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8 steps employers can take to prevent employee embezzlement

| Apr 28, 2020 | Business Law |

An employer/employee relationship is one of special trust. Sometimes employees take advantage of that trust by stealing from their employer. Embezzlement can happen when employees take cash or reroute invoice payments from customers, but it can also happen when employees submit fraudulent invoices for payment or use the company credit card for personal expenses. Embezzlement hits companies, public agencies, and nonprofit corporations of all sizes. The U.S. Department of Commerce reports that nearly a third of business failures are related to employee theft or fraud. Luckily, this is an area where an ounce of prevention can save your company from financial calamity down the road.

Eight particularly easy solutions you can take follow below:

1. Do a full background check before hiring a new employee. You would be surprised by how many companies do not perform a background check. If you use a recruiting company, you need to be very clear as to what its background check entails, and you need to make sure the responsibility for a background check is in your contract. Many placement agencies try to limit their liability for the employees they pair with their company clients, so read the fine print.

2. Have clear policies and controls in place–and enforce them. No matter how large or small your business is, you should have set procedures for allowing employees access to and use of the company credit cards or handling of payments. All reimbursement requests need to be accompanied with receipts or invoices. Never pay an invoice of a vendor you are not familiar with merely because an employee asks you to. If you have doubts as to the legitimacy of an invoice, call the company or do some research before you pay it. For internal accounting, you should record every type of transaction (e.g., write-offs, refunds, adjustments).

3. Restrict access to financial information and resources. As a company grows, it is critical to manage which employees have access to financial information and records. When people leave the company, terminate access immediately. Similarly, as new people come onboard, set them up with unique credentials and limit access to only the systems and tools they need.

4. Assign financial duties to more than one person and cross train employees. If you have a small business, it may be easiest to have one person handle the mail, log and deposit checks, and reconcile the bank statements. But putting all the responsibility in one individual’s hands makes it easier for theft to go unnoticed. Companies should divide financial tasks between two or more people. For example, you should have one person open the mail and log payments coming in, and a separate person paying invoices and doing the books. Having more than one person handling these tasks makes it easier to identify things that look amiss.

5. Use a lockbox for petty cash. Need we say more?

6. Perform random internal or external audits. If employees know their employer is paying attention to fraud and theft, they will be less likely to engage in it.

7. Get the right kind of insurance coverage and increase your limits for employee theft. Most businesses may have standard commercial general liability insurance policies in place, but they don’t have sufficient coverage for employee theft. Companies should backstop possible theft with employee dishonesty or crime coverage as part of their insurance package. If you work with third parties such as staffing agencies, ask for proof of their coverage.

8. Engage law enforcement. The most important thing you can do after you catch an employee engaged in financial impropriety is to report that person to law enforcement. A surprising number of companies simply terminate the employee because of sympathy or its own embarrassment of having allowed the company to be vulnerable. The problem with this approach is that there is no record for the next employer to discover when they hire the person you fire, so failing to report theft simply perpetuates the cycle. As for the employee, typically there are underlying issues that spark theft, such as addiction or mental/emotional problems. Reporting their conduct to law enforcement authorities can often lead to them getting the help they need.

Following these steps will help you prevent your business from suffering loss at the hands of an employee. If your company is the victim of employee theft, it’s critical to engage legal counsel right away.