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One of the joys of running a small business is how close you and your employees can become. For many entrepreneurs, their staff is more like family. That’s why it can be so painful to think that one of your employees is an embezzler. However, employee fraud is more common than you may think.

In fact, the majority (55 percent) of embezzlement takes place at companies with fewer than 100 employees, according to a study by insurance company Hiscox.

But that's not all. In addition to being disproportionately affected by embezzlement, small companies also face disproportionately large costs when they are robbed. Consider this: One incident of embezzlement costs small businesses a median of $289,000. Could your business take a hit that big?

In order to protect your business from an “inside job,” here’s what you should know.

Profile of an embezzler

• Some 37 percent of embezzlers in the study work in finance or accounting departments. However, embezzlement can occur in any department of a business.
• Embezzlement typically involves just one employee.
• Managers and executives are just as likely to be embezzlers as any other employee.
• In most cases, embezzlers are in their mid- to late-40s.
• Women are slightly more likely than men to embezzle.

How embezzlers steal

Embezzlement can cost a company hundreds of thousands or even millions of dollars — but it rarely happens all at once. Rather, embezzlers will steal small amounts of money over a period of years in order to stay under the radar. The median case of an embezzlement that lasts five years costs a business $2.2 million; the median case of an embezzlement that lasts 10 years costs a business $5.4 million.

Funds theft is the most common form of embezzlement. Embezzlers steal by transferring the company’s deposits or cash into a bank account they control.

Check fraud is the second most popular embezzlement method. Embezzlers alter checks or forge checks to deposit money to their own accounts.

Vendor invoicing or false billing is another embezzling scam. Employees may alter or fabricate invoices from real vendors, or create fake vendor companies and submit invoices from them. Payments are made to an account the embezzler controls.

Credit card fraud is a tactic frequently used by managers. They use the company credit card for personal purchases or issue themselves unauthorized credit cards.

Less common, but potentially more costly, are payroll fraud (wages paid to fictitious employees that actually go to the embezzler’s bank account) and loan fraud (in which the embezzler applies for a loan in the company’s name and deposits the loan proceeds in their own accounts).

How to catch an embezzler

Hiscox recommends using a system of checks and balances to safeguard your business from embezzlement. Something as simple as requiring two people to approve every financial transaction can be all you need. Business owners should also review the company’s bank statements, credit card statements, and other records of financial transactions with an eye out for any irregularities.

Before hiring employees who will work with your company’s finances, always conduct a background check. Of course, an employee who passes with flying colors may later start embezzling. Hiscox advises watching out for employees who live more luxuriously than their salaries would seem to allow. Finally, you should also be wary of that hard-working employee who never takes a day off and won’t let anyone else deal with payroll, payables, or another aspect of your finances. That could be because they have something they’re trying to hide.  

If you find an embezzler, take action

What should you do if you suspect internal fraud? Begin by taking notes and reviewing financial records. If you must involve others in your investigation, limit it to a few trusted employees who can keep it secret. During the investigation, it can be a good idea to restrict the suspect’s access to your company finances.

If embezzlement is uncovered, talk to an attorney and report the crime to the authorities. Although the odds are against you ever recovering the money that was embezzled, filing charges will show other employees you don’t tolerate fraud.

Finally, learn from the experience. Use the information you find in your investigation to adjust your company’s policies and help prevent theft in the future.

Need more advice on safeguarding your business? The mentors at SCORE can help.