy target for fraudsters because a lot of small businesses don’t keep too close an eye on it. Take away the temptation by requiring all petty cash transactions to have a petty cash slip or log to support the transaction. If the petty cash has to be refilled, require multiple signatures.

5. Manage by Walking Around

Managing by walking around will show your employees that you’re keeping an eye on things, without micromanaging. Your employees are more likely to toe-the-line if they know you’re keeping an eye on what goes on in the company.

6. Have an Expense Policy (& Stick to It)

By having an expense policy and sticking to it, your employees will have to submit receipts and other paperwork to receive a reimbursement. This will stop people from ordering extravagant room service or a massage when they’re on a business trip.

Red Flags

Keep an eye out for employees who might be tempted to commit embezzlement. Common signs to watch for include an employee who

  • lives beyond their means,
  • has financial problems,
  • has control issues, or
  • is going through a divorce or other family problems.

Pay extra attention if the employee

  • has unusually close relationships with vendors or customers;
  • refuses to take vacation (they might be afraid that their theft will be detected if they’re gone);
  • works a lot of overtime or wants to take their work home; and/or
  • submits extravagant expenses from business trips.

You should also keep an eye out if the petty cash seems to disappear too fast or office supplies go missing.

What Do I Do If I Suspect Embezzlement?

If you suspect that one of your employees is stealing from the company, be careful not to assume they’re guilty. If it turns out they’re not stealing from you, they could file a lawsuit against you. When you’re interviewing the suspect, don’t accuse them – just gather the facts. You want to understand what happened and find out if anyone else was involved.

Before you confront the suspect, talk to an employment attorney to discuss the best course of action and hire an investigations firm or forensic accounting firm to assess the situation. These firms will preserve and separate evidence, so when it is time to talk to the suspect, you have facts on your side.

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