In a small or medium-sized enterprise (SME), trust refers to the reliance that owners, leaders, and employees place on one another to act with integrity, fulfill responsibilities, and support the company’s best interests. Trust in an SME is often built through close relationships, frequent interactions, and a sense of shared purpose—fostering collaboration, agility, and a positive workplace culture. This trust enables faster decision-making and minimizes the need for heavy oversight, which is especially important in resource-limited environments. However, when trust is violated, it can have serious consequences—particularly in cases of internal fraud or misappropriation. That’s why it’s essential for business owners and CEOs to remain vigilant and be aware of 10 Warning Signs of Employee Theft for Owners and CEOs, which can help detect potential red flags before they lead to lasting financial or reputational damage.
However, trust in an SME has important limitations:
- Vulnerability to abuse: Because SMEs often have fewer formal controls and rely heavily on personal relationships, misplaced trust can lead to significant risks such as theft, fraud, nepotism, or unchecked poor performance.
- Lack of formal oversight: Trust cannot replace robust internal controls, segregation of duties, and transparency. Overreliance on trust can result in blind spots where unethical behavior or errors go unnoticed.
- Emotional bias: Decisions driven primarily by trust may ignore objective assessment, leading to favoritism, biased evaluations, or resistance to challenging conversations that would expose problems.
- Collusion risk: In SMEs where staff are tightly knit, collusion between trusted employees can bypass controls, making it difficult to detect wrongdoing despite high levels of trust.
- Scalability issues: As the business grows, informal trust-based approaches often become inadequate, requiring stronger governance frameworks to maintain integrity and protect assets.
In essence, trust is a vital cultural asset in SMEs but must be balanced with carefully designed systems, controls, and accountability measures to mitigate its inherent risks and limitations.
10 Key Warning Signs of Employee Theft for Owners and CEOs
- Missing financial documents such as invoices or payroll records.
- Vendors complaining of unpaid bills or duplicate payments.
- Customers reporting payments lost or misdirected.
- Unexplained cash discrepancies, inventory shortages, or odd transactions.
- Employees never taking time off or refusing vacations (to prevent others from discovering their scheme).
- Insisting on working alone or showing possessiveness about workspace or financial files.
- Unexplained wealth—lavish spending, new vehicles, or luxury vacations that don’t match salary.
- Financial distress—employees with debt or gambling habits are at higher risk.
- Altered/forged financial records or suspicious checks.
- Defensive or secretive behavior about financial matters or fraud controls.
Within the last few months, here are three “case studies” clients I have met.
- Red Flag – Aggressive GM, Suspected Theft and Nepotism
A rapidly growing company has consistently struggled with cash flow and is reporting trading losses, despite top-line expansion. During my stakeholder interviews, the General Manager displayed overt defensiveness, he was combative, persistently resisted filling a vacant finance role, and created obstacles at every turn. Such behavior often signals deeper issues beneath the surface. In environments where leadership is actively obstructing accountability, it’s not uncommon to uncover both significant asset misappropriation and nepotism, especially when hiring and operational decisions lack transparency. My strong suspicion is that the company’s financial health is being compromised not just by operational inefficiencies, but by insiders exploiting their authority for personal gain and to benefit their close associates.
- Weak Controls Results In Long-Term Employee Theft
Recently, I was engaged me to advise on revenue recognition practices and performance metrics. During our initial discussion, neither the CEO nor COO could offer any supporting documentation beyond a simple profit and loss statement. The absence of detailed statements immediately raised a red flag regarding their financial reporting processes. Upon reviewing the scant documents, I recommended a comprehensive overhaul of their financial statements and spotlighted their lack of internal controls, suggesting that irregularities were likely occurring. The CEO was initially dismissive. However, after a couple of days’ reflection, he tasked his CPA to investigate further. Within the past six months alone, more than $180,000 was discovered to have been stolen by a long-tenured employee — a sobering reminder that trust and familiarity do not substitute for oversight and strong financial checks. As the investigation continues, the total loss is yet to be determined.
- Collusion and Nepotism Among Trusted Staff
I was asked to give counsel to a firm, perplexed by ongoing cash shortages despite the presence of long-time, ‘trusted’ employees—many of whom had developed close personal relationships and benefitted from a hands-off management style. After a thorough review, my suspicions were unfortunately validated: there was gross theft occurring via employee collusion. Nepotism, while a common feature in many small or mid-size businesses and offering certain operational advantages, frequently opens the door to substantial risk. In cases where collusion is present, even the most well-designed internal controls lose effectiveness, as staff may work together to circumvent oversight systems. In this instance, the aggregate theft is believed to extend into the multi-million-dollar range—a loss compounded by the difficulty in pinpointing when the fraud began.
Fun Fact (though far from amusing): Law enforcement typically refrains from prosecuting these types of internal theft cases due to their complexity or the resources required. In most cases, prosecution only occur if individuals are apprehended during unrelated infractions, such as driving under the influence.
Sound familiar? Many SMEs—and even some of your clients—face the delicate balance of relying on trust while grappling with its limitations. While trust creates a strong foundation for teamwork and agility, unchecked trust without proper controls can expose a business to significant risks, including theft, fraud, and costly operational failures.
If your organization or clients are navigating these challenges, now is the time to evaluate the effectiveness of internal controls, strengthen oversight. Reach out, and we will gladly hold review the situation, and express an opinion, at no cost to you!
