Fraud: 5 Simple Steps to Prevent Embezzlement and Theft

Do you know what a corporate thief looks like? Is one of your employees stealing from you right now? I'm not talking paperclips and post-its. I mean outright financial fraud and embezzlement.

Major cases of embezzlement are on the increase and the consequences can be dire. In the of 485 cases of major embezzlement studied in 2010, the average embezzler stole -- ready? -- $17,656 per month from their employer.

The study by Marquette International also found that the guilty employee was more likely to be:

• Female (64%) 
• Employed in finance, bookkeeping or accounting (66%)
• An individual acting alone (84%)

Well-dressed and hiding in a cubicle, these kinds of thieves can kill your company before you even spot them. The bad news is there's not much you can do about the major causes of fraud: Debt, divorce, drugs and simple disgruntlement are the "4 D's" that push employees toward embezzlement and theft.

Be Proactive

Even if you know about employees facing these pressures, you can't watch them every minute of the day. But you can make fraud more difficult -- and more obvious. No matter the size of your company, start with the following fundamentals:

1. Separate the Financial Duties: This is a big issue for small business. If your receptionist opens the mail, writes checks to pay the bills, and mails the checks... you've got a problem. Divide each side of the accounting duties (paying bills and issuing invoices) between at least two people. The person who enters the bills, should not write the checks. Likewise, the invoice entry and deposits should go to two different people. In addition to reducing the opportunity for an individual to defraud you, this "check-and-balance" system will greatly reduce mistakes and oversights.
2. Look at the Bank Statements. The bank is your partner in avoiding and uncovering theft. Be sure you're looking at the original statement straight from the bank. Have it sent to your home if necessary. This is the single best strategy to avoid theft ... if anything on that statement looks funny, make it your job to track it down. Ditto with credit card bills.
3. Open a Lock Box at your Bank. By putting the bank's address on your invoices, you can have customers send payments directly to the bank. Deposits are made more quickly and accurately. Nobody has to leave their desk to take checks to the bank. And there is much less opportunity for an employee to steal or misappropriate a customer's payment.
4. Set up "Positive Pay" Notification. Ask your bank about this. Positive Pay means you send the bank a list of the checks you write each day or week. The bank then compares every check to this list before cashing it. With a Positive Pay arrangement, an embezzler trying to slip extra checks into the weekly run will be tripped up at the teller window long before you discover the odd entry in your ledger.
5. Be the Last Person to Touch the Checks. When you sign the checks (and you should), don't hand them back to someone for distribution. Mail them or, in the case of payroll checks, pass them out yourself. Payroll is one of the most often abused systems, so be sure you know exactly who is working and who has left. You may be surprised to find that a long-gone employee is continuing to be paid.

When the Worst Happens

Discovering employee theft is just the beginning of the nightmare. Dealing with it can involve audits, police, and of course HR. Be careful not to accuse the wrong person, but when the jig is up, swift and certain action is the best course.

Personally, I have lived to regret giving someone a "second chance"... in the future, my first call will be to the police. Law enforcement is a sad move but ultimately the safest for you and your other employees.

Prevention, not Cure

An ounce of prevention is still worth a pound of cure. Start with a thorough audit of your own. Look at the policies and procedures you have in your accounting department. Find the concentrations of power and break them up.

Then turn to your bank and make use of as many of their cash management services as you can. There are some great services you might never think of, like electronic check handling, armored car services, and account reconciliation (which works great with Positive Pay).

Finally, put yourself in the most critical role of approvals or signatures... and stay vigilant.

Dedicated to your (Safely Guarded) profits,

David