Understanding how to prevent embezzlement can help you and tour business save many headaches, legal action, and perhaps even a lot of money in the long run. Embezzlement is the act of allocating assets dishonestly by the controller of the assets in an effort to make personal gains - or in laymen's terms, embezzlement is a sophisticated method of stealing. Unlike the crime of larceny, where the thief does not have any legal right to the money they are stealing, embezzlement is perpetrated by people who have some sort of control or legal right to control the assets they are falsely allocating.

Embezzlement has resulted in millions of lost and unrecoverable dollars. In some cases, like that of Enron or the recent Bernie Madoff scandal, embezzlement can cause losses of billions of dollars and can directly and deeply affect the lives of many people. As a result of Bernie Madoff's embezzlement a few of his past clients have resorted to committing suicide due to lost fortunes. Despite the popularity of such stories, most embezzlement does not happen on such a public and prominent level. Most of the embezzlement activities take place in small businesses where there is a high level of trust between employees and management, as well as few internal controls. While trust is an integral part of creating a positive work environment for employees, it is important to install some system of internal controls and checks and balances in order to protect the assets company and insure that the company stays in business so that the employees can continue to have a job.

One of the easiest ways to prevent embezzlement is to hire more than one bookkeeper or account handler. Placing more people in charge of the company's money make it more difficult for one person to exploit the system.  Collusion is possible, but more difficult.

Unfortunately for most small businesses hiring another employee is expensive and perhaps even impractical.  In this case, there are many different ways to prevent embezzlement, but most, if not all, of them will require the management of the company to spend a bit more time micro-managing the financial side of things.  While these methods may require an extra time investment, they will no doubt pay off in the long run by keeping money in the company's account and out of the greedy hands of a criminal.

1.  Do not allow one person access to all.  While the bookkeeper's job description may include carrying out all financial activities and processes, allowing one person to be responsible for recording, entering, depositing, and cashing checks allows the person to change things without others knowing.  Select one or two tasks and either do them yourself, or allow someone else to be responsible for them.  If there is one particular thing you should delegate, it should be the recording and deposit of cash receipts.  Unless the complete process is supervised, it may be wise to let one person record and the other deposit and then compare balances.

2.  Signatures and Documentation.  Outgoing checks should require the signature of at least two parties, and should not be signed by the same person who prepares the checks for payments.  When signing checks, it is also wise to request the exact invoice for which the payment is going toward.  This will protect your firm against any sort of fraudulent and otherwise sketchy payments for nothing (read: embezzlement!).  Keeping accurately documented records with copies of voided checks, canceled checks, and bank statements if also important.  If any record does not exist, a detailed note should be on file for explanation.  If there is simply no record and balances do not match up, there may be cause for concern.

3.  Auditing.  One of the best ways to prevent embezzlement is to have the company's financial records audited regularly (usually on a quarterly basis).  While auditing will help, criminals will find ways to cover things up in time for scheduled audits.  Therefore, conducting a random audit or two each year can greatly increase your chances of catching and stopping and criminal activity.

This may all sound a bit over-zealous and cautions, but the dangers of embezzlement are real and looming. Many business owners and investors have completely lost all of their assets due to embezzlement. To put it in the words of the great Ben Franklin - "A stitch in time saves nine". Doing your due diligence for your company now can save a lot of hassle and money in the future.