Are You a Victim of Embezzlement and Not Even Know It?

Written by: Veronica Wasek | VM Wasek

This is going to be a very serious post about small business fraud and embezzlement. I want you to take it very seriously because you could be a victim and not even know it. Internal fraud and embezzlement are on the rise. There are many predatory individuals just looking for unsuspecting victims. In fact, we know of individuals who have been victimized and didn’t even know it until their employees stole hundreds of thousands of dollars. Could you be a victim of embezzlement and not even know it? I’ll share 3 signs to watch for.

SMALL BUSINESS FRAUD IS ON THE RISE

I get very upset every time I hear about a small business falling victim to embezzlement. I’d love to say that embezzlement and fraud are uncommon, but I have seen too many companies become victims. In fact, in the last month, I have already learned of 3 companies being victimized and losing hundreds of thousands of dollars.

3 SIGNS YOU COULD BE A VICTIM OF EMBEZZLEMENT

Could you be a victim of embezzlement and not even know it? Here are the 3 signs to watch for.

1 – CHAOS

Did you know that chaos conceals fraud? The biggest sign of chaos in a small business is – the bookkeeping is a mess. Is your QuickBooks file a mess? It may be a strong sign that your employee is concealing fraud.

Let me tell you a story of how chaos concealed a massive fraud. Betty is the office manager of a successful consulting business. Everyone loves her and the boss trusts her completely; Betty is like family. Everyone agrees that Betty works very hard. She invoices customers, takes care of the accounts receivable, pays the vendors bills, does the payroll, prepares the financial reports, makes collection calls, takes care of the office, and manages the administrative staff. Betty is a super hero. The only problem, it seems, is that Betty is consistently late in delivering financial reports to management. The company’s owner, Joe, has repeatedly questioned Betty about the reports and why key balances don’t look right. Betty says she’ll look into it. As soon as she “fixes” one thing – something else seems to get messed up.

One day, Joe gets a call from his credit card company asking about some unusual transactions. Upon further investigation, Joe realizes that Betty has been using the company credit card for her own personal purchases. Joe reviews past credit card statements and is surprised to find out that Betty has spent thousands of dollars on personal expenses. Not only that, Betty has forged Joe’s signature on checks and entered them in QuickBooks as payments to vendors. Joe terminates Betty’s employment immediately and is left to deal with the mess that Betty made.

Unfortunately, Betty’s chaos and messy books helped to cover up her fraudulent activities. Chaos conceals fraud.

2– CONTROL

Giving too much control to employees creates opportunities for fraud and embezzlement. Would you give your teenage boy your debit card, credit card, your wallet full of 100 dollar bills, and the keys to your expensive sports car? Probably not.

Here’s another story:

Mary is a trusted office manager/bookkeeper at a construction company. Like Betty, in our earlier example, Mary is responsible for all of the company’s financials as well as the management of the office. She deals directly with contractors, vendors, insurance agents and other business relationships. The company’s owner, Ryan, has given Mary access to whatever she needs to get her job done. For example:

Mary is the Master Administrator in QuickBooks.

She is the only one with access to payroll.

She has full access to the company’s online banking – including paying bills online and transferring funds to any account.

She deposits checks at the bank.

She uses a company credit card and debit card to purchase supplies and equipment for the office.

She approves all purchase orders.

She signs checks.

She reconciles the bank and credit card accounts.

She has sole access to petty cash.

Ryan trusts Mary implicitly. Mary has been working for Ryan for a very long time and Ryan doesn’t think that Mary would do anything wrong.

Ryan hires an outside accounting/technology consulting firm to streamline and modernize the company’s operations and accounting processes. The consultants ask various questions about what Mary does and Mary seems very uncomfortable and defensive. After the consultants ask more questions, Mary suddenly quits without notice and no one can figure out why.

As it turns out, Mary gave herself a “raise” and paid herself over $200K out of the payroll. She was stealing from the petty cash fund and she had not submitted any tax deposits to the IRS for a few months

By giving Mary sole control over sensitive financial tasks, Ryan inadvertently created the perfect opportunity for Mary to conceal her fraudulent activities. Now, everything is a mess and Ryan is struggling to sort through the damage that Mary caused.

Too much control over sensitive financial tasks gives employees the opportunity to perpetrate fraud.

3 – CARELESSNESS

Carelessness on the part of a company’s management also puts a small business at risk of embezzlement. I’m not saying that a business owner is purposely careless in overseeing their company’s finances. Business owners become careless because:

They’re too busy.

They hate numbers and don’t want to review financial reports.

They don’t want to seem vulnerable by admitting that financial reports don’t make sense to them.

Unfortunately, Joe and Ryan were too busy to notice that Betty and Mary had stolen hundreds of thousands of dollars from them. Their desire to “trust” their employees clouded their judgement.

Management’s carelessness puts a small business at risk of embezzlement.

WHAT CAN YOU DO TO PREVENT EMBEZZLEMENT AT YOUR BUSINESS?

As an owner, you have to set the tone at your business. You should establish a routine to monitor the financial aspects of your business. Your employees should know that you are keeping an eye on things. This will help to deter fraud. Here are some things you can implement at your company:

ELIMINATE CHAOS

The employee in charge of managing your company’s finances should be responsible for:

Maintaining timely and accurate financial transactions.

Providing you with monthly financial reports that are accurate and meaningful.

Reconciling bank and credit card statements on a monthly basis.

Going over key reports with you every month.

If your employee is not up to par – hire someone competent, work with an accountant/bookkeeper to clean up your books, or outsource your bookkeeping to qualified professionals. Make it a priority to eliminate financial chaos in your business.

TAKE CONTROL

As a business owner you should maintain control of your money at all times. You should also have administrator access to all your financial applications, like QuickBooks. The business owner or manager should:

Have master administrator access to QuickBooks.

Approve all payroll transactions.

Approve vendor bills.

Sign all checks.

A great way to stay in control of your money while being efficient, is to use an app like Bill.com to pay your vendors. Your employee can set up all the vendor bills. You approve them and release them for payment.

KEEP AN EYE ON THINGS

The business owner or manager should also oversee key functions of their business, like:

Reviewing financial statements monthly.

Reviewing accounts payable and accounts receivable reports weekly.

Comparing financial results to budgeted amounts.

Asking questions of their employee when things don’t make sense.

Reviewing bank and credit card statements (directly from your bank).

Here’s a tip – schedule a standing appointment on your calendar every week and month to review key financial reports.

WHAT IF YOU CAN’T AFFORD TO HIRE SOMEONE COMPETENT OR YOU CAN’T AFFORD TO CLEAN UP YOUR BOOKS?

I can totally understand. But look at it this way, what will cost you more? An employee who steals hundreds of thousands of dollars from your business? Or, eliminating chaos, taking control, and keeping an eye on things?

THERE ARE MANY HONEST EMPLOYEES OUT THERE TOO

If you’re reading this and you are a responsible and honest employee – I commend you! Keep doing a great job. I encourage you to set up a system of checks and balances so that you are not put in a compromising position at your company. You may need to educate your employer so that they can take more responsibility of their company’s sensitive financial areas.

FINAL WORDS

Fraud costs millions of dollars. Fraud is disruptive. Fraud hurts small businesses. I hope that the information I’m sharing with you will be a wake-up call. I hope that it will cause you to take an honest look at your small business and ask yourself – could you be a victim of embezzlement and not even know it?