It often starts with a trusted employee who a small business owner would never suspect. Invoices might be forged, or checks might be stolen. By the time the boss catches on, thousands of dollars in cash or inventory have been stolen.

Employee theft or fraud is a big and expensive problem at many small companies. But the pain is often more than monetary. A boss feels a sense of betrayal, anger and shame. And wishes after the fact that he or she hadn't been so blind to what was going on.

A look at the problem, and steps a business can take to try to prevent it:

WHO DOES IT

Lawyers who handle employee theft cases say workers who steal from their companies are usually not the recent hires.

Typically the thief tends to be the long-term trusted employee who's never had any evidence of wrong doing in their past.

Your biggest risk will generally be from someone with a high level of access to the various accounting systems and a high level of trust from management.  This could be a bookkeeper or controller.

Because of that trust, owners often don't think to check up on their staffers - or even their business partners - and the theft can go undetected for years.

HOW DOES AN EMPLOYEE STEAL?

There are any number of ways it can happen.  Some of the more common ones include:

An employee creates a fictitious vendor who is paid for goods never received or services never performed. The employee creates an invoice and a check is cut to pay the non-existent vendor. The employee cashes the check.

Another method involves an agreement between the employee and an actual vendor. The vendor agrees to mark up the price charged the company, and after being paid turns over the extra money to the employee. In return for this kickback, the employee promises the vendor that the company will keep doing business with him or her.

An employee might also open an account with the same name as the company, take customer checks and deposit them in that account. The company's books are then adjusted so there's no record of the customer transaction.

Usually most cases of theft involve situations where only one person does several jobs: receiving the mail, depositing checks and cutting checks. There's often little or no supervision.  Focusing on strong internal controls and separation of duties can be a good first line of defense.

Thefts of equipment and inventory tend to come after hours, when an employee doesn't expect to run into anyone else. They're most likely to happen in companies without security and inventory-tracking systems.

HOW DO YOU PREVENT IT?

There should not be one individual that is exclusively responsible for the accounting.

That employee should also be required to regularly take vacation time.

You also need to have an independent outsider, your accountant or financial advisor, come in and perform an internal controls audit at least once a year. An audit will not only uncover a theft, it will also let employees know they could be caught.

An owner who's a little more hands-on can also help. At a minimum the business owner should review the bank statements, review all the activity taking place on your bank and credit card accounts each month.

Employers should also let staffers know, through a clearly defined and written policy, that they cannot accept gifts from vendors. Also that there will be consequences if someone is caught stealing from the company.

If a theft does occur, it's a good idea if employees know that you're prepared to have it thoroughly investigated by accountants and information technology experts who will be able to trace fraudulent transactions.

In the case of inventory, companies can embed chips in individual containers that will be scanned as they are removed from the building. Used along with video cameras, this technology can help an employer determine who took something from the building and when.

DON'T FORGET IDENTITY THEFT

Reports that disgruntled employees have stolen co-workers' personal information are becoming more frequent. These employees often gain access to payroll records, including employees' addresses and Social Security numbers.

Meet with your insurance broker to assess your potential risks in this area and what types of coverages they can provide to protect you and your business.

WHAT DO YOU DO WHEN YOU DISCOVER IT?

When you discover that money, inventory or equipment is missing, and you suspect a particular employee is responsible, do not immediately confront him or her. Accusing someone who turns out to be innocent could make the company liable to a big judgment for defamation.

You should consult a lawyer and an accountant. The lawyer will tell you when it's time to take the case to the police or district attorney's office. An accountant can arrange for forensic specialists to go through your books and try to determine who had access to them and who likely committed the crime.

If the amount of theft was relatively small, the DA's office might not want to prosecute. But the DA might be able to pressure the thief to return the money, provided it hasn't all been spent.

The Baltimore Business Journal offers expert insight on simple internal measures to reduce possibility for employee business fraud.