Employee Embezzlement – Learn From This Mistake

Employee Embezzlement – Learn From This Mistake

By James Wheeler

Founder & CEO, kept.pro

A colleague of mine recently experienced the worst nightmare for any business owner –?he discovered a trusted employee had been stealing from him. We’re not talking about some random Post-its or office equipment, but tens of thousands of dollars of hard-earned cash. He’s given me permission to share his story as a cautionary tale, and hopes this can help other founders avoid the same costly mistake.

I learned about this when we went to dinner last month, and the first words he said to me were: “YOU TOLD ME.” A few months earlier, when he’d been describing a key hire he was excited about, I flagged that there wasn’t enough separation of duty in the company’s financial operations, and that he needed to provide some direct oversight to her accounting-related work. He acknowledged these concerns, but chose to keep things running as they were since he trusted her. It wasn’t until they were unable to make payroll one week that she was caught.

This CEO runs a profitable $8M/year manufacturing business. It turns out his employee was stealing company assets – including cash, physical resources, and supplies – so she could launch a copycat business. This was a full-time employee he worked closely with every day, face to face. She was recommended to him by someone in his personal network. He was completely blindsided. As he shared this with me, it was clear he felt genuinely hurt and betrayed by her. He couldn’t understand the short-sightedness of the scheme, and his confidence in his own discernment was shaken.?

I felt terrible for him, and I reminded him he was sadly in good company. Financial crimes are on the rise. According to a recent report by the Association of Certified Fraud Examiners, organizations lose an average of 5% of revenue to fraud each year. These schemes usually take at least 12 months to discover, with a median financial loss just under $150,000. In more than half of the 1,921 global cases analyzed in this report, the crimes occurred due to either a lack of internal controls or an override of existing (weak) controls.

The study also found that 84% of perpetrators displayed at least one warning sign before being caught. The red flags to look out for include:

  • Living beyond their means or financial difficulties
  • Unusually close association with a vendor/customer
  • Control issues, such as an unwillingness to share duties

While it’s helpful to know what to watch for when it comes to fraud in your business, what’s even better is preventing it in the first place. If you have a business with more than $2 million in annual revenue, you should, at a minimum:

  1. Ensure thorough background checks (criminal, employment and education) are conducted on all members of your accounting team to avoid known (to others) fraudsters;
  2. Segregate accounting, approval, and signatory duties so that one person can’t both steal and hide the theft;
  3. Execute a documented month-end close process to surface any unexplained discrepancies in your accounts; and
  4. Utilize an appropriate combination of services and technologies to reduce the possibilities of certain types of fraud. If you’re not sure where to start, my team at kept.pro can help.

Thankfully, my friend caught the embezzler in his business early. The investigation is still ongoing, but he’s learned his employee stole at least tens of thousands of dollars…and counting. He will recover, but not all businesses are as lucky. Use his story to ensure the proper controls are in place for your company.

About the Author: James Wheeler is the founder and CEO of kept.pro . He has 15 years executive financial leadership experience in service and technology companies, and was a San Diego Business Journal CFO of the Year finalist in 2019. James was the recipient of multiple graduate fellowships at the University of California, San Diego, where he earned a BA in economics and an MBA, before complementing that with executive education at MIT Sloan. He has held several nonprofit and for-profit directorships and committee positions over the past 10 years.

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