5 Ways to Prevent Fraud and Embezzlement

It’s every business owner’s worst nightmare: the company bookkeeper, who has been a loyal employee for eight years, has suddenly disappeared – along with $250,000 of the company’s money. Unless the company has the resources and know-how of the FBI, there is little that the company can do in such a situation. For the year, the company will end up taking a charge against earnings (which will affect its bottom line), and may have some explaining to do to agitated shareholders (who will wonder where their annual dividend is) and upset employees (who will not be receiving Christmas bonuses).

Yet as bad as this situation may be, it could be worse. In fact, having a one-time fraud committed by an employee or officer who then disappears will at least provide the business owner with a finite loss and a red flag with respect to gaps in company procedures that need to be remedied. Infinitely worse is a “creeping fraud,” a situation where your company’s Chief Financial Officer has been quietly diverting $5,000 each month into an out-of-state bank account which he controls, and after 10 years retires and buys himself a villa in Italy. In a creeping fraud, a dishonest employee exploits a continuing company weakness over an extended period of time; which is a bigger violation of the company’s trust, not to mention its financial position.

However, it is not only a company’s employees who may have the impetus and wherewithal to commit fraud or embezzlement. Often, fraud is committed by other entities with whom the company does business, including the company’s contractual or transactional partners, vendors, and even customers and clients.

It doesn’t have to be this way. In fact, it should never be this way. With proper planning and certain simple and easy-to-implement procedures, a business can make itself virtually “fraud-proof.”

Here are 5 ways to Protect your company from Fraud and Embezzlement:

  1.  Ensure that all disbursements over a certain amount (say, $1,000) require the signature of more than one company officer
  2. Check (and re-check) your company’s numbers every month with your accountant to ensure there is no “creeping” fraud or unexplained irregularities
  3. When signing a material contract with a contractual counter-party, consider using an escrow arrangement for any sums to be advanced prior to completion of work or services
  4. Resist attempts by contractual counter-parties to be paid in advance for work to be performed or products to be provided – instead, set benchmarks for performance and pay in installments once benchmarks are achieved
  5. Do some basic due diligence on your contractual counterparts. Do they have any judgments against them? What do other companies who do business with them say about them? Does your customer have an in-state bank account? Have you done a credit bureau check on your counter-party?


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