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Small Business Digest


Internal Controls Prevent Employee Theft Especially From Trusted, Long-Term Employees

Experts are reporting an upswing in the number of reported cases where trusted, long-term employees have seriously undermined a firm due to theft.

In many cases, the culprit has been identified as a nice, "little-old-lady" who has been with the firm for years.

Besides the trusted thief, theft or fraud at a small business can take on many forms, in most cases cutting into profit margins.  In a worst-case scenario, fraud can put a hard-working and unsuspecting entrepreneur at the brink of a business failure. 

Employee theft includes:

  • A trusted bookkeeper who once a month writes a check to herself to pay out-of-control credit card debt;
  • Construction firm employees who treat themselves to materials for side jobs they perform on the weekend;
  • A trusted controller who creates a fictitious employee at a fast-growing company in order to supplement his income;
  • A rank-and-file employee who helps himself to the postage meter machine to pay her monthly bills. 

And because many entrepreneurs are running a million miles an hour on sales and other vital tasks, these occurrences of theft – both large and small – can often go unnoticed. But there are concrete steps that can be taken to prevent employee theft, according to Mike Rhodes, a partner at New York City-based accounting firm Citrin Cooperman & Company, LLP (

Review how cash receipts, payroll and cash disbursements are handled. 

Problems typically arise when one person has sole control over the process of handling billing and collections, or vendor invoice processing and cash disbursements, says Rhodes. 

Make sure employees don't have conflicting responsibilities.  If one employee has too much ownership over a sensitive process, add another person to the process to create a system of checks and balances. Additionally, owners can insert themselves somewhere into the process.

Although entrepreneurial business owners are usually more valuable bringing in new business or working directly with customers, participation in the bookkeeping tasks show employees the boss is involved, and allows for discrepancies to be caught before it's too late.

Use both scheduled and unscheduled audits.

Audits are also helpful in catching employee theft as well as preventing it.  Sloppy record-keeping invites fraud.  Simply ensuring basic account reconciliations are up to date will help a business owner feel comfortable that “cash in” and “cash out” reconcile. 

“Regularly scheduled audits let employees in the accounting area know that their work will be checked on a regular basis, while unscheduled audits provide a clear picture to the owner of how diligent employees are,” said Rhodes. 

“Cash is the most valuable – and vulnerable – asset most businesses have.  It is good business to have policies and procedures in place to ensure accountability.”

Limit access to limit theft opportunities.

When it comes to hard goods – inventory, office supplies, equipment, materials or retail items – limiting access to a handful of employees can protect against theft.  If not possible, a surveillance camera can be extremely effective in cutting down employee theft, and helpful in the event of break-ins as well.

Perform a physical inventory of products at least once a year.

"Performing inventory is never fun, and detracts from actually doing business.  But it’s necessary," says Rhodes.  "Not doing so is an invitation for some employees to skim off the top." 

Not only does counting inventory prevent theft, but it may also catch unintentional errors – such as too much product being shipped or an accidental short from the supplier.  And again, people involved should be independent of production or distribution operations. If significant shrink is found, it's a red flag.

Use an employee outside of the payroll department to hand out checks.
Payroll is an area that is always at risk for fraud.  As a business grows, an owner who used to hire and terminate every single employee now doesn't know all his people by name. 

This creates an opportunity to pay people who aren't actually working. To prevent this from happening, use an employee from outside the payroll department to hand out checks. 

Even if a firm uses direct deposit, there’s typically a slip provided to show wages for that pay period.  This way the physical presence of all employees is accounted for. You can also segregate your human resources function from your payroll function so that new hires go through two people.

Work with an accountant to set up and review internal controls.

Many accounting firms have CPAs who specialize in internal controls and in implementing policies and procedures.  Working with many clients across diverse industries, these accountants can provide a range of internal controls solutions appropriate for businesses of different sizes, and in different industries. 


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