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When a business associate uses company funds for personal use over long periods of time, this is known as "embezzlement." Embezzlement not only drains the financial reserves of a business, it can be emotionally demoralizing as well.
I recently took over the bookkeeping for a small business and, while auditing the records, discovered quite a few discrepancies that left me concerned. While we're not sure if the missing funds are due to sloppy bookkeeping or shady hi-jinks, it did get me wondering what recourse a business owner has if company funds are embezzled by an employee.
After a little research and a few meetings with my accountant, I learned a few of the common ways a business owner can attempt to recover embezzled funds. Before using any one of these tactics, consult with an attorney to make sure that you don't violate the rights of the employee. A false accusation can land you in serious trouble and cost you more money than amount embezzled.
Let the embezzler know that prosecution is forthcoming. One of the more widely used recovery strategies is to let the embezzler know that charges will be filed if full restitution isn't made immediately. This strategy might shake loose some of a company's cash, especially if the embezzler thinks that partial restitution might prevent prosecution (it won't, but they don't need to know that).
Report it as income. Another strategy is to tell the person involved in the embezzlement that the stolen funds or stolen equipment will be reported to the IRS as taxable income. They may motivate a person to make restitution before he ends up owing both the company and the IRS.
Use it to reduce the embezzler's share of ownership. This creative piece of advice also came from my accountant who noted that embezzlement discovered within a family owned business can be treated as a buy-out. While this won't get the money back, it does result in the injured parties owning a larger piece of the company and ultimately benefiting from a higher percentage of the profit.
Invest in fidelity coverage. Sometimes the best defense is a good insurance policy. Businesses should consider adding fidelity coverage (sometimes known as crime insurance) to their policies which protects them against loss of cash, securities, and inventory due to crime. While crime insurance won't prevent embezzlement, it does lessen the sting of being defrauded by an employee.