Entrepreneur David Schulhof never imagined that one of his own workers would rip him off. Until, that is, an accounting manager he hired at a company he owned bilked him out of approximately $200,000 within two months. The employee, Schulhof says, fraudulently changed the check-signing card at the bank to require only his signature and began writing checks almost daily to his own account. "I should have caught it," admits Schulhof, who says he was too busy managing a fast-growing business to read bank statements.

Schulhof eventually sold that company, and he does things differently at his current one-year-old business, Make It So Inc., an Internet direct-marketing company in San Mateo, Calif. At Make It So, Schulhof outsources accounting and signs all checks; he also has one person doing accounts receivable and another doing accounts payable, since he reasons that it's less likely that two employees will conspire against him. And, with prospective hires' permission, Schulhof runs personal-credit checks. "I don't care if they missed a mortgage payment two years ago," he says. He's looking for bigger discrepancies.

David Schulhof is not the only entrepreneur to experience employee theft. According to a study prepared by the Association of Certified Fraud Examiners, in Austin, Tex., small companies are especially vulnerable to theft---thanks to fewer controls and more trust among people who think they know one another well.

What should Schulhof have done to protect himself? Read his bank statements, for one, says Joseph T. Wells, chairman of the association and author of the book Occupational Fraud and Abuse. "What do you think he would have seen?" asks Wells. "All these checks payable to his employee." Some other precautions from Wells:

  • Make it known that the monthly bank statements will always be delivered, unopened, to your desk. "Let everyone know you're going to look through every deposit and every check," says Wells. "But do it nicely."
  • Keep an eye out for statement discrepancies. "Look for unusual patterns, dual endorsements, and unfamiliar vendors or financial trends. Take, for example, checks made payable to companies you don't recognize, or dual endorsements. One way to convert a check is to take a check made payable to someone else and add my name to the end so it's payable to both of us. Or if there are two signatures, one could be a forgery."
  • Divvy up financial tasks. "In a small business the person who keeps the books should not be the same person who keeps the money....If you have only one person, the boss ought to at least be signing the checks."