Protecting Your Business from Embezzlement

It seems that every other day the newspapers feature a story where a longtime employee has embezzled money from his or her employer. You may sadly shake your head and blithely continue to go about your business. After all, this cannot happen to you … can it?

Do not be naive. Recent studies show that employee embezzlement accounts for a majority of ordinary business losses suffered by employers. Some estimates indicate that more than $400 billion is stolen annually from U.S. employers.

How can you protect your company? A good place to start is with an examination of your bookkeeping procedures. Be sure to completely separate the accounts payable from the accounts receivable. In addition, have at least two employees handle the payroll—one to write the checks and the other to distribute them. If only one person is assigned both of these critical jobs, it may create an irresistible temptation to embezzle.

Furthermore, the owner of a small business should approve all checks over a certain amount. Payments should be made with an original invoice, not a copy. Have all bank statements reconciled and audits performed periodically.

Even with these safeguards in place, there is no guarantee that you will not be victimized. What should you do if you find out an employee has embezzled from the company? Here are a few suggestions:

  • Consult with an attorney to find out the civil and criminal legal remedies that may be available to you. For instance, you might sue the employee to recover the embezzled money.
  • Contact the authorities. Frequently, owners feel partly to blame for allowing the theft to take place, but hiding it does no good. In most cases, the employee will simply move on to the next victim, and you will be left holding the bag.
  • Try to recover the funds. Reporting the crime does not mean you will be reimbursed in full. Before paying claims, insurance companies want solid proof of embezzlement, which is not always easy to provide. For example, when inventory is stolen, it is hard to show that the loss is actually theft and not an inventory mistake.
  • Notify the IRS about the embezzlement. This becomes an added incentive for the employee to make restitution, because embezzled funds are considered to be taxable income. If you report the crime to the IRS, the employee will owe tax on the total amount stolen. This amount will be reduced to the extent that restitution is made by the employee. If your business involves sensitive matters, or if security is a critical issue, you might obtain a bond to cover your employees.

Reminder: Do not ignore the threat of employee embezzlement. It is best to thwart potential problems before they occur. Keep your eyes wide open at all times.