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Strategies for Success: Internal controls can ward off embezzlement

Strategies for Success: Internal controls can ward off embezzlement

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The newspapers have recently had several articles about embezzlement, the individuals involved and the amounts of money taken. Interestingly, it doesn't seem that embezzlement is limited to one area, type of business, age or gender of individual involved. Prominent regional banking institutions, automobile dealers, manufacturing firms and non-profit organizations have all been victimized.

What is very clear to me is that each of these firms failed to have adequate and sufficient internal controls in place to prevent embezzlement from happening. Internal controls are one of the key elements that are adjudicated when a firm undergoes an audit by a certified public accounting firm. The audit has several tests in their specific audit protocol to identify if your firm, business or organization has adequate and sufficient internal controls. It makes no difference if you run a one-person business or your firm has several hundred employees, the basic principles of internal control are identical. Simply put, who is doing what and who is watching to see that it is being done correctly?

In many cases, business owners and fellow employees do not suspect that one of their colleagues would steal company money. Sadly, that belief is false on most occasions. When an employee has been identified as the culprit, most folks, including the owner, want to deny that anything like that could happen in their business.

Let us explore some common themes that may suggest that you need to dig deeper to discover if you might have a problem with possible embezzlement.

Theme 1 is the employee who is always present for work-no matter the weather, health or business conditions. This individual never takes vacation, is always one of the first to arrive in the morning and one of the last to leave in the evening. He/she is friendly, out-going and has an excellent grasp of the entire firm's financial picture. He/she knows the computer programs, all of the bookkeeping entries and, amazingly, is usually always right when asked a question about the funds.

If you have one of these individuals, place them on forced vacation for two weeks and see what happens. If nothing happens and the firm runs just as smoothly two weeks later, you have one very loyal, dedicated and ambitious employee. However, if on day three the bank calls and questions certain transactions or customers have billing questions that are hard to answer, you may wish to explore further to see if you have a possible problem.

Theme 2 is the employee you always trust. Perhaps he/she needs a "loan" to get through the week, with the goal of paying back the petty cash fund on Friday. They may ask permission the first couple of times, then assume that you would say, "Sure, no problem, go ahead and just be sure it is paid back by Friday." Probably, the third time, they do not want to bother you so they go ahead and borrow without your knowledge. Here is where you need to really understand the books and how each entry is made.

Make the time to review the books, preferably every month, if not more frequently, to make sure that you really understand your firm's financial position. If you do not understand or are not interested (you should be VERY INTERESTED, this is YOUR MONEY), then delegate this task to another management-level staff member to review and understand.

A business does not have to be big to have rich, robust internal control procedures and processes. In many cases, small-business owners will ascribe not having good, robust internal control procedures to "our size." Well, it really makes no difference if you are two employees or two thousand employees, internal control processes and procedures insure that your finances are managed in a manner that is consistent with commonly accepted auditing practices.

Good internal control procedures dictate that all financial management responsibilities are clearly defined, in writing. Each person involved should have clearly defined, delineated duties. This allows you to identify who made a mistake if indeed a mistake transpires. Good records should be maintained to identify all financial transactions. All assets should be insured and employee bonded. The cost of bonding your financial staff is insignificant compared to potential losses that may result from embezzlement.

There is no reason to experience embezzlement. Many other firms have done so. Once a firm has this experience, better internal controls are developed and established to preclude fraud in the future.

Internal controls are one area where you need to review your procedures today. If you do not have any procedures, today is the day to begin getting some help to develop your own procedures.


Joe Michels, PhD, P.E., C.P.I., is principal of Solomon Bruce Consulting LLC. Contact him at (406) 672-6387 or at


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