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Nov 20, 2009 -

Embezzlement by an employee is among the worst nightmares of any business owner, and it’s surprisingly common. We’ve had a string of such cases in the news here in Missoula in recent weeks, including the case of a bank teller-supervisor who stole some $800,000 over a nine-year period, a bookkeeper at an architecture firm who took $240,000, a treasurer for a local ambulance service who stole $160,000, and a woman who took $227,000 from two different construction companies that employed her as a bookkeeper.

That’s a lot of embezzlement for a small place like greater Missoula - and of course those are only the cases that made the news. Many companies don’t like to report embezzlement cases because it makes them look bad, so there is undoubtedly a lot more of it happening than meets the eye.

The bank case is perhaps the most shocking, since banks are supposed to have plenty of systems for preventing this sort of thing. But the other cases show something equally shocking: how simple it can be for a trusted employee to forge checks, file phony expense reimbursements, and get away with it for a long time. On top of that, several friends of mine in the business community have told me about other cases, which involved people who had been fired from previous jobs for stealing.

There is of course no foolproof way to prevent embezzlement short of becoming the bookkeeper yourself. But I’d offer these basic precautions:

- Know your bookkeeper, or anyone else with access to the money, and treat them as a key member of the team. Too often, bookkeeping is considered a menial task, and the bookkeeper is treated as a glorified secretary. A person in that kind of position is not likely to feel a great deal of loyalty, and might even be resentful. If, on the other hand, they feel that they have a stake in the success of the business, they’re much less likely to take advantage.

The corollary to this is to know as much as possible about the person you are putting in this position. These days it is often difficult to get an honest job reference, as previous employers feel bound by privacy laws and the threat of litigation from saying too much. On the flip side, it’s much easier to get a formal background check to make sure there are no criminal convictions. If someone has flitted from job to job, that’s also a red flag, unless there is a very good explanation. And don’t be shy about prying when it comes to someone who will be handling money.

In a small town, you can also sometimes tell if a bookkeeper or other employee with access to money is suddenly flush with cash. In several of the Missoula cases, much of the money was spent on lavish gifts to friends and the like – and that something illicit was going on was obvious in hindsight.

-Require the bookkeeper to take a contiguous stretch of vacation – two weeks, say – during which time someone else will perform the functions. This is a technique routinely employed by banks to assure that no systemic fraud is underway; such frauds usually require daily upkeep, as it were, and breaking the chain on that can be revealing.

-If your business is small enough, informally review all outgoing payments on a monthly basis. Many small-business owners are probably like me in that they have something of a ledger in their head and can tell at a glance if a payment looks suspicious. If your company is too big for that, invest in an occasional outside audit; it costs money, but it’s worth it, not only for the money you’ll potentially save but for the mental anguish avoided in the event of finding out you’ve been hit with a significant theft.