How Does Embezzlement Affect Businesses?

Employee theft can have a significant impact on small businesses, especially when the economy is struggling and sales have taken a hit. Unfortunately, employees are more likely to embezzle money when the economy is bad and they're having financial troubles, too. The Association of Certified Fraud Examiners reported in 2010 that a whopping 30 percent of businesses that are victimized by their own workers have fewer than 100 employees.

If an employee is stealing money or products from your business, it will obviously affect revenue and profits. Either sales have been diverted or profits that you should have in the bank are not available. The bottom line is that the business doesn't have the cash flow that it should have because of the theft, so the business may not be able to expand, buy additional inventory or hire new employees. The ACFE's 2010 report estimated that businesses lose an average of 5 percent of sales to employee theft, and for small businesses with less than 100 employees, that means a median loss of $150,000.

Losses based on employee theft can get so bad that it can directly result in catastrophic business failure, especially for small businesses without the cash reserves to easily absorb such losses. According to the U.S. Chamber of Commerce and other business-monitoring organizations, one-third of all business bankruptcies and 20 percent of business failures are a direct result of employee theft. Once a business closes, its employees are put out of work and a community loses a vital citizen, broadening the effects of embezzlement to everyone who relied on the business.

Embezzlement can have the ancillary affect of lowering customer confidence in the business, once the facts of the theft are made known publicly. This is particularly true if your small business handles transactions for customers who require a level of trust. The integrity of a business can be called into question by its association with untrustworthy employees, even after they have been fired and prosecuted.

If your business relies on investors, embezzlement by key staff can undermine their confidence and cause them to pull their money out of your business. Investors can sometimes assume that embezzlement means that the business is not being run properly or has not hired the right people in key management spots.

Embezzlement that reaches the public's attention can cause third parties with an interest in your business to want to double-check your finances. For example, employee embezzlement can trigger a tax audit, since the Internal Revenue Service might want to know how the stolen money fell through the cracks. If you have contracts with governments or other organizations that award money based on specified uses, employee embezzlement can trigger an audit to ensure that the theft did not affect those contracts. These audits can be troublesome, and the whole experience can result in a loss of trust and current or future business.