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 company's check-signing card at the bank to require his signature alone. Then he 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, but he has learned to do things differently. At his next company, Schulhof outsourced accounting and signed all checks himself. He assigned one employee to do accounts receivable and another to do accounts payable, because, he reasoned, it's less likely that two employees will conspire against the company. And, with prospective hires' permission, Schulhof started running personal credit checks. "I don't care if they missed a mortgage payment two years ago," he says. Instead he looked for larger discrepancies.

Schulhof is not the only entrepreneur to experience employee theft. According to a study prepared by the Association of Certified Fraud Examiners, in Austin, Texas, small companies are especially vulnerable to theft because small firms apply fewer controls, and people tend to trust those whom they think they know well.

What should Schulhof have done to set up safeguards against internal theft? For one thing, he should have read his bank statements, says Joseph T. Wells, chairman of the association. "What do you think he would have seen?" asks Wells. "All these checks payable to his employee." Here are some other precautions from Wells:

  • Make it known that all 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 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 a name so it's payable to both people. 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 at least to be signing the checks."