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Internal Fraud Controls for Small Businesses

August 26, 2021

Employee theft is one of the most uninsured or underinsured coverages. While businessowners policies will include a small amount of crime insurance, and many insurers will include employee theft in their property enhancements, most small businesses do not increase their limits. This can lead to major loss with at best partial coverage. (Real life example: a small manufacturer only had $50,000 in insurance to cover an $82,000 theft by their bookkeeper. It was only after urging from my consulting firm that they had increased their limit from $10,000.)

 Beyond adequate limits, there are measures small businesses can take to control employee fraud. Here are ten basic controls listed by Jessica Recdes of 8020 Consulting (

  1. Compare budget to actual expenses. Review monthly or quarterly for discrepancies.
  2. Segregate duties so no one person handles any transaction. Preferably two people should sign checks.
  3. Document everything, including but not limited to internal policies and financial transactions.
  4. Have an independent reviewer in the company check for errors and omissions on a weekly or monthly basis.
  5. Train employees to spot red flags and report suspicious behavior.
  6. Keep cash and checks secure. Incoming checks should be logged on receipt, with restrictive endorsements.
  7. Reconcile all accounts at least monthly, with an independent review of the reconciliation.
  8. Safeguard electronics - not just the computer system but building entry codes and credit cards.
  9. Provide guidance and supervision for employees.
  10. Always be aware of fraud, and don't dismiss red flags.