In May 2003, Jay Myers' Memphis-based network consulting company Interactive Solutions had $6 million in the bank. Since its launch in 1996, the company had grown considerably, so Myers added an employee—an account manager with glowing references from friends and fellow choir members and enough experience to take over the financial aspects of the business. Within a year, the new hire would steal $260,000 from the company.

Chances are there are many small business owners who find it hard to believe something like this could ever happen to them. But embezzlement within small businesses is fairly common, and as a result, it's vital that business owners be able to spot signs of fraud and implement internal controls to prevent it.

Trent Watrous, a senior manager and CPA with Nashville's Horne LLP, says fraud can occur from within your business or from an outside party, but "most often, you let that person through the door." As a result, prevention begins with a company's hiring practices. In addition to verifying a potential employee's work history and interviewing references, consider checking his credit history, police records and even civil records when filling certain positions.

In the case of Interactive Solutions, the account manager didn't have a criminal record, but a previous employer had engaged her in a civil suit, accusing her of stealing more than $2 million. That lawsuit was on her civil record, which Myers didn't check.

Still, while such background checks can serve as an employer's first line of defense, they can't fully protect a business from an embezzler. After all, about 90% of embezzlers don't have a criminal record, according to the Association of Certified Fraud Examiners' (ACFE) 2008 "Report to the Nation." In fact, the report reveals that employees who have been with a company for more than 10 years are the most capable of stealing—and usually the most successful when they do.

In general, Watrous explains, an employee needs motive, justification and opportunity to commit embezzlement. Any monetary need, even just greed, can be the motive enough, but as Watrous explains, that isn't enough to prompt an employee to act.

"Everybody knows that stealing is wrong. The justification provides someone with the means to step over that boundary and say, 'Hey, I deserve this,'" Watrous says.

If an employee can morally accept the act of embezzlement, the only thing preventing theft is the opportunity. "When business owners hand over tremendous amounts of responsibility, they open the door for fraud," Watrous says.

In Myer's case, the sudden death of his brother distracted him from his business and caused him to rely more and more on his new account manager.

"Even when I was at the office, I wasn't really there mentally," he says. "She knew this and took advantage of it."

Travis Parham, a Waller Lansden attorney who works with companies that are targets of fraud, says fraudulent payment—cutting a check to a legitimate party and diverting some of the funds—is a common means of theft. Using the computer program QuickBooks, Myer's account manager changed the name on checks made out to vendors and others to her own. She also used a rubber stamp to forge Myers' signature. The amounts were small enough that an independent, in-depth company audit didn't catch the missing money.

When Myers realized that his bank statements no longer contained an image record of the checks he'd signed, his account manager told him that the bank had stopped sending them to save money and that all records were online. In actuality, she removed the images before handing them over to Myers.

"When things don't add up, business owners are hesitant to double-check," Watrous says. "They don't want to offend their bookkeepers."

Watrous suggests that employers not only ensure that all bank statements and checks go through them, but also that they establish a reputation as a boss who does due diligence.

"Even if you can't be everywhere at once, the impression that you'll ask questions and check up on things is a powerful deterrent," Watrous says.

Only after reading an article on the subject did Myers consider the possibility of theft. On a hunch, he asked his receptionist for the payroll information, which revealed massive bonuses to both the receptionist and account manager. Further investigation revealed the $260,000 theft.

Though the company pressed charges and helped put the rogue employee behind bars, most of the money couldn't be recovered, and the fidelity bond Myers had taken out was only enough to cover $80,000. "Usually the money is spent on things that depreciate in value," Parham says, "or is completely blown on gambling or drugs."

In addition to implementing careful hiring practices and closely monitoring financial transactions, Parham says to be on the lookout for warning signs.

"An employee who does not take vacations or who goes out of his or her way to take overtime may be a red flag," Parham advises.

Taking vacations means relinquishing access to the money, and if someone takes over a fraudster's job during a vacation, he may uncover the scam. Parham even suggests having people in the same department switch positions periodically to ensure a system of checks and balances.

Finally, Watrous says it's crucial to set "the tone at the top." A boss' behavior offers employees cues as to what's acceptable. If, for example, employees see their bosses treating clients honestly and fairly, they will generally act accordingly.

Bouncing back from a major blow, Interactive Solutions has since tripled in size, but Myers has learned some valuable lessons.

"It's almost like a ceremony when I get handed the unopened bank statement," Myers says. "Everyone knows how important it is."