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Jan 30 2012

Embezzlement – 5 Basic Tips & Strategies

Small businesses are particularly vulnerable to employee theft and embezzlement because of generally lax internal controls. According to Marquet International’s 2011 report, the most common embezzlement scheme involved the issuance of forged or unauthorized company checks. The report also revealed that nearly three-quarters of the incidents studied were committed by employees who held finance/bookkeeping and accounting positions.

What can small business owners do to prevent embezzlement in their business?

Pre-Screen new employees

One of the best ways to prevent to employee theft is to ensure that all new employees are carefully pre-screened. In addition to conducting a background and credit check on new employees, small business owners should make a point of speaking to former employers.

Make vacations mandatory

Employees who are tasked with handling cash or accounting duties should be required to take vacations. During this time, the owner or another employee can take over the responsibilities of the employee on vacation. This increases the potential of uncovering any fraudulent behavior.

Ensure that duties are segregated

You are looking for trouble if only one employee in your business is tasked with handling cash, recording, authorizing and reconciling transactions. This essentially means that there are no internal controls in place and the likelihood of embezzlement taking place is significantly increased.  Segregating these duties and assigning tasks to different employees will significantly reduce your risk e.g. don’t allow the same person who sends out bills to collect the mail and prepare bank deposits.

Get involved

Owner involvement is the most important element of internal control. Small business owners that don’t pay attention to their accounting and bookkeeping send a message to their employees that they could get away with theft.  Owners can get involved by ensuring an internal audit system is setup and maintained and overseeing at least some of the accounting duties. Here are some ideas for setting up internal controls:

  • Require all checks above a certain amount be authorized by two people.
  • Review accounts payable by checking cash disbursements and payments.
  • Review checks, purchase orders and invoices for missing documents.
  • Ensure there is a way for employees to anonymously report fraudulent activity and offer rewards for informants.
  • Examine payroll records periodically to ensure there is no padding.

Review your financial statements every month

Timely and regular review of your financial statements will reveal possible threats e.g. large fluctuations in your cost of goods sold ratio, administrative expenses or percentage of returned merchandise should ring alarm bells and trigger an investigation.

Many small business owners are opting to outsource their bookkeeping function as a basic crime prevention strategy. An outsourced bookkeeping firm will act as an official on your behalf. Timely reconciliation helps detect and prevent embezzlement of funds from within your business.

BKSC Business Bookkeeping strives to add a layer of review and professional expertise to your accounting process to help strengthen your company’s internal controls.  We help you sleep better at night by knowing that your bank accounts are reconciled, balanced and all checks and funds are properly accounted for.

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One Comment

  1. GiulianneFebruary 11, 2012 at 2:47 pm

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