10 Ways to Prevent Employee Theft

Simple Ways to Keep Employees from Stealing from your Small Business

Disclaimer:

Though I am a tax professional, please seek professional advice from your tax professional.  The information provided here is for informational purposes only and should not be viewed as tax advice.  I make no guarantee or promise regarding the accuracy, or reliability of the information presented.  The information on this website is accurate to the best of my knowledge, but there may be omissions, errors, or mistakes.  By use of this website, you agree to hold me harmless.  I have the right to change how I manage to run my website and change the content at any time. 

Story Time – Based on Actual Events

Sobbing, barely audible, ” We’ve been robbed, and I don’t know what to do.  Karen, the bookkeeper, stole all our money.”

Me- “What?  I thought you said she was like family.”

Chelsea- “We thought she was”

Chelsea explained that Karen used the company credit card for personal use and paid her bills from the company checking account.  In addition, she even bought an RV with company funds.  How did she manage all of this? – She had total control—no separation of duties.

Karen opened the bank statements, wrote checks, reconciled the bank accounts, prepared the financial statements, and controlled the accounts receivables as well as the accounts payable.  She even had online access to the bank accounts.  – NEVER a Good idea!

Do not give anyone total access to your company finances.

Karen had too much control.  She downloaded the bank statement and paid the bills online using the owner’s account (which was provided to her).  She wrote the checks, prepared the deposits, reconciled the bank, and finally prepared the financial statements with no oversite.  This is very common in small businesses, unfortunately. 

Steps to ensure this will not happen to your business.

1. Separation of accounting duties.

Separations of duties what exactly does this mean?  It sounds so simple, but many companies do not have different people overseeing things like getting the mail, opening bank statements, writing and signing checks, reconciling the bank accounts, and preparing financial statements (if they even do that).  The more these activities are done by separate people, the lower the chance fraud will occur.  A small business owner should never give out online banking information to anyone.  The business owner should always get the bank statement and examine it.  Does it make sense?  If something does not appear correctly, do not wait to investigate it.  The sooner, the better. 

2. Do not allow access to online banking

In this case, Karen had online access.  This access included downloading the bank statement, including bill pay (online bill paying app), and the ability to stop payments. 

3. Have the bank statement mailed to the owner’s home or PO Box.

The owner should examine the bank statement before giving copies to the accountant/bookkeeper.

4. Arrange for a surprise “owners audit”

This does not have to be an actual audit with a CPA, but the owner should look at the information in the accounting system.  Look at the checks written, invoices, deposits, etc. 

5. Create an ethical professional work environment

Cross-train employees.  Communicate to everyone what constitutes fraud.  Offer a confidential whistle-blowing method for personnel to inform of any inappropriate activity.

6. Have a policy where the owner and or manager must authorize invoices over $500.00

The company should customize the amount, but there should be a limit on the size of a check or bill payment amount that will need to be approved by the owner or manager.

7. Only the owner should have access to blank checks.

They should be stored in a locked area.

8. Manage Inventory

Inventory should be taken on a monthly or quarterly basis. 

9. Payroll should have a process- which should include approval of timesheets

In theory, if there is a payroll manager or accountant (bookkeeper) and the owner should both authorize these.  Payroll is usually one of the most significant expenses for an employer.

10. Install security systems

Security systems may be one of the most important reasons employees will not steal. 

These are only 10 steps to deter employee theft. There are of course many others. Staying on top of the systems and constant monitoring will be needed.

Unfortunately, in this case, it is doubtful that the business owners will ever recoup the money stolen.