Business fraud has become a costly issue that many small businesses have had to deal with. It refers to illegal acts being carried out by an individual or a corporation in an unethical or dishonest manner. It is intended to benefit the person committing it and scammers are using a variety of tools and techniques to accomplish their goals.
Small business are in a unique spot. It can be difficult to identify the frequency of different types of fraud schemes, since there are generally fewer people monitoring different areas. According to The Association of Certified Fraud Examiners in 2020, billing schemes occurred at almost twice the rate in small businesses compared to larger corporations. Check and payment tampering taking place nearly four times more in small businesses, as well.
The average small business median loss in 2020 was estimated at around $400,000. 28% of cases resulted in civil litigation and most of cases were a result of employee fraud. This is why it can be so important to invest in and ensure your business has sufficient fraud detection and deterrence measures in place. It’s much easier to work on reducing the risk than recouping anything that may be lost.
It’s also important to recognize that fraud may come from anywhere. This includes staff, customers, suppliers, or any third party unconnected to the business. Criminals use a variety of tools and techniques. While there isn’t a single solution to prevent all business fraud, the information below will help you identify the most common types. It will also help you to take action to protect yourself and your business.
Most Common Types of Business Financial Fraud – Avoid Becoming A Victim
1. Identity Theft
When someone uses your business’ name, EIN or other identifying information without your permission to do things such as obtain credit or open new accounts, that constitutes identity theft.
Work to keep all sensitive information in a secure location. Only share it with trusted individuals. You should also regularly check accounts and information yourself to see if there is any suspicious activity.
Know that in today’s technological age, there are many additional ways for someone to steal a business’ information, such as:
- Phishing (theft of data through emails and replicas of websites)
- SMShing (theft of data through texts or SMS messages)
- Vishing (theft of data through voice telephone calls with engineered numbers)
Always make sure to let your teams know to avoid calls where data is requested, or to validate who writes or calls from different entities or banks. Ensure people are encouraged to report suspicious activity and not provide information.
2. Embezzlement
Embezzlement occurs when an employee steals money from your business by falsifying expense reports, doctoring invoices, or skimming cash from sales. Make sure you always carefully review all financial documents with checks-and-balances in place, before approving anything for payments. Conducting regular audits of your books with a strong system for tracking inventory and revenue is a good course of action, as well.
Embezzlement accounts for nearly 90% of fraud cases, which means it is the one that should be prepared for the most.
3. Scams
Some business owners may be convinced to invest money in a bogus project or product that doesn’t exist. Always make sure you do your research before investing any money. Always ask for legitimate documentation that you can corroborate from public records. These can take many different forms, but tend to appear as investment scams or investing in another business that may look legit.
4. Invasion of Accounts
This mainly happens when there is an account takeover, or when someone steals the identity of a person or business and starts making movements in their bank accounts.
Many times, a scammer uses bots illegally to obtain access to the bank or website. This can lead to fraudulent transactions and unauthorized purchases for the business. They work to hack into a computer system and work to steal data like customer credit card numbers.
Always make sure you keep credit cards in a secure location. Never give out your account number or PIN to anyone. To further protect your business, use strong passwords, install security software on all devices, and never click links or attachments from unknown sources. Again, always check your statements regularly for suspicious activity and immediately report suspicious charges to your credit card issuer.
5. Various Employee/Vendor Fraud
While it’s not technically embezzlement, it is a fine line when looking at different types of fraud employees or vendors can perform.
Payroll fraud occurs when someone is manipulating the payroll system, which leads to them stealing money. They can create fake employees or inflate hours worked. Ensure you have strong internal controls in place and perform regular audits. It’s also a good idea to install some type of biometric timekeeping system. This will eliminate the possibility of employees clocking in and out for each other.
Inventory fraud occurs when someone is stealing inventory or records it incorrectly. They may do this to make themselves look good or to pad their own pockets. In this case, make sure you have a strong system to conduct regular physical inventories to compare to your own records. Limit access to inventory to only those who absolutely need it.
How to Prevent Business Fraud
The best way to protect your business from being a victim of business fraud is to minimize your company’s risk. These steps will help all small businesses protect their livelihood from fraud.
1. Implement Internal Controls
By implementing different plans, programs, or processes to manage, regulate and secure assets, you will help to prevent business fraud. Implementing internal controls will make it easy to detect anything suspicious happening. It will also make it more difficult to commit even the simplest fraud in your business.
You may also want to ensure you are securing and protecting your business property, as well. Make sure you have business insurance to cover different items in your company if they are compromised or stolen and know what the inventory is on all of the property your business holds, as well.
2. Audit Books Regularly
Know your business inside and out. Make sure you audit things regularly such as cash, refunds, product returns, inventory, and accounting activities. It’s also a good idea to do non-scheduled audits on occasion, which can help detect fraud different areas of your business.
Missing or out-of-order checks, unclear payment items and checks handed over to third parties instead of deposited in a specific account are all red flags. Make sure your employees are aware that check activity is a large part of what you will examine when the books are audited.
3. Set Up A Reporting System
Anyone who works in different areas of your business who are in fraud-prone areas should know what to look for regarding warning signs. They should also be made aware of preventive techniques and how they should report suspicious behavior or activities by coworkers, customers or vendors.
A fraud risk policy should also be established, which includes the different types of fraud and the repercussions that come with them. Everyone in your business should understand these and will know that management is monitoring items on a regular basis.
4. Know Your Employees and Business Partners
Work on connecting with employees and spending time getting to know them. Any employee that handles cash or manages client payments should undergo background checks. If there are any behavioral characteristics that seem dubious, it may be time to take notice.
Same goes for business partners that you may work with. Ensure you know their actual address, as well as having references before working with them. A basic web search can help you determine their validity and how long they have been in operation, but checking with the commerce department in your local or state government is a great way to make sure you are working with someone legitimate, as well. And always trust your gut. If you have a hard time trusting them based on past behavior, suspicious activity is easier to spot.
5. Watch for Cyber Attacks
This is becoming more and more common and something that many businesses don’t take seriously enough. Make sure to regularly back up your systems in case something goes wrong and take extra steps to protect your client and customer information.
The bottom line is that if you suspect fraud, you should report it as quickly as possible. It’s important that you take the time to familiarize yourself with the signs of business fraud, as well as have a strong system in place to minimize your business risk against different kinds of fraud. Remember, business fraud can come from a number of different directions, so always stay alert and stay informed. Contact us with any questions you may have about Business Financial Fraud – Avoid Becoming A Victim.