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Checks and Balances: Discouraging Embezzlement


It is something no business owner wants to uncover - an employee who has embezzled from the business. Unfortunately, employee embezzlement occurs more than one would like to acknowledge and we are seeing it on a much more frequent basis. Embezzlement occurs in both small and large businesses and often involves a long time trusted employee and friend. In most cases, the more trusted the employee, the greater the amount of money involved. Some commentators have suggested that embezzlement may occur in one out of every twenty businesses.

Often times, out of necessity, business owners rely on staff to handle the day-to-day operations of the business. In a small business, this might mean one key employee who is responsible for most of the day-to-day tasks including billing, opening the mail, depositing checks, writing checks and handling payroll. For mid sized and larger businesses, these duties might be split among two or more individuals. However, even with a division of duties, rogue employees can often go undetected depending on how the business office is set up. Additionally, if the rogue employee holds a senior level position in the organization, it is even harder to detect anything out of the norm.

To reduce risks, large businesses will often implement sophisticated internal controls. Unlike, large businesses however, smaller businesses do not always have the resources for such controls. This makes small and mid-sized companies more susceptible to embezzlement. Nevertheless, businesses of all sizes can, and should, take reasonable steps to discourage embezzlement. As the new year begins, now may be a good time to review your business practices, and while doing so, below are some steps to consider:

• Conduct background checks of new hires. In today’s environment, this step is becoming increasingly important.

• Ensure appropriate checks and balances are in place to discourage embezzlement or other wrongful activities. If you are the owner of a small businesses, be involved in the operation of the business, such as signing or approving all checks or requiring two signatures on checks.

• As the business grows, separate the intake of funds, the posting of collections and the depositing of receipts. No one person should be responsible for all such functions. Review monthly financial statements and understand what the statements reflect.

• Conduct periodic or even surprise internal audits. Another option would be to engage an outside CPA to conduct the audit, or to assist you in conducting your own audit.

• Establish a whistleblower hotline. One of the best ways to identify fraud is through other employees. When employees feel that the employer takes complaints seriously and will do something about it, they will take action.

In sum, implement a few safeguards as insurance against potential embezzlement or other wrongdoing. If employees know (or believe) that someone is watching, they are less likely to think they can get away with such wrongdoing.

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