Small businesses have to contend with various issues in the current hectic business environment — including financial management and competition. But there is one silent danger that can be overlooked until it is too late and this is embezzlement. Although some people tend to relate the idea of embezzlement to big companies or big scandals, the reality is that small companies are particularly susceptible to it because they are characterized by less internal control, limited workforce, and a significant amount of trust among the employees.
This paper identifies the real life embezzlement examples of small business embezzlement, how such crimes are committed and what owners can do to prevent such crimes.
What Does Embezzlement Mean?
Embezzlement refers to theft or misappropriation of money given to a person, usually one who has a responsibility. This normally occurs in small businesses where the employees or the managers have access to financial resources. As opposed to mere theft, embezzlement is a deception since it can be done gradually, and in most cases by people one trusts.
Small Businesses Are Easy Targets
Small business owners tend to work on the basis of trust and personal relations. Sadly, such trust is exploitable. Most of the small businesses lack an effective internal audit system, and the employees tend to wear many hats with little supervision, thus having access to sensitive financial details.
In addition, small businesses might not have the finances to employ compliance officers or fraud prevention experts, thus, they are the most likely targets of embezzlers.
Small Business Embezzlement in the Real World
1. The Bookkeeper Who Skimmed Thousands
In one of the documented cases, a small retail shop in Ohio has found out that its long-serving bookkeeper had stolen more than 150,000 over five years. To hide her tracks, the bookkeeper produced bogus invoices, and she altered accounting records. Her activities were not noticed because she was the only person dealing with the financial books and this took years. The theft was discovered following a routine audit by a new accountant.
2. Payroll Fraud in a Family-Owned Construction Company
The case involved a family owned construction company in Texas who was a victim of payroll fraud, an employee added fictitious employees to the payroll system. This plan led to over eighty thousand dollars stolen in two years. The employee took the counterfeit paychecks himself and spent them on himself. The fraud was found out only after a significant deterioration in profitability caused a more thorough financial examination.
3. Abuse of Company Credit Cards at a Café Business
The manager was given a company credit card to cover operational costs in a small Florida cafe. In the long term, she started billing personal expenses such as vacations, luxury goods, and online shopping amounting to more than 50,000 dollars. Since the owner was occupied with the daily running of the business, he was not able to realize the illegal expenditure until the credit card company detected a suspicious transaction.
Typical Embezzlement Strategies in Small Businesses
Although the above examples are particular, the techniques of embezzlement tend to be grouped into several common categories:
- Dipping cash out of day to day sales prior to being booked
- Submitting false reimbursement of non-business expenses
- False payments to the vendor in which the employee invents fictitious suppliers and keeps the money
- Overcharging and transfer of money to personal accounts
The most harmful aspect of these crimes is that they are normally done over an extended period of time and can bankrupt a small business.
Embezzlement Cost
In addition to the monetary loss, embezzlement may lead to devastating effects on morale of the employees, trust of the customers and the overall stability of the business. Going to court is costly and time consuming and in most instances the stolen money is never fully refunded.
In other cases, business owners have been forced to borrow money or even close shop because of the economic losses incurred as a result of workers fraud.
Protect Your Business
Although this may appear to be an uphill task, there are precautionary measures that small business owners can take in order to mitigate the occurrence of embezzlement:
1. Independent Financial Obligations
Make sure that no individual employee controls the entire process of financial transactions. As an example, the individual who signs off on payments should not be the individual who writes checks.
2. Carry Out Regular Auditing
Regular internal and external audits may be effective to detect inconsistencies before they grow into big issues.
3. Apply Accounting Software
Contemporary accounting systems will allow keeping track of all transactions, highlighting anomalies and minimizing human error.
4. Read Bank Statements Yourself
Business owners ought to ensure that they go through bank and credit card statements on their own.
5. Institute Whistleblower Policy
Establish a culture in which the employees are not afraid to report any suspicious activity without fear of retaliation.
Final Thoughts
It is not as uncommon as you may think that embezzlement occurs in small businesses and the effects are devastating. Trusted bookkeepers, long-term employees, embezzlers usually exploit trust and the absence of control. Small business owners can greatly minimize their risk by studying examples of what has happened in the real world, as well as taking more effective financial controls.
As a reminder, prevention is much cheaper than recovery. As a small business owner, you can do something now to protect your financial future.
