Safeguards Against Embezzling

Embezzling is not a fun topic. Just the notion that somebody might be cheating—or will do so in the future—is not a comforting thing to consider. It falls in the same category as drafting a prenuptial agreement, filling out your living will before surgery, or making your parents sign a note before loaning them money.

If it helps, think about your honest employees, clients, and vendors. For that matter, think about those close to you who depend on your livelihood. You might be willing to operate entirely on “trust” (as if that is antithetical to safeties), but you may not have the right to make that decision for the other affected parties. In other words, by not instituting anti-fraud policies, you could be hurting more than just yourself.

After seeing so much heartache over the years, we’ve recommended many specific anti-fraud procedures in consulting settings. In most cases the principal’s response is this: “That would never happen. I really trust [person’s name].” You know what? The only people who can steal from you in a small service business setting are those you trust. And in every case—without exception—the person embezzling was still trusted until they were caught, and almost always accidentally.

When they are discovered, it will statistically be the fifth employer they have stolen from. In many cases, the offending employee (or partner, believe it or not) has been with the company for many years and is considered trustworthy and loyal. In fact, many times the relationship was stronger than just an employer/employee type bond, often involving some element of family or friendship. Which of course makes it more difficult to implement any policy that smacks of distrust.

We recently completed a study on the scope of financial fraud at firms like yours, and then painted the profile of a typical embezzler. After explaining what motivates this, we detailed the most common methods of stealing from you, followed by specific steps you can take to prevent it. The study has specific examples of how embezzling was done, from real-life stories.

Here is just one of the thirteen specific suggestions we made about preventing fraud at your firm. To protect you (and your bookkeeper), it is important that your bank send the cancelled checks and statement to an address other than the office, where you can flip through the checks quickly, looking for any suspicious vendors, amounts, or endorsements. Ideally this will be to your home. (Don’t frustrate him or her by keeping them in a pile!) This is the simplest and most effective way to prevent embezzling. (If you don’t receive cancelled checks, but sure to scan them electronically as if you were doing it in person.) Please do it! And if there are partners at your firm, have the cancelled checks and monthly statement sent to the partner with the least financial involvement. Note that it is not sufficient to simply ask that the envelope be given to you at work, unopened. Many banks use resealable envelopes, and even if they don’t, the envelopes are easy to open and reseal without your knowledge.

This will prevent that “trusted” employee from writing a check to himself or herself, forging the signature (which the bank might or might not catch), and cashing it. Without the procedure in place described above, that person will simply pull the cancelled check out of the monthly batch when it comes back. And you’ll never know.

More than 6% of creative service firms know that someone embezzled from them. Many more probably never found out.