Protect Yourself from These 10 Common Business Frauds

Fraud is an unfortunate phenomenon that plagues people and businesses worldwide. The Association of Certified Fraud Examiners (ACFE) reports that organizations lose 5% of their revenue to fraud yearly, accumulating total losses of over $5 trillion globally.

Businesses could be victims of fraud committed internally by individuals within the organization or externally by hackers and scammers. Small businesses are especially at risk since they often lack the resources or workforce to have reliable internal controls to prevent fraud. These incidents can have far-reaching repercussions on a company’s finances, reputation, customer experience and trust, and operational processes. The good news is, according to the ACFE report, a growing percentage of organizations are taking measures that show their commitment to fraud prevention and detection.

This guide highlights 10 common types of fraud that your business should be wary of. It also discusses measures you can take to protect your business from fraud as part of your risk management practices.

What is Fraud?

Fraud is a category of illegal and deceptive activities conducted by an individual or set of individuals, typically for financial gain. Business fraud refers to fraudulent activities that affect a company or organization. These activities could be carried out by employees or senior management within the company, customers, and suppliers from outside.

How Fraud Can Affect Your Business

When a business is victim to fraud, the impacts go beyond mere financial losses. Fraud opens a company to all types of risks, and the ripple effects can often be felt across the entire business ecosystem.

Types of fraud that have repercussions on your customers or their experience can also severely affect your company’s reputation. For example, online payment merchants likely have their customers’ financial information saved in their systems. Suppose your business falls victim to cybersecurity attacks that gain access to this highly confidential information. In that case, it will cause customers to question your ability to protect them, subsequently impacting their trust in you.

10 Common Types of Fraud in Business

Whether it’s risk management for SMEs, life sciences companies, or consumer brands, the first step to protecting your business from fraud is by familiarizing yourself with the most common types. After all, you cannot protect yourself from something you do not know. Here are the 10 most common business frauds:

1. Payroll fraud occurs when employees are dishonest about their productivity, sales, or work hours. This could also happen if one employee clocks in and out for an absent employee. Payroll fraud can also lead to embezzlement when an employee steals company funds by misrepresenting timesheets, paying fake or terminated employees, or issuing unauthorized bonuses.
2. Accounting fraud is committed when financial documents and reports, such as balance sheets, income statements, or profit and loss statements, are falsified or manipulated. This type of fraud also includes misrepresenting sales and revenue numbers or operational costs to dupe investors or influence a company’s stock price.
3. Phishing and malware attacks are a form of online fraud committed when external criminals hack into a company’s email system or impersonate suppliers or senior managers to gain access to confidential information and data. This is becoming increasingly prevalent in today’s digital world, impacting intellectual property or financial loss.
4. Money laundering and tax fraud refer to activities that attempt to disguise illegally obtained money as ‘clean’ or misreport taxes to the IRS to qualify for a lower tax bracket or special exemptions. Money laundering is a growing concern in the digital age, as it is often linked to organized crime and terrorist organizations.
5. Cash theft occurs primarily in cash-based businesses such as restaurants or food carts but can also affect other industries. It falls under the category of asset misappropriation. It refers to skimming small amounts of cash from the business without recording it or through falsified disbursements and fake billing.
6. Invoice fraud occurs when employees or external scammers issue fake invoices to your business, requesting payment for goods or services that were never rendered. Employees could create a shell company that these invoices get paid into, or external scammers could hack into your email to falsify a payment request from within your organization.
7. Inventory theft occurs when employees steal or misuse company inventory for personal use or resale. Employees may do this by claiming to have misplaced purchase receipts or modifying inventory records.
8. Insurance fraud occurs when people misuse their insurance benefits for financial gain. This often happens when employers offer insurance, with employees filing false claims or faking injuries. This type of fraud can also occur with unemployment insurance.
9. Intellectual property or data theft occurs when employees steal confidential company information or data for personal use or to sell to the highest bidder. This can include information such as patents, trade secrets, or customer lists.
10. Bribery and corruption encompass a variety of practices, such as skimming or kickbacks. They occur when an individual accepts bribes or payments in exchange for conducting unethical or illegal activities, such as influencing important company decisions or awarding contracts unfairly.

Steps You Can Take to Protect Yourself

Now that you know the enemy you are fighting, there are several fraud prevention and detection measures you can put in place to safeguard your business from fraud proactively. Experts who specialize in consumer brands, SaaS, and life sciences risk management recommend the following:

Raise awareness among your employees and staff

Educate your employees about the different types of business fraud that could occur, and encourage them to report suspicious or fraudulent behavior through an anonymous anti-fraud hotline. Foster a risk management culture within your organization so everyone is encouraged to identify potential vulnerabilities that could result in fraud. Frequently remind employees of the far-reaching detrimental effects of fraud on them and the organization.

Gain greater control over the flow of information

As part of your risk management for SMEs, establish efficient internal controls that give you greater control over the valuable information within your organization. Almost half of all fraud in small businesses occurs from a lack of internal controls. Limit how much financial data and confidential information any one employee can access. Decentralize accounting duties so that power and knowledge are distributed within your teams. Additionally, a multi-person sign-off on finance-related activities should be established to add an extra layer of security and help catch errors or suspicious behavior.

Develop the habit of checking and verifying

Empower yourself and your employees to double-check essential documents such as invoices, financial statements, or bills. Specialists in risk management for SaaS finance can help you build policies and internal controls that ensure documents and processes are regularly verified. Conduct surprise audits within departments where fraud was less likely to occur, such as finance, sales, and IT. Do your due diligence when hiring new employees or signing off on a business deal to prevent exposure to fraud.

Use digital tools and technology to your advantage

Technology and automation can be used to your advantage to bolster your anti-fraud capabilities. For example, in risk management for SaaS finance, signing documents using eSignature tools is recommended, as their anti-tamper technologies make them more secure than analog signatures. eSignature tools have built-in audit trails that track and time-stamp any edits made to an electronic document. This digital paper trail ensures that documents can only be modified or tampered with with your knowledge. Some advanced tools also contain a hashing technology that stores a copy of every version of a document. This allows you to compare different versions to determine whether any suspicious modifications were made.

Robot process automation (RPA) technology, a software many companies use to automate repetitive tasks, can also help eliminate fraud in your business. When you conduct a risk management exercise within your organization, implementing RPA in areas such as accounting can help you identify vulnerabilities and examine anomalies in your current processes. Automation also helps flag high-risk accounts or automatically block accounts with suspicious activity more precisely and efficiently. As part of your ongoing automated anti-fraud efforts, you might also consider ramping up your organization’s cybersecurity with the help of this handy guide.

Opt for outsourced financial services

Outsourced services such as consumer goods and life science risk management, accounting, and auditing can help you gain external expertise on your processes. These specialists can review your internal controls, processes, and workflows with a fresh, unbiased eye, highlight suspicious activities, and recommend additional measures to help protect you from fraud.

Final Thoughts

Business fraud is becoming increasingly common in today’s world. A Federal Trade Commission report says that the number of frauds reported in 2023 has increased compared to 2022. With this handy guide, you can educate yourself and your employees on the types of fraud to look out for and establish the necessary measures to safeguard your finances, reputation, and operations.

Want to know more about protecting your business from fraud? In addition to HR, benefits, recruiting, and payroll through its PeopleOps, Escalon’s Essential Business Services include FinOps (CFO services, taxes, bookkeeping, and accounting) and Risk (business insurance). Talk to an expert today.

This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal, or accounting advice in this article. If you would like to engage with Escalon, please get in touch with us here.