What is Business Fraud and How to Prevent It

What is Business Fraud and How to Prevent It

It is a difficult challenge to run a business. Fraud is something you shouldn’t have to worry about. Business fraud is a serious problem that continues to affect businesses of all sizes.

According to The Association of Certified Fraud Examiners, (ACFE), U.S. companies will lose on average 5 percent of their gross revenue to fraud. Small and privately-owned businesses are most at risk.

Small business fraud is often due to poor internal control or a lack of knowledge by the employer about ways to prevent fraud. However, it’s not just employees that are at risk.

Hackers and online thieves can steal confidential company data without proper oversite. Executives and owners can also be at risk. It is important to have safeguards that eliminate fraud in order to reduce business fraud.

What is Business Organization Fraud?

Business organization fraud can range from an employee stealing petty cash to a chief financial officer committing fraud. These are the most common types of corporate fraud schemes:

Asset Misappropriation

This includes theft, falsifying expense records, and stealing other non-cash assets. Asset misappropriation accounts account for the majority of fraud cases each year. It can include theft of petty cash or making unauthorized purchases using a company credit card.

Asset theft can also include the theft of office equipment, inventory, and supplies.

Payroll Fraud

Payroll fraud can include incorrect timesheets, fraudulent overtime payments, and unauthorized bonuses.

Although payroll fraud is most likely committed in the payroll department, there have been many cases where employees or departments submitted incorrect overtime hours or bonuses for payment.

Financial Statement Fraud

Financial statement fraud is a rare but serious problem. However, it often occurs in publicly-held companies that deliberately withhold financial statements.

This can also occur with smaller businesses that try to create false financial statements in order to get a loan.

Fraud in financial statements can result in severe penalties. These include the return of any loans made under false pretenses and even a sentence of imprisonment, especially if the loan was from a federal government agency.

Tax Fraud

Financial statement fraud is a direct link to tax fraud. In order to avoid taxes, owners may alter financial statements. In addition to not paying taxes, tax evasion can also be considered a crime With significant repercussions from the IRS


This is a more complex scheme than the previous two. Common corruption charges include bribery or extortion. Corruption is most commonly seen in large companies. It can happen when high-ranking executives accept bribes or funnel money without their knowledge or consent.

Also read: 14 Proven eCommerce Security Tips to Protect Your Online Store

What is the Most Common Type of Fraud in Large Businesses?

According to the Association of Certified Fraud Examiners (ACFE), asset misappropriation is the most prevalent type of fraud in large companies.

Asset misappropriation simply means that employees are stealing company assets or funds. These are typically employees in high-ranking positions that have access to company assets and bank accounts.

Implementing internal controls to safeguard company assets is the best way to stop asset theft in your company.

It is also a good idea to watch for warning signs, such as changes in attitude or a sudden desire to work longer hours than usual.

What is the Most Expensive Type of Fraud?

Financial statement fraud is the most costly type of fraud with a loss median of almost $600,000. Financial statement fraud is when financial statements that are false or misleading are made in order to deceive investors and lenders.

The 2002 Sarbanes-Oxley Act, which increases reporting requirements for publicly-held businesses, was established in response to the bankruptcy of Enron. However, some companies continue to attempt to game the system by creating fraudulent or altered financial statements.

Financial statement fraud is a major contributor to white collar crime. It’s most common in publicly-owned businesses. However, with the recent loans available from the government through Covid-19, small business owners are also active participants in financial fraud.

Fraud in financial statements can raise red flags that need to be investigated. Here are some things to watch out for:

  • Profits have seen an obvious increase at the year’s end
  • There has been a proliferation of bonuses that are based solely on performance.
  • Cash flow is low and revenue growth is slow.
  • The competition significantly outperformed

Why Is Fraud in Mmall Businesses So Common?

Fraud isn’t just a problem for large businesses. Fraud is more common in small businesses, but it’s usually at a lower rate.

Lack of internal controls is often a risk for small businesses. Owners of small businesses may not have a good understanding of accounting procedures and processes. They may neglect to implement controls because they do not know.

One employee can be responsible for multiple tasks in small businesses, such as signing checks and processing payments.

Procurement fraud is another risk. Although this is a small risk for smaller businesses, it can become a serious problem once your business grows.

Here are some areas where procurement fraud is most likely to occur.

  • Kickbacks: This is when vendors conspire with employees to raise the price of a product in exchange for cash or goods.
  • Fake Vendors: If you don’t have a formal procurement process, including software procurement, you risk paying fake vendors for goods or services that you have never received.
  • Inflated bills: With the right safeguards, employees can approve incorrect or excessively inflated invoices.

You can spot procurement fraud by looking for consistently mismatched invoices, low bids, and poor employee/vendor relationships.

Small businesses are not only vulnerable in procurement. Small businesses are also vulnerable to embezzlement. It can happen in many ways. The number one method is simply not making the sale and then taking the cash.

Skimming is a practice that’s usually used in cash-based businesses. It involves taking a portion of the total amount received.

Fraudulent checks, altered checks, or even payroll fraud are just some of the many things that small business owners must be aware of the dangers present.

Identity Theft and Fraud in Small Businesses

There were nearly 17 million instances of identity theft in the U.S. just in 2020. Identity theft is not limited to individuals. Recent reports indicate that small business owners are the latest targets for identity theft, with 46% more cases of business identity theft reported in 2020.

Small business owners can be vulnerable, even though larger companies have better controls to protect their identity.

Thieves are most likely after confidential information about a business such as a federal tax ID number. This allows them to impersonate the company and open lines of credit, cards, or loans.

It isn’t going away. Small business owners need to be aware of the dangers and take the necessary security precautions to prevent thieves from obtaining financial information.

Also read: 17 Ways to Prevent Cyber Attacks

How to Avoid Business Fraud

Implementing the appropriate internal controls is the best way to stop business fraud. You should also include these anti-fraud steps in your internal controls.

Segregation of Duties

You should never have one person handle all your accounting tasks. One employee may enter new vendors or cut checks. Another employee should read the printed checks, ACH/electronic payment statements and sign them.

This is not always possible for small businesses. However, if you don’t have enough employees, it can be a problem. You will need to review any new vendor information or payments made by your business.

Implement Three-Way Matching for Accounts Payable

Matching an invoice to a purchase order or shipment/receiving information is possible using the three-way matching process. Or, all three must match or an investigation will be required.

Investigate Financial Statement Discrepancies

Spend some time looking into any anomalies in your financial statements when you review them. It doesn’t matter if it’s an exaggerated expense or a lower-than-expected bank balance. Take the time to look deeper. It may seem like nothing but you will never know what it is if you don’t look.

Conduct a background check on your employees

Sometimes, simply checking references doesn’t suffice. It is crucial to conduct a criminal background check on potential new hires.

Be aware that fraud cases almost always involve people without criminal records. A clean background is not a guarantee of success, and it’s not a reason to avoid putting in additional safeguards.

Do not Focus on Finances Only

Employees can also defraud your company by stealing supplies, products, and sensitive information. You should make sure all confidential documents are kept safe away from your office.

Keep Computers Secure

You expose yourself to internal fraud, phishing scams, and business identity theft if you don’t have the right measures in place for protecting your computer data.

Your company is vulnerable to scammers, regardless of whether your software is stored on your computer or in the cloud.

It is unlikely that business fraud will disappear anytime soon. However, good fraud prevention strategies can reduce fraud risk and help keep your company safe against both external and internal financial crime.

Written by
Albert Lukmanov

Albert Lukmanov is a Junior Content Writer at The Next Trends. He covers all known and unknown facts related to security and research information and puts them together to create trending articles on websites.

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