Bank and Business Investment

Protecting Your Business and Investments from Embezzlement

The difference between those who are successful at building permanent wealth and those who aren’t is how they use their resources.

The last few weeks I have been sharing the resources I see used incorrectly or not at all in a wealth strategy. If you missed these reports, you can read them now in the Wealth Strategy section.

Protecting Your Wealth

As part of running a business and growing an investment portfolio, most business owners and investors understand the importance of creating and maintaining a plan to protect the wealth they create.

In fact, most business owners and investors have at least one form of protection in place, whether it’s using a legal entity or having insurance in place to protect against loss. These forms of protection typically focus on protecting against external threats.

There is one form of protection that I rarely see business owners or investors use, and it is quite possibly the most effective protection tool against internal threats – specifically embezzlement.

This form of protection is a system of internal controls.

Internal controls are a tremendous resource in a wealth strategy but are very rarely used. Internal controls create checks and balances that make embezzlement much more difficult to go undetected.

Is Your Business or Investing “Too Small” to be Concerned About Embezzlement?

Many business owners and investors think they are “too small” to worry about embezzlement happening to them – this is why this resource is often missing from wealth strategies.

There are several studies that show this is NOT true! Here are just a few of the findings from studies performed by fraud and management organizations:

46% of all workplace fraud happens to small businesses with fewer than 100 employees.

The average business loses 6% of its annual revenue to fraud and abuses by internal sources.

This is 6% of revenue – not net income!

At least 20% of all business failures are the direct result of internal theft.

One-third of all business bankruptcies are due to internal theft.

As many as 40% of small-business owners are embezzlement victims.

Yes, these statistics are frightening! And true!

Identify Your Internal Threats

When I coach clients on how to use internal controls as a resource to protect against embezzlement, I often get these responses initially:

My bookkeeper handles everything but I’ve known him/her for 10 years

My office manager takes care of the banking and he/she came from a well-known employment agency

A close friend of the family helps us out

All of these responses indicate that there is no need to worry about embezzlement if you trust the person who handles your books. If you are in this category, read this next part very carefully!

All 3 of the descriptions I gave above all came from 3 separate victims of embezzlement. In 2 of these cases, the company went out of business due to embezzlement.

Think about the people who have access to your cash, bank accounts, credit cards, accounts receivable, investment accounts or any of the other assets in your business or investing. These are the internal threats to your business and investing, regardless of how long you have known them.

Small Businesses and Investors ARE at High Risk

Small businesses (businesses with only a few owners) and investors are at high risk for embezzlement.The business owner or investor is often the person generating the revenue, moving the business and investing forward, and wearing several different hats. There is often no time to focus on putting the checks and balances in place to create an effective system of internal controls.

While most business owners and investors have years and years of education, there are few, if any, courses on how to protect against embezzlement. On top of that, even a CPA is not likely to uncover embezzlement because a CPA typically does not participate in day-to-day operation execution – that falls to the business owner or investor.

How to Create an Effective System of Internal Controls

There is good news. It is possible for small businesses and investors, even those with just 1 employee, to create an effective system of internal controls without spending a fortune on it (even though it may protect a fortune).

Look for my report next week where I’ll share tips on how to identify if your system of internal controls needs updating.