Financial theft is a growing threat to area small businesses. Here’s how to protect yourself.

Employee theft can become a big issue for small businesses. How can you protect your money and your assets? The first thing is understanding how it occurs.

Theft can come from multiple directions. A Business.org survey of 700 small business owners found that 22% said they had experienced theft from their own staff. Organizations lose 5% of their revenue to fraud each year, a 2024 report from the Association of Certified Fraud Examiners found.

David Anderson, a forensic accountant based in Philadelphia, calls it the “fraud triangle,” referring to “three elements that are necessary for fraud to occur.”

These are “pressure, opportunity, and rationalization,” Anderson said. “As long as you’ve got those three factors present, then you run the risk of a trusted person committing fraud and stealing money from the business.”

Owners often lack financial oversight, Anderson said, and that creates opportunities for an employee to commit fraud. Many small business owners are excellent at their trade, he stressed, but not at managing finances, leading them to delegate too much control.

“They bring in someone who they trust to handle the financial side, and pretty much stay away from it,” he said. “That potentially creates problems.”

To overcome these challenges, Anderson said, it’s critical to set the right tone at the top.

“Owners who cut corners or behave unethically create an environment where employees feel justified in stealing,” he said. “If you are not being honest, employees see that and rationalize their own fraud.”

Anderson recalled a client whose employee had stolen $1.5 million. That person said: “‘The owners were defrauding the banks, so I figured I can do it, too.’”

If you’re running a small business, you’re probably wearing a lot of hats, which means you are likely asking a bookkeeper or accountant to do financial work for your company. But the more you delegate, the more you open yourself up to risk.

To mitigate this, business owners must take an active role in safeguarding their finances through strong internal controls, said Adrienne Straccione, a CPA with the local accounting firm Wouch, Maloney & Co. LLP.

“It’s important to have someone other than the bookkeeper perform key reviews like bank reconciliations to reduce opportunities for fraud,” she said. ”You never want the person who’s cutting the checks and making the deposits to also be the one that’s reviewing bills and approving bills and also doing the bank statements.”

Other practices like reviewing bank statements monthly can make a big impact.

“Have the bank statement sent directly to you or log in once a month and look at your bank balances and statements,” Anderson said.

When it comes to cash, Straccione said, simple tools like Positive Pay — a service offered by many banks — can help identify potentially fraudulent transactions.

“If a company doesn’t take advantage of this service, they’re leaving themselves open to the risk that some checks may be cashed fraudulently,” she said.

Straccione runs an audit trail of transactions for the year to check what things have changed after an original transaction was entered. These types of reports are common in most mainstream accounting systems, she said.

Both Anderson and Straccione strongly recommend requiring employees — particularly those in the financial areas of the company — to take vacations. When an employee is out of the office, others perform their responsibilities. It’s not only a good way to cross-train people but also to provide another set of eyes on the transactions.

“A majority of the instances we’ve heard where fraud has occurred is discovered when the bookkeeper goes away,” Straccione said. “When someone else is doing the work, it’s not uncommon for questions to be asked.”

It’s also important to watch external signs like lifestyle changes, which can signal possible fraud.

“Look for unexpected spending habits or possessions among staff which can be red flags,” Anderson says. “You might want to ask yourself why is my accounting clerk is driving a BMW on a $40,000 salary, or how is my cashier affording to buy expensive clothing.”

It’s important to be aware of external fraud and scams, which are a growing threat to small businesses due to their increasing sophistication.

“There’s been a lot of buzz in the news lately about AI being used to create fake voices and making sure that you’re talking to the right person on the other end is very important,” Straccione said.

“It’s also important people on the accounting side of the business look closely at email requests and confirm that they’re receiving these requests from a legitimate email address from a known supplier or customer.”

In the end, it’s still the owner’s responsibility to be involved and be wary.

“Small business owners have to keep their eyes open,” Straccione said. “It’s your money, and some things can’t be completely delegated.”