Best management practices to prevent embezzlement, the invisible crime of opportunity

Embezzlers are frequently your most trusted, most valued, least problematic and your hardest working employee.

As a small business owner, I have been ripped off by embezzlement. Thankfully, I became aware of it as soon as it happened, and the theft did not sink my business. I learned the hard way, but you can learn to avoid it with some of these best management practices.

One of the easiest ways to prevent embezzlement is to never allow anyone access to your bank accounts. The owner of the business will sign all checks when paying for inventory, supplies, payroll, taxes, etc. This means that the business owner must review the invoice or tax document that you are paying, match it to the check that is written and then sign the check.

If you collect the money, make all bank deposits, pay all the invoices and pay all the taxes, there is less room for error. Recently, a payroll processing company in California went bankrupt because the owner decided to take all the money and run. He was never found. The company was a typical payroll processing company where they would calculate wages, calculate FICA and other taxes, write the payroll checks, write the 941 tax forms and checks, and process and file all the tax documents and make all the tax payments. This work was done under contract on behalf of their small business client.

The small business employer would make a single check payable to the payroll company for the total cost of wages plus taxes and a small service fee. What a significant time savings for an entrepreneur! However, this payroll company did not pay to the government the withheld income taxes taken out of the employee’s wages, did not pay the fica taxes, etc., and the employers had to repay all of the taxes owed, and it was in the millions of dollars. Some of these small business victims are out of business, but the victims are still liable for the taxes owed, and probably will be paying on this tax liability for many years to come. If you use a payroll processing company, pay them to do the calculations, tax forms, etc. and then you write all the checks and file your own tax forms. It is one of the best ways to ensure that all of your bills are paid correctly.

Another way to prevent theft by embezzlement is to open and post all business mail yourself. Thieves cannot embezzle if they do not have access to the invoices and bills for your company. Yet a better way to prevent embezzlement is to send your bank statements to your home.

It is also important to remember that you should review your bank statements regularly; this is how I discovered my accountant was embezzling from my small business.

Another best management practice is to use pre-numbered purchase orders, invoices and business checks. Any inexpensive computer can produce an official looking purchase order or invoice with a serial number. But if your documents are pre-printed serial numbers, it is more difficult for someone to create a fraudulent document. Of course, you will have to monitor voided documents, watch for missing serial numbers and most importantly, credits to accounts after an invoice has been sent.

There are many more best management practices to prevent embezzlement. And you can learn more about them with free business counseling by registering below.

Paul J. Werner is an Michigan State University Extension educator from L’Anse, Michigan. You can obtain free business counseling by registering with the MSU Product CenterWerner has many years of experience in small business ownership and entrepreneurship; he and his wife currently own two small businesses in the Upper Peninsula of Michigan. 

Other articles in this series:

Related Events

Related Articles

Related Resources