Small Business Employee Theft: Tips for Detection and Prevention

Small businesses are at the highest risk for employee theft or embezzlement. According to the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations, fraud occurs 42% more often compared to larger corporations. This is both frightening and disappointing, as many small businesses place their trust in employees in accounting or financial positions. The betrayal of those trusted employees is devastating to small business owners, not only emotionally, but financially as well.

Segregation of duties is one of the tools designed to prevent fraud within companies, but, as a small business, it is often impossible to implement segregation of duties, especially for check writing and bank reconciliations. When this is not possible due to the size of the company, you can use other methods to detect or prevent theft and fraud:

  • Deliver company bank statements to the owner’s or president’s home instead of the business. This gives that individual an opportunity to review the bank statements before giving them to finance or accounting to prepare bank reconciliations.
  • Request copies of returned checks be included with the bank statements and review them each month. This ensures there are no checks clearing the bank to employees other than authorized payroll and/or expense reimbursements.
  • Require purchase orders for all checks. These purchase orders should be reviewed and approved by owner or president of company before any checks are written.
  • Verify all vendors before issuing purchase orders for that vendor.
  • Limit check-signing authority to owner and/or president of company, and require two signatures on all checks, if possible. Sign your full name, instead of initialing checks, because a full signature is harder to forge.
  • While it may be convenient, do not have signature stamps, as they make it easy for dishonest employee to sign unauthorized checks.
  • Perform periodic internal audits on financial statements to make sure everything is in order. Compare to the previous year to identify any abnormalities.

Often times, the same employees are responsible for preparing payroll and making payroll tax deposits to the required taxing authorities. When those employees are taking money from the company, it often leads to cash flow issues, and those payroll tax deposits go unpaid. This can lead to very high interest and penalties. The IRS is cracking down on employment taxes and the Trust Fund Recovery Penalties are often very harsh. One of the ways to address this issue is to log into EFTPS periodically and check that these deposits are in fact being made on your company’s behalf. Be sure to review the quarterly payroll tax returns as well. When the tax deposits are being made properly, you should have zero balance due with those returns. Another option would be to have an external accountant prepare the quarterly returns for you. They would double check the deposits were made with the proper taxing authorities.

Another piece of advice is to conduct background checks on all employees before hiring them. This could alert you to any prior issues with potential employees. Most businesses today have background checks in place as common practice before hiring anyone.

As a small business owner, your time is limited and often better spent running the day-to-day operations. Consider having an outside accountant review your bank reconciliations, as well as your monthly and/or quarterly financial statements.

In the unfortunate event that you discover employee theft or fraud, alert the authorities. Making it known that you will not condone such behavior within your organization will deter future occurrences.

By Anita Murphy, CPP


  1. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
By |2020-01-14T15:18:20+00:00February 15th, 2020|Employers, Theft, Trust Fund Recovery Penalty|0 Comments