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Why Embezzlement Most Often Occurs at Small Businesses -- and How to Prevent It From Happening to You A recent survey shows 80 percent of embezzlements occurred at small businesses.

By Ken Springer Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

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The latest statistics on fraud should send a big jolt of fear into small business owners. According to a 2016 embezzlement survey by HISCOX, a specialty insurance company, 80 percent of embezzlements occurred at small businesses -- defined as those with less than 150 employees -- and 30 percent of embezzlements involved a loss of more than $500,000.

One major reason scammers target small businesses is because they often lack checks and balances. Typically, a company starts out with employees who are family and friends, and everyone has access to sensitive client information, inventory and sometimes even the checkbook. You may say, that won't happen at my company -- they all love working here -- but it does. In fact, 30 percent of the embezzlements occurred because there were no checks and balances at all.

For any business, employees are your biggest asset yet also the greatest risk. Every night your "assets" walk out the door and go home to everyday financial pressures, drug use, family issues and more. What does this tell us? Employees need clear boundaries. If they know you are looking, they often won't take a chance of getting caught. If they think there is a chance of getting caught, they won't jeopardize their job security or cause family embarrassment.

Related: The 5 Most Common Fraud Scenarios for Small Businesses

How do you remove the temptation? Whoever cuts the checks cannot sign them, and the same applies for sending wires. Someone other than the payroll department should hand out checks, as many frauds occur via ghost employees or after employees have left the company. Someone other than the accounting department should open the mail, especially the check statements and correspondence from the IRS or state agencies. Rotate employees from dealing solely with either vendors or clients.

A rogue employee can try to steal cash or equipment, but it may be easier to steal intellectual property, which can also be very damaging. Regardless of the type of theft, as a general rule, a larger business can absorb the cost of fraud better than a smaller company. You should check with your insurance broker to confirm you have fidelity coverage (fraud insurance), so that if you can prove an employee stole from you, you can collect on the policy if you adhere to the guidelines.

Most people have a distorted sense of who is most likely to commit fraud. They may closely watch a new or younger employee, thinking that their immaturity or impulsivity might lead them to steal. In fact, the profile of the typical embezzler is quite different. "He" is more often a "she" (56.3 percent of embezzlers are women), and the average swindler is 49, according to HISCOX. More often than not, it's the longtime employee, the one that never complains, that stays late and works weekends who bears close watching. The accounting and finance departments bear special attention, as the survey found 40 percent of the embezzlements occurred in those departments.

Related: 6 Tips to Avoid Employee Theft

But, just as an experienced poker players look for "tells," we advise companies that people intent on committing fraud typically have one or more "red flags" that should cause them to keep close tabs on them. In fact, 78 percent of the embezzlers had at least one of the following red flags:

  • Living beyond one's means
  • Financial problems
  • Unusually close association with vendors or customers
  • Excessive control issues
  • Wheeler-dealer attitude
  • Recent divorce or family problems

What should you do if you suspect fraud? Assuming you or the life of an employee or your premises is not in imminent danger, call counsel and an investigations firm/forensic accounting firm to assess the situation to include preserving and segregating evidence, whether a computer or documents. Exploratory interviews with management should be undertaken, and then expeditiously map out a strategy to minimize a company-wide morale problem, as well as to make sure news of the fraud does not leak to the media, competitors or even investors. This should be undertaken before taking any action against the "suspect." Although you have a few options about what to do with the suspected employee, when in doubt consider placing the suspect on paid suspension, subject to an appropriate fact gathering inquiry.

Related: How to Handle the Disgruntled Employee Out to Sabotage Your Job

In these situations, always assume the suspect is innocent until the facts prove otherwise, as that may spare you from a potential lawsuit by your employee down the road in the event he or she is innocent, as, often, anonymous allegations against an employee are unfounded. This is a great time to interview the suspect and others, not in an accusatory manner, but from a fact gathering standpoint. You just want to understand what happened and who could have been involved. The suspect may have an alibi, or may dig himself into a hole. Further, you may learn of other accomplices.

What can you do to prevent fraud at your company?

  • Implement a pre-screening program for all new hires, checking LinkedIn and other social media. This should include tiered background screening levels depending upon one's position.
  • Conduct thorough reference checks. Be sure to speak to current and former supervisors and underlings.
  • Implement appropriate checks and balances, so no one can make a payment or have access to sensitive information without multiple approvals or checks.
  • Create cyber controls, to include having a computer policy, locking up intellectual property and educating employees about opening attachments.
Ken Springer

President and Founder of Corporate Resolutions Inc.

Ken Springer, a certified fraud examiner and former FBI agent, is the president and founder of New York-based Corporate Resolutions Inc., a 25-year-old firm that conducts background checks and corporate investigations. Springer is a frequent speaker on due diligence issues, risk management and corporate investigations. 

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