How to Prevent Embezzlement at Your Company

You’ve seen the headlines: An employee for a large company is arrested and charged with embezzlement.

If you’re like most business owners who read these articles, you say a brief prayer of thanks it wasn’t your company in the news, wonder for a few seconds if your organization is at risk, and then promptly put the idea on the list of things to take care of “later.”

The good news is that protecting your company against embezzlement is surprisingly easy. Keep reading, and you’ll find out how fast and simple it can be.

How Common Is Embezzlement?

Do you tell yourself that embezzlement is nothing to worry about – that it will never happen to you?

Maybe … but maybe not.

A survey of Certified Fraud Examiners (CFEs) conducted by the Association of Certified Fraud Examiners (ACFE) estimated that, worldwide, organizations lose 5 percent of their revenues each year to fraud. The ACFE 2020 Report to the Nations, a study of 2,504 cases of occupational fraud investigated by CFEs in 125 countries, found the typical fraud lasted 14 months before it was detected and caused a median loss of $8,300 a month.

What Is Embezzlement?

Embezzlement happens when someone, usually an employee, steals money or property from a business. What makes embezzlement unique is that the thief is trusted to be a steward of the asset. In cases of embezzlement, the financial injury to your business is compounded by the added insult of being betrayed by someone you trusted to have your back.

Trust is not only a distinguishing characteristic of this type of theft, but it also reveals the most important step you can take to protect your company: Don’t be too trusting.

Most embezzlement happens in environments where the person who is supposed to be supervising (e.g., the owner) is very busy – and very trusting of their team. In small and medium-sized businesses, the person handling the finances is typically very close to the owner – perhaps your assistant, your spouse, or your partner. The person you trust the most can become the person who betrays you the most. It’s understandable in a way. You get used to them taking care of things. They get used to your trust. Until one day, they found themselves in a financial predicament or perhaps overly tempted by greed for the money they’re handling … and they choose take advantage of their trusted position.

A word to the wise – be skeptical, and know that it could happen to you.

Your First Anti-Embezzlement Action: Separate Duties

A fundamental concept in accounting is separation of duties. In a nutshell, it means to have more than one person involved with each financial transaction and reviewing your bank account and finances. If one person writes checks, have a different person reconcile the bank statement. If one person deposits checks, have a second individual record receipt of the payment.

Separation of duties is an accounting best practice is because the likelihood that two people will conspire to embezzle is slim. Even if both individuals lean toward stealing, they typically will be worried that their would-be partner in crime could mess up, landing them both in trouble.

In addition to separating duties, you or another supervisor needs to do random spot checks of your bank account. Each month, pick at least one obscure transaction on your bank statement and ask for an explanation, as well as supporting documentation. In small and medium-sized businesses, this detail can typically be found in the general ledger. In larger organizations, you may need to go to a subledger to find the detail you want.

The Most Common Embezzlement Scheme

One of the most common schemes that embezzlers use is posing as a vendor. They set up a fake vendor profile with their employer and submit invoices under the vendor name. They authorize payments to the fictitious vendor and then deposit the payments into a bank account they control.

It may seem risky and downright dumb. But employees can get away with this type of scheme simply because their higher-ups aren’t paying enough attention.

To ward off and sniff out this particular type of fraud, randomly select a vendor payment each month. Ask who the vendor is, what they did for your company, and who authorized the transaction.

3 Easy Ways to Prevent Embezzlement

Here are three easy ways to keep an eye on your finances – and let would-be embezzlers that you’re paying attention:

  1. Spot check expenses. Randomly select at least one expense each month and probe for details, as described above. Check obscure expenses, and also periodically poke around with charges that you see month in, month out. You may find that you’re paying for things you no longer need or receive.
  • Review payroll each quarter. Do you recognize all the names on the list? Have you verified that all of the people listed are current employees? If your company is so large that you can’t reasonably expect to know everyone by name, spot check your payroll records just as you would for expenses.
  • Review your accounts receivable aging report. If payment for an invoice has not been deposited, the invoice will show up on this report – and you should ask why it’s there. One possible answer is that the payment receipt was diverted.

Do You Need More Team Members?

Larger organizations may have enough employees involved in accounting that even review and spot checking can be delegated. In smaller companies, however, the owner must get involved. At the very least, you should be checking your bank statement regularly.

Truly too busy that you can’t invest 30 minutes a month doublechecking your finances? Delegate it to someone, even if you need to hire a professional for oversight. Remember, the person who is spot checking cannot, under any circumstances, be involved with your finances on day-to-day basis.

When it comes to handling your money – in particular, preventing embezzlement – it costs less to have multiple employees vs. just one. Not only will you get more done with multiple people, your team’s effectiveness increases by a multiple. It’s a situation where one plus one equals three or four – not just two. When it comes to properly managing your finances and preventing theft, more brainpower is better than less.

Trust Your Team, But Maintain Healthy Skepticism

Even if you’d trust your employees with your life, don’t trust them 100 percent with your money. Embezzlement is often a crime of opportunity, where employees dare to try it simply because they know you aren’t paying attention.

Separation of duties and more rigorous oversight are the keys to protecting your money and the financial health of your business. The worst-case scenario of taking these simple steps is that you’ll uncover embezzlement. Best case? You’ll alert the people you’ve entrusted to watch your money that you’re paying attention.

Need a sharp set of professional eyes to help you keep an eye on your finances? As your virtual CFO, we’re focused on your financial strategy and helping you achieve your vision. As part of our mission, we help our clients execute the ideas in this article to ensure that their hard-earned money stays in their business. To explore whether our eagle-eyed support is right for you, schedule a complimentary Strategies & Solutions Session here.



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