As the economy continues to face uncertainties, businesses of all kinds are seeing an uptick in employee embezzlement, and the modular home building industry is no exception. This year has been especially busy for modular home builders and factories, creating both opportunities for growth and unfortunately, fertile ground for employee theft. When the pace picks up and eyes are focused on production and sales, even your most trusted employees might succumb to the temptation.

Take, for example, a case from a few years ago on the Eastern Shore of Maryland. A bookkeeper who had worked with a builder for 15 years was found to be dipping into the company’s escrow account, embezzling over $350,000. This betrayal forced the builder to close its doors, leaving multiple homes unfinished and customers stranded. It’s a stark reminder that employee theft can have devastating consequences, especially for small businesses.

In fact, companies that insure small businesses against fraud have become alarmed by the number of cases this year, urging business owners to become more vigilant than ever. Statistics show that employees who steal often work at the company for several years before starting to embezzle. On average, they continue their activities for three years before being caught. That’s a long time to wreak financial havoc on your business.

But how can you prevent such a situation in your company? The following Nine steps can help you safeguard your business against embezzlement and protect your assets.

1. Recognize the Warning Signs of Potential Theft

The first step in preventing embezzlement is knowing what to look for. Employees who steal often exhibit noticeable changes in behavior or lifestyle. Some key indicators include:

Sudden, excessive devotion to work: If an employee who previously kept regular hours is suddenly working late or coming in early, it could be an attempt to cover up fraudulent activities.

Lifestyles that exceed salary levels: If an employee is living beyond their means—driving expensive cars or taking lavish vacations—without an obvious source of income, it’s a red flag.

Resistance to changes in money-related procedures: Employees engaged in theft are often protective of their workflow and may object to any changes involving financial controls.

Substance abuse or gambling problems: Employees with drug, alcohol, or gambling addictions are more likely to steal to fund their habits.

Moonlighting with company materials: If materials from job sites or the warehouse seem to disappear or are being used outside of work hours, this could be a sign of theft.

Persistent borrowing or bad check writing: Financial instability can sometimes lead employees to steal.

Conducting thorough background checks on all new hires, especially those who will have access to your finances or valuable assets, can help identify potential risks early on.

2. Supervise Employees Closely

While it’s essential to trust your employees, you also need to supervise their work carefully. Studies show that theft rates increase when supervision is lax. This doesn’t mean micromanaging, but rather keeping an eye on key financial activities. It’s wise to have more than one person involved in handling money, which creates checks and balances within the system. Cross-checking responsibilities can be an effective deterrent to fraud.

3. Implement Purchase Orders with Separation of Duties

Purchase orders (POs) can be a powerful tool in preventing theft when handled correctly. To avoid conflicts of interest or opportunities for embezzlement, the responsibilities for payment, receipt, and preparation of purchase orders should be separated among different individuals. As a business owner, you should also review all purchase orders on a weekly basis to ensure consistency and legitimacy.

4. Conduct Regular and Informal Audits

Unannounced internal audits are a strong deterrent for potential embezzlers. The fear of random checks can keep employees honest. In addition to these surprise audits, it’s crucial to have a yearly financial audit conducted by an outside firm. Having fresh eyes review your company’s finances helps uncover any irregularities that may go unnoticed in the day-to-day operations.

5. Monitor Your Business Checks and Use Financial Software

Business checks are a common method for employees to siphon off funds. Always use pre-numbered checks and ensure that payees and amounts are typed or written in permanent ink to prevent alterations. It’s highly recommended to produce all checks through financial software like QuickBooks, which tracks each transaction and leaves a digital paper trail. Lock up blank checks and signature machines to prevent unauthorized access.

6. Secure Escrow Accounts

Escrow accounts are particularly vulnerable to theft, as seen in the Maryland case. If you manage escrow accounts for clients or projects, consider either being the sole authorized signatory or requiring two signatures on each transaction, with one of them being yours. This two-step authorization process adds an extra layer of protection.

7. Manage Inventory and Enhance Security

Materials and tools left at job sites or in warehouses are prime targets for theft. Workers often have unrestricted access, which can lead to moonlighting using your resources. To combat this, consider installing security cameras and instituting a manual material checkout/check-in ledger. Additionally, conduct annual physical inventories, making sure that the task is performed by individuals not responsible for maintaining inventory records.

8. Don’t Forget About Supervisors and Foremen

It’s important to remember that theft isn’t limited to lower-level employees. Foremen and supervisors may also engage in fraudulent activities, such as having employees work on their personal projects or using company credit cards for unauthorized purchases. The same rules of vigilance apply to all levels of the organization.

9. Handle Suspicions with Care

If you suspect an employee is stealing, proceed with caution. False accusations can lead to lawsuits, which can be damaging both financially and reputationally. Before confronting an employee, gather all the necessary evidence and consult with legal counsel or a professional investigator.

Modcoach Note

In a fast-paced industry like modular home building, it’s easy to overlook the warning signs of employee theft, especially when business is booming. However, taking proactive steps to prevent embezzlement can save your company from significant financial loss. By recognizing the red flags, implementing sound financial controls, and maintaining a culture of accountability, you can protect your business from falling victim to employee embezzlement.

Stay vigilant, conduct regular audits, and foster an environment of transparency and supervision. The busier your business gets, the more critical these precautions become.

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Contact Gary Fleisher