What Small Business Owners Should Know About Embezzlement

If you own a small company where you personally know and interact with everyone who works for you, it can be hard to fathom that one of those people would ever steal from you. But the fact is, embezzlement happens all the time, even at small, family-owned businesses.

Indeed, according to a 2017 study on white-collar crime by the U.S. insurance company Hiscox, the majority of embezzlement (55%) occurs at companies with fewer than 100 employees. And because these companies are small, embezzlement can impact these organizations much more severely than a similar crime would a larger company with deeper pockets. The study found that the median loss for a single incident of embezzlement for small businesses is nearly $290,000—which could prove fatal for some companies.

Given the potential damage embezzlement can cause, we’ve highlighted some of the key factors associated with small-business embezzlement from the Hiscox study, along with offering suggestions for preventing such crimes and what you should do if you suspect someone is stealing from you.

Like most other crimes, there aren’t any characteristics specific to all embezzlers. But the Hiscox study did find a few interesting commonalities among the most frequent perpetrators:

• Embezzlement takes place at all levels, but executives and those in management are the most frequent culprits.
• Women are slightly more likely to embezzle (51%) than their male counterparts.
• Embezzlers are typically in their mid- to late-40s.
• Embezzlement can occur in any department, but most incidents (37%) occur in finance or accounting.
• Embezzlers are most likely to be individuals who mostly work alone.

For those with smarts, particularly in bookkeeping and accounting, there are numerous ways to skim money. The most common method is also one of the easiest—theft of funds. Making up 34% of all cases, this typically involves the transfer of their employer’s cash or deposits into a bank account they control.

The second most popular method is check fraud, whereby an embezzler forges or alter’s checks, which accounts for 22% of cases. About 14% of incidents involve vendor invoicing and false billing. Here, the perpetrators alter or forge invoices from real vendors, or they make up fake vendor companies, invoice their employers, and route the payments to their own accounts.

Credit card fraud accounts for about 10% of cases and is most often committed by managers, who make personal purchases on company cards or issue themselves unauthorized cards. Other, less common embezzlement methods include property/merchandise theft, payroll fraud, and fraudulent loans taken out in the company’s name.

Notably, embezzlement rarely involves a single big score. Most incidents entail fairly small amounts of money being stolen over a period of several years. In fact, more than a quarter of embezzlement cases lasted for five years or longer.

To protect your company, Hiscox suggests implementing a system of checks and balances, such as having more than one staffer involved in every financial transaction. Since most embezzlers fly solo, this alone can significantly reduce your risk.

Additionally, business owners—or at least someone outside of the normal bookkeeper—should regularly review the company’s bank statements, credit card invoices, canceled checks, and other financial records. At the very least, you should do a monthly profit-and-loss review, looking for variances and checking into even small discrepancies. That’s something we often participate in with business owners who are part of our Creative Business Lawyer Strategy Plans®. Email us for more details.

Obviously, pre-employment background checks are also a good idea, especially for anyone involved with the business’ finances. But don’t let a clear background lull you into thinking they aren’t capable of stealing.

One of the biggest red flags to watch for are employees who seem to live well above their means, with lifestyles and purchases that aren’t commensurate with their salaries. Many times, the culprits can’t help but flaunt their riches, so keep an eye on employees who enjoy showing off wealth that doesn’t match their paychecks.

And though it won’t prevent embezzlement, company owners should always purchase adequate business insurance to mitigate the consequences of employee theft. Even if you catch the culprit red-handed, it’s rare for more than a fraction of the stolen funds to be recovered, and restitution—even when paid—will do your business little good if the missing funds cause your business to go bankrupt.

If you suspect embezzlement, you should immediately document everything you know about the situation, and discreetly review financial, payroll, and personnel records for supporting evidence. Only share the investigation with one or two trusted individuals, and always on a strict need-to-know basis. Make a list of potential witnesses, but don’t discuss anything outside of your small investigative team until the final stages.

However, be very careful not to jump to conclusions and accuse someone without proof—this could irreparably tarnish the employee’s reputation, cause serious staff conflict, and even expose the company to liability.

If you do uncover theft, contact us to discuss your legal options and also inform your insurance carrier. Even though pressing charges may not get your money back, it’s often necessary in order to send a signal to other employees that such behavior will not be tolerated—but we can always help you make that decision.

Whenever you launch a business, you should consult with us to discuss the safeguards, systems, and insurance to put in place to prevent embezzlement. And if you suspect an incident has already taken place, contact us as soon as possible for advice on how to mitigate the damage and handle the investigation in a manner that will protect your company from liability and potential blowback.

We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.