Most small businesses struggle in their formative years due to difficulties associated with obtaining sufficient working capital. Assuming that you have cleared that hurdle, your business should move forward and begin to grow. Internal control systems generally take time to refine and are usually behind other systems in terms of development. In fact, the faster you are expanding the more likely that internal control systems are neglected. Without dedicated, loyal, and honest employees, you would probably not be able to grow in the first instance.

Statistics have shown that thefts by employees from their employers account for losses of approximately $40 Billion a year. That number is staggering when you consider that it is larger than the Gross National Product of some Third World Nations. No matter what type of business you are in, you are not immune. Professional practices, service companies, banks, and manufacturing companies are all equally susceptible to this universal problem.

Initially, before conducting any internal audit or investigation, you should be mindful of your employees’ right to privacy. Courts have shown a great willingness to protect an employee’s privacy from invasion by their employer. Therefore any employer must be cautious not to offend the sensibilities of their employees. If an employee suspects that he/she is being placed under scrutiny company moral may be adversely affected, leading to more serious labor troubles.

People that embezzle from their employers do not fit any one mold that can be easily identified. Experience has shown that dishonest employees are as diverse as the schemes that they originate. For example, I have seen acts that involved false bank accounts, false bank records, false billing statements, false receivable records, and even false computer records. However there exist some similarities in these various schemes.

One common theme is that the employee is almost always highly trusted and otherwise dependable. This employee usually has delegated authority and supervisory responsibilities. If it is any consolation, a dishonest employee normally has a great incentive to insure that the business is successful, because the more successful the business, the greater the opportunity to continue a scheme. Often the employee has two reasons for making sure that neither third parties nor other employees gain an advantage in their business dealings. First, the dishonest employee wants to be the only person taking advantage of the company. Second, such aggressive protection of the business’ interests usually does not go unnoticed by Management, which can lead to more responsibility and less scrutiny of their activities.

Another common characteristic is that the dishonest employee will generally work long sometimes irregular hours. Typically they will arrive early or stay late when few other employees are present. This permits an opportunity to act without co-workers observing their actions. This employee will frequently not take their vacation or spend long periods away from the business. Extended absences result in a greater chance of detection.

Another popular misconception is that you are protected if your company books are routinely audited or reviewed by your accountant, or bookkeeper. However, an essential part of any embezzlement scheme is a method of preventing detection. No one engages in criminal activity if they think that they will be caught. The initial temptation to embezzle is usually associated with a determination of how easy it would be to accomplish, without being detected. In most business situations, a competent employee can design a scheme that would not likely be noticed. Your accountant may, unwittingly, contribute to the development of a scheme by specifying what records are needed for the audit. A predictable audit, either in terms of timing, or the documents to be reviewed, will not necessarily be a deterrent.

Additionally, the employee very often has supervisory control over the company’s payables, receivables, and banking relations. Since this is an area where revenue transfers in and out of the company, special scrutiny is required.

Even employees for whom special allowances have been made are capable of embezzling from their employer. Many employers are shocked to learn the identity of a dishonest employee when an embezzlement is discovered. Often I have heard an employer lament that this was an exceptional individual who received special favors or treatment due to their status as a loyal and trusted employee. In many of these cases, regardless of the size of the loss, employers are more distressed by feelings of betrayal then the actual loss suffered.

The local police while being very helpful may not recover what has been taken. If the money involved is a sizable amount, then jurisdiction probably rests with the county prosecutors office. Due to the fact that a Civil action can be brought against the dishonest employee, authorities may not be as helpful as expected. A far more effective response is to retain either an attorney or accountant that specializes in this area. Note that once funds have been embezzled, the likelihood of recovery diminishes very quickly. The typical dishonest employee does not invest the proceeds in conservative investments. Rather the money may be indulged on luxuries that would not normally be afforded by the employee on their normal salary. For this reason it is imperative that quick action be taken to locate whatever assets can be frozen in order to maximize any recovery.

Other significant issues exist with respect to the termination of the employee. A confrontation should be avoided until sufficient information has been developed, otherwise there is the possibility of a wrongful discharge suit being filed by the employee.

In closing it is important to stress that not all employees are dishonest, and this article is not intended to imply that all companies have a problem but merely to suggest that the company be sensitive to the issue and prepared to deal with the problem should it arise.