Embezzlement, It CAN Happen To You – Tips For Prevention

tips for preventing embezzlementAs a busy business owner it is quite easy to fall into the bad habit of simply turning over your business’s accounting to someone else; because your time is best spent in the field and not in the office doing paperwork.  Not only is this a bad habit, it can also become a dangerous situation.

In the course of my bookkeeping career, now over 30 years, I’ve seen many instances of employee theft – from the simple act of people taking home office supplies in the fall for their children, employees giving themselves unauthorized raises, bookkeepers embezzling money from the business, accountants “cooking the books”, and even family members “making a mess of things”.

Whether it’s theft of money, supplies, inventory, equipment, or intellectual property, nearly every small business will experience some type of employee theft or embezzlement at one time or another.

Small businesses are particularly vulnerable to theft simply because they don’t have the resources or security controls in place to stop them.

Employee theft is extremely common; unfortunately, we hear about it or read about it in the newspapers all of the time.

While it is fair to say, most people don’t steal, embezzlement does happen; so it only makes good business sense for you to consider what you can do to minimize your employees’ opportunities to steal.

Here are some simple ideas you can use to reduce your chances of becoming a victim.

Protecting Your Business from Embezzlement

Fortunately, there are easy ways to minimize the opportunity for embezzlement at your company.  Here are some steps you can take to protect your business’s assets:

1.  Do a background check before hiring someone to be an employee. A person with a criminal background of theft or a problematic financial past might be tempted to take resources from your business.  It’s a good idea to be informed about the person you’re hiring before you hire them.

2.  Keep track of your company’s checks. Purchase and use pre-numbered checks and periodically check for missing check numbers by using the QuickBooks Missing Checks report; available by going to the Reports menu -> Banking -> Missing Checks.

Have a written “voided check” procedure that requires all voided checks to be coded to an Expense Account called “Voided Checks” and use the memo field to record the reason the check was voided; for example, printer jam.  Periodically generate a Quick Report for this account to see what checks have been voided and why; create a Quick Report by going to the Lists menu -> Chart of Accounts -> scroll down to the Voided Checks account, click to select it -> click the Reports button -> choose Quick Report.

Our best advice is to Never, NEVER sign a blank check, don’t leave a signature stamp laying around, and don’t insert a graphic of your signature to be printed on each and every check that your business generates.

3.  Sign and verify all checks, especially payroll checks. It’s a good idea to sign all checks-even small ones-yourself. This can be a lot of work, but you can have an employee prepare the checks for your review and signature.

Not reviewing and verifying checks before you sign them is like signing your bank account over to anybody who wants the money (and that could be everybody).

The benefit of signing all your checks is that your signature will be a requirement for money to leave the business.  No cash will be deducted from the business bank account without your knowing about it.

For payroll checks, review the hours worked, pay rates, taxes deducted, and who the check is made out to.  You should always know who works for you and how much they get paid.

If you’ll be on vacation for, say, a couple of weeks, the business will probably need to pay some bills while you’re away.  You can deal with this in a couple of ways.

  • You can decide to trust an employee enough to leave behind a signed check or two; the employee can then use these signed checks to pay for things such as an unexpected C.O.D. shipment.
  • You can decide to simply require vendors to wait.
  • Pay upcoming bills before your leave.

If you leave signed checks, be sure to leave specific instructions as to what these checks should be used for, and review the checks when they come back from the bank to be sure that your instructions were followed.

4.  Make bank deposits nightly. As the business owner, you should make the nightly bank deposits.  This is especially true for cash because it is so tempting and easy to steal.  Your funds are much safer in the bank than in your desk drawer or the cash register.

5.  Understand your books. Embezzlement is easy to miss and difficult to prove if your bookkeeping is sloppy or unsupervised.  You need to be educated in how to review financial statements and know what to look for.  Your accountant can show you how to do this, or you can take an accounting or bookkeeping course.

Use and review the QuickBooks Voided/Deleted Transactions Detail Report, found by going to the Reports menu -> Accountant & Taxes -> Voided/Deleted Transactions Detail.  This report will show you who voided, deleted, or changed a transaction and when it was done.

Another report that you should review periodically is the Audit Trail Report; this report is accessed from the Reports menu -> Accountant & Taxes -> Audit Trail.  This report can be very overwhelming, so it is our advice that you consult your CPA or QuickBooks ProAdvisor for help on what to look for in this report.

Employee embezzlement and theft costs U.S. businesses millions of dollars each year. Small businesses are especially vulnerable because the ramifications of theft can cripple a small firm and even force it to close.

6.  Reconcile the bank and credit card statements yourself. Make it your company policy that you are the one who is responsible for reconciling the monthly bank and credit card accounts.

This way, you can make sure that no one is forging your signature and writing a check or two for non-business reasons.

This might seem unlikely, but if your business writes a hundred checks a month totaling tens or hundreds of thousands of dollars, would you really notice an extra check or two if the amounts were “only” a few hundred dollars?

7.  Separate Mailroom Duty from Bank Deposit Duty. One of the most common ways to embezzle money from an employer is called lapping.  To lap, an embezzler skims a little bit of the cash that comes in each month and then adjusts the books to hide the skimming. 

As long as the person skimming the cash also maintains the checkbook, it’s easy for the theft to go unnoticed. The embezzler simply ignores or hides the fact that, for example, the $500 Customer A owes you has been paid.

You can minimize the opportunities for lapping if you have one employee open the mail and make notes on an Accounts Receivable report of incoming cash and another employee enter the bank deposit information into the computer.

For this approach to work, you simply compare the Accounts Receivable Report of incoming cash maintained by the mailroom person with the bank deposit information shown in the computer, and you contact customers about past-due payments. This way, you can discover, for example, that Customer A actually paid the $500 owed and that the check has cleared the bank.

8.  Protect Other Valuable Assets. From an embezzler’s perspective, cash is the most convenient item to steal. It’s portable, easy to store, and easy to convert to other things an embezzler might want.

Because cash is usually watched so closely, however, embezzlers often steal other items of value, such as office equipment, inventory, and supplies.

You can follow a couple of general rules to minimize losses such as these.  You can keep a record of the things that your business owns and periodically compare what your records show you have with what you actually hold.

If you buy and sell inventory, for example, keep a record of what you buy and sell.  Then, once a month or once a year, compare what your records show with what you have in your warehouse or storeroom.

You can also restrict access to any valuable assets that the business owns.  Warehouses and storerooms should be locked. Access should be limited to people who really need what is being kept behind lock and key.  If you have items of high value in a storeroom, for example, and several employees have access, it’s also a good idea to make it a rule that people go into the storeroom only in pairs. (A dishonest employee is less likely to steal if someone else is present who may see and report the theft.)

9.  Require Vacations. There’s a final embezzlement prevention tool that many big businesses use and that you should probably consider: Require regular vacations of a week or two. (Banks almost always do this.)

Here’s the rationale: Some embezzlement schemes are so clever that they’re almost impossible to catch. The one typical weakness of these super-clever schemes, however, is that they usually require ongoing maintenance on the part of the embezzling employee.  By making the employee take a vacation, you can see what happens if the employee’s not around.