Business fraud can devastate a business and ruin trusted relationships. Unfortunately, there are a lot of different ways to defraud a company, but knowing them, and knowing how to protect your business may safeguard your organization. Keep reading to learn more about business fraud and shielding your company from fraudulence.
Business Fraud
When you think of business fraud, you most likely think of skyscrapers and big cities, however, business fraud is not limited to billion dollar companies. Small businesses, those with less than 100 employees, are more vulnerable to fraud than companies with over 100 employees. This usually happens because small businesses don’t have enough employees to separate duties and business owners are too busy to carefully audit accounts.
Many small businesses also hire employees they know, or who were referred to them by trusted sources. Believing you can trust employees makes you vulnerable to fraud. According to the Association of Certified Fraud Examiners (ACFE), 89% of small business frauds involve first-time offenders.
Large corporations also have their problems with fraud. A study published in the Journal of Financial Economics estimates that an average of 10% of publicly traded companies commit some type of fraud each year. Corporate fraud isn’t always reported for fear of harming the reputation of the company or costing the company more money in technology upgrades for fighting fraud–some companies deal with it internally and accept it as a part of their business.
Recognizing what fraud looks like is the first step in protecting your business from it. The 7 most common types of business fraud that a business should be aware of are:
- Payroll Fraud: Payroll fraud is when someone embezzles funds from a business utilizing the organization’s payroll system. There are several methods that enable people to steal funds they are not entitled to, including falsified timesheets, issuing unauthorized bonuses and paying fictitious or terminated employees.
- Asset Misappropriation/Skimming: This is one of the most common types of business fraud, but also one of the easiest to catch. Watching out for forged checks, missing inventory and accounts that simply don’t add up is key to identifying asset misappropriation. You could also fall victim to skimming, which is the act of taking money from either a customer or the company without recording the transaction.
- Invoice Fraud Schemes: An employee (often in sales or accounting) who has access to all clients, vendors, transactions, invoices, and banking information, creates fake invoices to steal money from the business.
- Financial Statement Fraud: This involves changing important numbers like sales, revenues, assets and liabilities. This is done to dupe investors or the public and increase stock prices or the reputation of the company.
- Tax Fraud: Also known as tax evasion, this is when a company (or an individual) intentionally incorrectly reports earnings and expenses to the IRS.
- Insurance & Banking Fraud: Most companies offer health insurance or worker’s compensation to their employees. Unfortunately, some employees try to profit off of insurance by filing false claims or lying about illnesses or injuries. This results in higher costs for the business.
- Bribery & Corruption: This includes a variety of other types of fraud like skimming, receiving kickbacks, using money to influence major company decisions, and manipulating contracts to favor one person over another.
It doesn’t matter what type of industry you are in, or whether your business is large or small, fraud can affect you. Knowing the types of fraud helps, but knowing how to protect your business is also key.
Tips for Protecting Your Business from Fraud
There are a few things you can do to protect your business from being a victim of fraud. Some of these tips may sound like common sense, but if done consistently, they can help avoid fraud problems.
Know Your Employees. Make sure managers form relationships with employees and know what is happening in their lives. Open lines of communication are important, so are expectations.
Make Employees Aware of Fraud Risks. If employees know that you’re looking out for fraud, they will be less likely to try and commit it. Employees that have no intention of committing fraud will also be more likely to look out for it.
Segregate Duties. Rotate cash-handling duties and do not trust all financial transactions to one employee. It is also good to rotate employees to various jobs within the company.
Protecting your business from fraud is an investment not only in time and money, but in the people you choose to hire. Being aware of the different types of fraud helps, but so does implementing some internal controls to make sure you’re addressing any risk.
Oftentimes instances of fraud need to involve legal advice or assistance. The Law Offices of Robert J. DeGroot can help. Reach out to us today!
