Types Of Frauds In Business | 2 mins read

5 Leading Types of Frauds in Business to be Wary Of

5 leading types of frauds in business to be wary of
Chloe Henderson

By Chloe Henderson

Business fraud can cost a company up to $500,000 in capital alone. However, this does not account for the other vital resources lost, such as time, productivity, reputation, and loyalty.

When someone infiltrates business operations, they could gain access to profits, as well as sensitive information, intellectual property, and documents. Compromised invoices, payroll, credit information, assets, and identity can put a business's future at stake. Established partnerships may be terminated, customer retention can decline, and employment may decrease due to broken trust and fear of exposure.

When businesses become victims of fraud, they may not be able to recover the full amount of capital lost or obtain reparations for damages. Therefore, organizations must use preventative measures to reduce the risk of fraudulent events.

With automated tools, such as predictive analytics software, organizations are alerted whenever unusual values or activities are detected. This allows management to promptly address issues and secure systems to ensure that capital and sensitive data are protected.

To begin, companies should understand the different types of fraud that they may face in order to adequately prepare and protect their operations.

5 Main Types of Business Frauds

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Fraud can occur from internal sources, such as employees, or external persons, such as customers or hackers. However, regardless of the perpetrator, businesses need to understand the various threats that they may encounter and how it could impact their organization.

Common types of fraud that occur within businesses include-

1. Identity Theft

Identity theft could potentially cost a company thousands of dollars to regain access to their identity and all lines of credit. Thieves could gain hold of financial statements, tax returns, and bank documents, putting both the business's identity and financials at risk.

Whether the company information is stored as physical documentation or on a virtual database, businesses must ensure that their financial statements are secure. Digital records should be protected by a firewall and only accessed by authorized users with set usernames and passwords. Likewise, physical papers should remain under lock and key, and only retrieved by verified workers.

Identity theft can also occur if a check is misplaced and ends up in the wrong hands. With the account and routing number, a fraudster could potentially withdraw funds. Therefore, companies should consider establishing a separate payroll system and utilizing electronic fund transfers (EFTs).

2. Payroll Fraud

According to the Association of Certified Fraud Examiners (ACFE), payroll fraud is twice as likely to happen in a small business than a large enterprise. Accounting fraud can occur in several different ways, including-

  • Inflating Hours - The most common payroll fraud occurs when employees slightly inflate their recorded hours. By incremental inflation, workers receive small pay increases, hoping to be overlooked and avoid system alerts. This can happen when an employee is still clocked in while failing to work, entering extra hours manually, or buddy punching.
  • Not Refunding Advances - On rare occasions, an employee may ask their supervisor for an advance. However, most payroll records do not account for these scenarios, making it easy to forget. This allows ill-willed employees to receive extra pay without the intention of paying the advance back.
  • Changing Pay Rates - While very uncommon, some employees work with payroll advisors who have access to the accounting system to inflate hourly wages. This requires the authorized user to alter the pay temporarily right before payments are released to avoid triggering the system.
To combat these risks, organizations should run background checks on new employees to ensure they do not have criminal records or questionable work histories. Businesses should also run regular payroll audits to track all outgoing funds and hourly wages to ensure accuracy.

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3. Money Fraud
Money fraud can entail counterfeit bills and physically stealing cash from a business.

  • Counterfeit Bills - Unfortunately, fake bills may be overlooked upon initial purchase but are verified once the business tries to make a deposit. This leaves the company with lost stock and revenue. Therefore, companies should train employees on how to decipher real from fake currency through physical features. Differences in microprinting, watermarks, raised printing, and colored ink are all signs of counterfeit money.
  • Cash Theft - Most small business fraud occurs from cash theft by in-house employees. Skimming, cash larceny, and register disbursements are the most common employee cash scams and can cost businesses hundreds of dollars. To prevent employee fraud, companies should continuously monitor registers and have supervisors count cash drawers at the end of each shift.

4. Return Fraud
There are many types of return frauds, but each one can put a business's inventory and financials at risk. Some customers may purchase an item and try to return the product after having already used it to receive a refund. In this case, the business is left with a defective item and a loss in revenue. Other customers may steal products and attempt to return it for a refund, claiming they lost the receipt to make a profit.

However, companies can prevent return fraud by implementing strict policies that require physical or digital receipts or customer loyalty profiles to verify purchases. Businesses can also limit the return time so consumers can only receive store credit or a refund within a small window. These policies minimize the risk of receiving a used or stolen item.

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5. Worker's Compensation Fraud
Most states require businesses to purchase workers' compensation insurance if employees injure themselves or become ill at work. However, some workers have found ways to take advantage of this compensation. Employees may file for workers' compensation for an injury that took place outside of work or completely fabricate an illness.

The only way for businesses to prevent this type of fraud is to keep detailed documentation on all operations and employees. Regular reports that outline any issues or accidents during tasks can help create a timeline and provide evidence if a false claim is suspected.

Unfortunately, business fraud can occur in many forms, making it difficult to detect unless management is aware of the common scams. To protect against fraudulent activity, companies should implement training sessions, regular audits, and monitoring software. These fraud prevention techniques can save organizations capital, effort, and time needed to reconcile lost assets.

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