Dealing With Theft and Embezzlement in a Small Business

It’s an awful thing to discover a trusted employee has been embezzling from your business. If you are a small business owner, this embezzlement is even more devastating. It is often hard to detect if this is happening; however, the end results could ruin you financially. Looking for warning signs means you have to understand what embezzlement means.

What Does Embezzlement Mean?

Whenever one of your employees steals from your business, whether it be money or one of your assets, and uses it for their personal gain, it is embezzlement. This stealing is considered a white-collar crime and can consist of taking money from your bank account, forging checks, or committing payroll fraud. Embezzlement is not limited to just taking money; there are other ways to steal from you that fall under this crime’s description. If you suspect someone is an embezzler, there are signs to look for to help you spot the problem and ways you can avoid them.

Different Forms of Embezzlement

There are no specific characteristics for embezzlers, but as a small business owner, these are suggestions for you to watch that may suggest such a crime is being committed. If you discover one of these crimes is being committed, you should contact a certified specialist in criminal law to protect your business.

  • Customer checks cashed but not deposited in business accounts- With advancing technology, employees could set up an account similar to your business accounts and divert electronic payments to themselves rather than depositing into your bank account. 
    • To prevent this problem, you should have your functions separated, so one employee is responsible for payment processing, and another is responsible for reconciling the entries. Put measures into your system to track customer payments to avoid embezzlement chances.
  • Creating fake payments to vendors- One form of embezzlement with a small business is when an employee takes your funds but conceals it as a payment to a vendor. This fraud is done by creating fake vendor invoices and then placing a charge in your system to hide the act.
    • Preventing this form of fraud would have you regularly review your expense reports. Break the charges down by vendor, the amount, and the purpose of the charge. If you stay current on these records, you will easily spot an account that looks suspicious. 
  • Stealing data from customer’s cards- If your business does phone transactions, your employees can take the customer’s data to make personal purchases. There are also skimmer devices that some use to skim data from credit cards and then use for their personal gain. Some cases have even involved employees taking the credit card information and selling it to the dark web. 
    • Preventing this form of embezzlement, you should limit access to your customer’s data to only those who need it. The use of technology that only allows the last four digits of a credit card to appear during a transaction is another way to prevent this theft.
  • Forging company checks- Forgery is perhaps the most common form of embezzlement and involves an employee writing business checks out to themselves or making electronic payments to their personal accounts. This embezzlement scheme is made easier if you use a signature stamp for your checking.
    • The first step to stopping this fraud is not to use signature stamps so that you have to sign off on all payments personally. You could also separate responsibilities so that one employee processes checks and another reconciles the transactions. 
  • Overcharging customers- Some employees have been found to overcharge a customer and keep the extra money for their personal gain. This fraud adds up over the years and can even involve an employee charging double or adding items on to invoices that were not purchased. 
    • To prevent this overcharge from occurring in your small business, you can conduct periodic audits of your customer’s charges. If you receive any customer complaints concerning their billing, this would be a red flag indicating a bigger problem.

There are multiple other ways in which an employee in a small business can commit embezzlement. If you encounter any form of theft in your business, you must respond immediately. Even small instances, if ignored, can become habits and turn into serious losses for your business.

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How to Deal with Embezzlement in a Small Business

It is a crime to commit embezzlement and can result in felony theft charges under your state laws. If you’ve discovered proof of embezzlement in your small business, it is not a small matter. Talking with a criminal law attorney will help you protect your business and learn how to take action against this crime. 

However, be careful when accusing someone of this crime as you could cause irreparable damage to their reputation and create serious staff conflicts. Proof of embezzlement is imperative when making this claim as you could expose your business to liability.

Annika Bansal

Annika "The Chick Geek" is the founder of Small Business Sense shares small business ideas, tips and resources for independent Entrepreneurs and Small Business owners.