The idea of theft and embezzlement within a small business is something that many business owners would rather not consider...and for good reason! Often small businesses are run by a tight-knit group of close friends and possibly even family, and as a result, the level of trust maintained within that team is extraordinarily high, and the idea that a member of that group might break that bond by stealing or through other dishonest dealings would be devastating not only on a business level, but on a personal level as well. As unthinkable as it may seem, over my 28 years of working with small businesses, I have seen numerous instances of theft and embezzlement, often from the team members one would least have expected. As difficult a topic as it may be to address, it is invaluable to think ahead of these situations before reactive action is needed, and before bonds of trust within the company are irreparably broken.

Small businesses can be especially susceptible to embezzlement or other nefarious activities not only because of the high level of trust between team members, but also because they lack the well-documented internal control processes and segregation of duties that exist within large companies to help prevent dishonesty. This can either be the result of a shortage of personnel, funds, available time, or even expertise. With this in mind, however, there are several key things that small business owners can do to safeguard their companies from malevolent dealings.

The first way in which small business owners can create safeguards is by eliminating blind trust in their team members. No matter how trustworthy your team may be, you will never regret instituting checks and balances as part of your operations. A great way to do this is to have your bank send you images of cancelled checks with your bank statements, so that you can review the images for unapproved expenditures. Check images don’t lie, and if any suspicious activity is going on, those images can provide valuable information about where your money is going. In addition, another simple but effective way to prevent theft is to make it a part of your regular operations to review credit card charges for any unapproved activity. It may take a few extra minutes of your time to check behind your company card charges, but a little time investment can go a long way toward keeping honest people honest, and making sure nobody takes advantage of company funds.

Another valuable tool in preventing employee theft or embezzlement is the use of software controls. Part of the beauty of small business software, such as Quickbooks, is the flexibility and ease of use they afford. However, that same flexibility can leave your business open to fraud if certain controls are not configured properly. It is important to note that different software systems allow for different types and levels of controls, so without getting overly specific or technical, here a couple of mostly universal controls that should be used within most software systems. The first control you should look to implement to prevent employees from committing fraud is to set permissions such that employees do not have the ability to delete transactions and they only have limited ability to edit current transactions. This prevents transactions from being tampered with and limits the number of people authorized to process money in the system. In addition, business owners can make sure that their “audit trail” is turned on in the system so that changed or deleted transaction history is preserved. It could be possible that employees might delete transactions in the system after making fraudulent transactions, but use of an audit trail to track all transactions—even canceled or deleted ones—can provide an extra level of security. 

An under-recognized tool in fighting employee fraud is simply being able to recognize risk factors for dishonesty. There tend to be 3 primary elements that, when all are present, create a recipe for fraud. The first element is opportunity. The aforementioned steps are geared toward eliminating or, at the very least, limiting opportunity for anyone to take advantage of poorly secured processes. The second element that drives employee theft is personal financial pressure. If the employee or employees handling company funds are poor money managers in their personal lives, such that they are constantly in financial straits, or even if they find themselves in financial need through no fault of their own, perhaps due to an unexpected financial loss or liability (for example, medical bills/automobile failure/etc.), there may be a temptation to skim a bit off the top. Finally, the third element that drives employee theft is a sense of rationalization—the employee believes that they either deserve or are entitled in some way to the company funds that they manage. They may be dissatisfied with their job, and they consider helping themselves to company funds to be just compensation for their trouble. 

It is so important to control the opportunity factor, since the other two factors are largely out of your control as an employer. While it is your responsibility to do your best to create a positive work environment and to pay your employees fairly and on time, you often cannot control their personal circumstances and you may be totally unaware of the presence of any kind of motivation on their end to steal from the company. To try to manage the pressure and rationalization elements of employee theft, it is important that you do your best to keep a pulse on the people in your company who are handling the money, and if they seem to be constantly voicing complaints about money, or asking for advances, they may be someone who could be tempted to take advantage of their access to the business’ funds.

Despite your best efforts to eliminate opportunity and to minimize temptation, there will undoubtedly remain some loopholes that a person bent upon committing theft or fraud could uncover and attempt to exploit, if they are determined enough. As a result, it is always a good idea to invest in employee dishonesty insurance. It is always the hope and expectation that you will never need to use it, but even under the best of circumstances, as a busy company owner, you may still accidentally overlook some fraudulent transactions—maybe even some pretty large ones—and you may never catch the embezzlement until it is too late. Small business owners have so much on their plates to manage from day to day, and it can be remarkably easy for fraud to slip by unnoticed. Employee theft insurance can be a lifesaver in those instances when you could find yourself on the hook for thousands of dollars stolen by an employee.

In conclusion, as difficult a topic as this may be to address, it is far easier to establish checks and balances before any issues arise than it is to deal with the fiscal and public relations ramifications once a disaster has already occurred. Rather than leaving gaping opportunities wide open for team members to take advantage of, especially if they are already feeling financial pressure, it would be far easier and better to simply make those opportunities more difficult to seize in the first place. By simply instituting a few extra security and tracking measures into your financial system, your chances of keeping honest people honest will increase significantly.