Preventing Employee Fraud

Use these tips to help protect your business from staff members who might be tempted to steal.

February 3, 2003 5 min read

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Embezzlement and other kinds of financial fraud are perhaps the most common kind of employee theft. Small businesses tend to fall prey to this swindle because they don't have the controls in place to prevent it. Use the tips below to help protect your business from unethical staff members.

Keep duties separate
No single employee should control a financial transaction from beginning to end. The person who writes your checks should never be the person who signs your checks. The person who opens the mail should not also record the receivables and reconcile the accounts. By dividing up responsibilities, you will make it more difficult for a person to steal from you and manipulate your records to cover it up.

Get your bank statements personally
Don't give a person who is in a position to embezzle a chance to destroy or remove evidence of the wrongdoing. The business owner or an outside accountant should receive unopened bank statements and canceled checks each month. Review these checks carefully. Examine the payees, signatures and endorsements on each check. Keep an eye out for indications of fraud such as:

Checks to suppliers or people you don't know
Checks made out to cash that are larger than the amount you allow for petty cash
Signatures that look forged
Missing checks, or check numbers that are out of order
Checks made out to a third party but endorsed by someone in your company
Checks where the payee listed does not match the name in your register

Closely guard your company's checks
Don't be careless with your corporate checks. Keep them in a locked drawer and don't give out the key. Use pre-numbered checks, and check for missing check numbers frequently. Have a "voided check" procedure in place that requires you (the owner) to validate all voided items. Require all checks above a nominal amount to have two signatures (one of which is yours). And never, ever sign a blank check.

Sign every payroll check personally
This may take some time, but it is generally worth it. Review the checks to make sure they are for people you know. If there's a name you don't recall, go find that person. Keep a weekly count of the number of people on your payroll, and verify that number against the number of checks you have. Make sure that changes can not be made to your company's payroll master file without your approval and signature. Another option: have a separate bank account for payroll, and deposit the exact amount of your payroll in that account; then insist on a prompt monthly reconciliation.

Watch your receivables closely
Have more than one employee involved in counting and verifying incoming receipts. Make sure all incoming checks are properly endorsed. Consider buying a "for deposit only" stamp, and use it on all incoming checks--this can prevent an employee from cashing them. Personally investigate customer complaints that credit has not been received for payments. Get a copy of the front and back of the customer's check, and be sure it was deposited into your business account.

Make your bookkeeper take vacation
An employee who is embezzling from you may need to make a continuous effort to conceal this kind of stealing. Many small business owners are surprised to discover employees who appear loyal-they never take vacations and never stay home sick-are actually stealing from them. The reason these people have to be in the office constantly is to cover a complicated paper trail. Insist that employees who perform accounting/bookkeeping take vacation every year. Ideally, this vacation should be at two weeks in length, and occur at month end, when the books are being closed. Use this time to have someone else review your books and look for discrepancies.

Have your books audited regularly
Bring in a third party at least once a year to conduct an audit of your books. This makes it difficult for an embezzler to cover his or her actions. This audit should be unscheduled and a surprise; make sure it does not occur at the same time every year. If you suspect fraud, consider specifically requesting a "fraud audit" instead of a "general audit." This type of audit is designed to uncover and prevent these kinds of losses.

Make sure you understand your books
Embezzlement commonly occurs when bookkeeping is sloppy and unsupervised, which makes it easy for an employee to keep cash and receipts. As the business owner, you must be familiar with your company's bookkeeping and record keeping system. This way you can easily review the books and make sure nothing is amiss. If you're not a "number person," have your accountant spend some time with you to show you what to look for, or take an accounting or bookkeeping class at your local college. Trusting someone else to oversee this most important part of your business only opens the door to fraud.

Secure your bookkeeping software
Don't allow unauthorized access to your bookkeeping software. Don't put the computer that holds your books on your network. Make sure both the computer and the software are password-protected. Change the password frequently to lock out unauthorized persons from this program. If you still use paper ledgers, keep them under lock and key.

The views and opinions contained herein are not necessarily those of American Express and are intended as a reference and for informational purposes only. Please contact your attorney, accountant or other business professional for advice specific to your business.