5 Tips For Identifying Embezzlement

Small business owners know that employee embezzlement goes far beyond financial damage. Embezzlement is a betrayal of trust. It may also cause small business owners to question their hiring practices. Identifying embezzlement before it gets very far will help prevent low business confidence as well as the loss of money.

Establish an Audit Trail

Accounting software and security log-ins help business owners track employee financial interactions. Some software packages are capable of conducting audit trails and issuing red flag alerts. An audit trail records the chronological steps employees take during specific financial processes. Any deviation from standard practice can initiate a red flag. For instance, a red flag might result when an employee logs an amount into accounts receivable prior to logging the amount into sales.

When establishing an audit trail ensure the business owner is the only person with supervisor access to the software program. If other employees, even trusted ones, have access to audit trail modes then they can modify or delete those trails.

Conduct a Cash Count

Unannounced cash counts are an old school embezzlement deterrent. Usually conducted in small retail environments, supervisors announce a drawer count and rectify the contents of the cash drawer with the register’s records.

Track Employee Work Schedules and Attendance

If one of your trusted employees volunteers is usually the first one in or the last one to leave, then switch their duties and schedule for a short period of time. Fraud analysts have noticed a pattern between employee embezzlement and a reluctance to take a vacation and to cross-train other employees. The reluctance is based on the employee’s need to remain in control of discrepancies to prevent their discovery.

Review Supporting Documentation

Many small businesses still need paper checks to pay vendors and cover other expenses. Instituting a check writing policy that does not allow checks made out for cash will prevent some fraud. Locking up checks is another proactive measure. To identify check fraud, look for documentation like vendor invoice statements. If supporting documentation is unavailable then consider a full audit.

Investigate Related Party Transactions

Small businesses often work closely with local vendors. As a result, conflict of interest forms are often signed by all employees. Though these forms may not prevent embezzlement, they do provide the legal recourse needed to terminate an employee. They also serve to identify the relationships between employees and vendors.

Embezzlement can be identified and prevented, but only if supervisors and business owners pay close attention to financial transactions. In addition, breaking up financial responsibilities across employees acts as a deterrent. You can trust all of your employees but avoid placing too much responsibility in the hands of any one person.

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