Types Of Business Fraud And Accounting Tips To Prevent Them

Nobody like entertaining the idea that their company could become a target of fraud, but the unfortunate reality is that this occurs much too frequently. Schemes that are utilised to obtain money or important information can target any size of business, from the smallest to the largest. Sadly, a great number of companies do not really notice they've been scammed until it's far too late to do anything about it.

If you want to safeguard your company from fraud, it is vital to be aware of the various types of fraud that are now operating in the world and to take measures to stop them from occuring. In this article, we will discuss some of the most frequent forms of business scams and provide some advice on how to protect your firm from falling victim to one of these schemes.

If you're the owner of a company, you're probably always looking for new methods to boost your revenues while decreasing your expenses. But you might not be aware of this, but fraud and mistakes in the accounting of financial transactions are two of the most prevalent ways that organisations lose money. In this article, we will go over the various forms of business fraud and provide some advice on how to avoid falling victim to any of them. In addition to this, we will provide guidance on how to construct a robust accounting system that will assist in shielding your company from potential monetary losses.

Business Fraud Types

Even if you are the most ethical person in the world and run the most trustworthy company, fraud can still put your finances in a difficult position. This is due to the fact that con artists target small and medium-sized businesses (SMBs) more frequently than they target large corporations. This is due to the fact that SMBs typically are not equipped with the same amount of security procedures in place as large corporations.

During the COVID-19 outbreak, the Australian Competition and Consumer Commission (ACCC) received over 4,850 reports of scams citing the coronavirus, with a total of over $5,820,000 in reported losses. This information was reported by the ACCC. Scammers are banking on the fact that you have relaxed your vigilance, thus the ACCC's Scamwatch division recommends that everyone be vigilant and keep their guard up against scams relating to the coronavirus. In addition, the Association of Certified Fraud Examiners (ACFE) found that most companies lose somewhere in the neighbourhood of 5% of their yearly sales owing to fraud that is performed by managers, employees, executives, and even owners!

Online Fraud

To perpetrate fraud against you or your company, the perpetrator need not physically be present. Scammers have the ability to break into various computer and software systems in order to steal important information. This information can include details of the customers, credit card information, bank account details, and much more.

Fake Invoices

The fabrication of false invoices is one method that can be used to steal money from an organisation. Another typical practise is to put people on the payroll who do not actually work for the company so that someone else can receive their paychecks.

Fake Bills 

There is a fair amount of counterfeit money floating around the commercial world, and it is very feasible that your company could be the recipient of some of these bills at some point. Set up processes to verify these invoices at the register if you wish to reduce the risk of fraud occuring at your business.

Theft of Identity

Someone who obtains sensitive information such as bank statements, tax file numbers, or financial records may be able to commit identity theft by stealing sufficient funds to do so.

Skimming

If you do not have a reliable accounting system in place, it is possible that taking a little cut of the profits will go undiscovered for a considerable amount of time. For instance, a person could remove a part of the funds well before transaction is recorded in the accounting records. This would be considered theft. Unfortunately, it is all too typical for employees to commit fraud by using company credit cards for personal purchases, stealing office equipment, and making fraudulent claims for workers' compensation benefits.

Customers Being Overcharged

One prevalent type of theft involving embezzlement is the practise of overcharging clients. It is also a particularly sneaky one because it is not always easy to spot when it is happening.

When a worker overcharges a customer, that worker continually adds on extra charges or "fees" to the customer's bill and then keeps the additional money for themselves. Sometimes this is accomplished by double billing the customer or by charging them for little products that they did not purchase.

Be on the lookout for this type of fraud by keeping a close eye to the complaints of your customers and carrying out routine audits of their bills.

Fake Payments

This is another another prevalent method of stealing from small businesses.

In this scenario, a dishonest worker at the company might steal money from the corporation and then pass it off as a payment to a vendor that does not exist. This may even involve submitting phoney invoices and engaging in shady accounting practises in order to conceal the facts even further.

Ensure that you read your bank statements and invoices from vendors very carefully. It would be easier for you to recognise these phoney payments if you are familiar with the numbers associated with your company.

Extra-Pay Fraud

Routine payroll fraud, in which an employer is paying themselves for overtime that did not actually occur, is one method that can be used in these schemes. Alternately, it may involve personnel working together in a conspiracy to cover for one another.

In order to avoid this kind of payment fraud, routinely review the electronic timesheets you use and keep an eye out for any unusually large increases in overtime pay.

Office Supplies Theft

It's possible that you wouldn't expect a risk assessment to concentrate on anything like this.

However, office supplies may be quite pricey, and their total cost can build up over time. And it seems that certain workers believe they have the right to take as many of them as they like. In point of fact, it is possible that they are not even aware that they are committing a type of theft against a small firm.

It is possible that reducing the amount of office supplies that are kept on hand might be a wise decision. If you capture a worker taking these materials for themselves without permission, you should try talking to them about making restitution. It is possible that they were unaware that what they were engaging in constitutes theft; therefore, it is imperative that you make it plain that this behaviour cannot continue.

Paying for Customer Checks

You'll find that this is among the most obvious ways to steal money that you'll come across.

In this scenario, a member of staff cashes a check written by a customer, so retaining the money that should legally go to your business. A effective strategy for preventing this kind of fraud is to keep a tight eye on all of the payments made by customers and to delegate the tasks of accounting and payment handling to different personnel.

Customers Being Overcharged

One prevalent type of theft involving embezzlement is the practise of overcharging clients. Regrettably, it is also a particularly sneaky one because of how difficult it may be to spot when it is occuring.

When a worker overcharges a customer, that worker continually adds on extra charges or "fees" to the customer's bill and then keeps the additional money for themselves. Sometimes this is accomplished by double billing the customer or by charging them for little products that they did not purchase.

Be on the lookout for this type of fraud by keeping a close eye to complaints from customers and carrying out regular audits of their billing practises.

Fake Payments

This is another another prevalent method of stealing from small businesses.

In this scenario, a dishonest worker at the company might steal money from the corporation and then pass it off as a payment to a vendor that does not exist. This may even involve submitting phoney invoices and engaging in shady accounting practises in order to conceal the facts even further.

Ensure that you read your bank statements and invoices from vendors very carefully. It would be easier for you to recognise these phoney payments if you are familiar with the numbers associated with your company.

Extra-Pay Fraud

Routine payroll fraud, in which an employer is paying themselves for overtime that did not actually occur, is one method that can be used in these schemes. Alternately, it may involve personnel working together in a conspiracy to cover for one another.

In order to avoid this kind of payment fraud, routinely review the electronic timesheets you use and keep an eye out for any unusually large increases in overtime pay.

Office Supplies Theft

You might not expect a risk assessment to put much of an emphasis on this particular aspect of the situation.

However, office supplies may be quite pricey, and their total cost can build up over time. And it seems that certain workers believe they have the right to take as many of them as they like. In point of fact, it is possible that they are not even aware that they are committing a type of theft against a small firm.

It is possible that reducing the amount of office supplies that are kept on hand might be a wise decision. If you do find an employee helping yourself to these goods, you should attempt to have a conversation with them about making restitution. It is possible that they were unaware that what they were engaging in constitutes theft; therefore, it is imperative that you make it plain that this behaviour cannot continue.

Paying for Customer Checks

You'll find that this is among the most obvious ways to steal money that you'll come across.

In this scenario, a member of staff cashes a check written by a customer, so retaining the money that should legally go to your business. A effective strategy for preventing this kind of fraud is to keep a tight eye on all of the payments made by customers and to delegate the tasks of accounting and payment handling to different personnel.

Not-So-Petty Cash Fraud

It is possible that at the conclusion of the day, a dishonest worker will decide to steal cash from the bank deposits and put it in their own pocket.

In order to prevent being discovered, the sum of cash will often be rather low. However, when added up, that money might have a negative impact on your bottom line. It is helpful to fill out the deposit slip on your own or to rotate the responsibility of making deposits at the bank amongst the various employees.

Taking Money from a Fundraiser

Although this is a particularly heinous form of stealing, there are certain employees who just can't help committing it.

If your company is participating in philanthropic endeavours such as charity events and fund-raising campaigns, there is always the possibility that some of the funds raised will be misappropriated. Once more, the most effective strategy in this context is to have more than one person participating in the process of calculating and receiving donations.

Use Of Expense Accounts In A Responsible Manner

Expense accounts are a method for covering the additional out-of-pocket expenses that come with working for an organisation.

Nevertheless, one of the most typical types of embezzlement involves utilising a corporate expense account to pay for charges that are in no way connected to the operation of the business. In the policies governing your expense account, make sure to specify what kinds of expenses may and cannot be reimbursed, and require a detailed accounting of all costs falling under this category.

Using a Company Credit Card Improperly

Another prevalent type of fraudulent activity committed by small businesses is the use of company credit cards for the purpose of paying for personal costs.

This is quite similar to the inappropriate utilisation expense accounts in many ways. This variety of embezzlement can also involve complex strategies to falsify accounting records. However, this issue can be avoided to some extent by allowing more than one person participate in the accounting process as well as the approval of spending.

Taking Things

Another typical type of theft committed against small businesses is the outright stealing of the company's merchandise.

Employees are able to steal from their employer on occasion in a small business that does not have a rigors inventory management system because they have the opportunity to take items for themselves. Put in place surveillance cameras and make use of inventory tracking technologies to stay one step ahead of this issue.

Fraudulent Returned Merchandise

If you run a store, an online store, or any other kind of business that deals with customers returning items, you should be aware that this type of fraud is fairly common.

In this situation, employees will take returned things for their own personal use or to resale on the internet. It is possible to put a halt to theft of this kind by utilising appropriate control mechanisms to monitor returns.

Asset Theft and Misappropriation

When consumers hear that a company has been the victim of internal fraud, the first thing that comes to their minds is typically this form of fraud because it is the most commonly used type. Theft of property belonging to an organisation is one definition of this term. The following are some instances of this kind of fraudulent activity:

• Consumer fraud
• The stealing of money
• Invoicing Fraud
• Misappropriation of Assets Other Than Cash
• Compensation for Expenses

When you experience a financial loss as a result of unfair, dishonest, or fraudulent company practises, you have been a victim of consumer fraud. One typical form of this is known as identity theft, in which a criminal uses stolen information to open bank and credit card accounts in the victim's name and make unauthorised transactions. Check forgery is another possibility in this context.

Theft of cash that has already been recorded in an organization's books is known as "cash larceny." It is a type of embezzlement that is specific to transactions involving the initial receipt of cash and is limited to those operations.

A billing method known as "invoicing fraud" involves an individual submitting phoney invoices to a firm, which then results in the company paying for those invoices. Although the payment itself is lawful, the person who is being paid is dishonest. The following are the two most typical approaches:

• Utilising a company that is defunct in order to create fraudulent invoices.
• Alternatively, by paying the actual merchant twice.

This might be accomplished by the transfer of funds to an alternate account, or even through the creation of fictitious suppliers. Controls within the organisation are crucial to lowering the likelihood of being exposed to something like this. The following are some instances of internal controls that ought to be put into place:

• Tasks in high-risk sectors, such accounts payable and payroll, might be split up or rotated to reduce risk.
• Accounts Payable and Payroll should be reconciled on a regular and comprehensive basis.
• Purchase orders, invoices, and online payments should all go through the appropriate approval processes.
• A review of the master files to validate any new details regarding suppliers or employees that may have been added.

Misappropriation of Assets Other Than Cash

When an employee takes business property or any other tangible assets and utilises them for his or her own gain, this is an example of employee theft. This sort of fraud, which is sometimes referred to as "shrinkage," typically targets organisations that are engaged in the selling of products and merchandise.

Finding instances of non-cash asset misappropriation can be challenging, particularly for businesses that maintain a big inventory. However, the danger can be reduced if effective controls, such as the ones that are listed below, are implemented.

• Changing roles
• Inventory checks on a regular basis
• Vetting of potential employees and checking of references

Fraudulent acts in the area of expense reimbursement frequently take the form of false or exaggerated demands for reimbursement of expenditures related to work. For instance, when a worker joins a meeting and needs to pay their own money on items like housing or car rental, this is an example of out-of-pocket expenses. In most cases, receipts and invoices may be produced to back up these expenditures.

It is possible for an employee to submit inflated or otherwise fraudulent invoices or receipts, which the company will then pay. Identifying bogus expense reimbursement can be hard.

When determining whether the predicted mileage or dinner tabs appear appropriate, you frequently have to rely on your "Gut Feeling." When questioning an employee, exercise caution so as not to hurt their feelings or make an unfounded accusation against them.

Financial Reporting Fraud

Because it occurs so infrequently, this sort of fraud typically results in far higher financial losses for a company. A fundamental definition of fraudulent financial reporting is the act of misrepresenting information in financial statements.

Financial statements are utilised not only by third party companies, such as banks and investors, but also by the company itself for the purposes of planning, forecasting, and budgeting.

If the statistics in the financial information are wrong, it might easily cause the financial infrastructure of an organisation to disintegrate, and it could even lead to a loss of the confidence of "external parties."

Misrepresentation of assets, misrepresentation of revenue, and misrepresentation of obligations are all examples of this particular form of fraudulent activity.

Given the prevalence and scope of fraudulent activity in business settings, being aware of the red flags to look out for is essential to any attempt at preventing it. Even though many of these schemes usually only take a modest sum of money from the total assets of the company, the accumulation of even these modest sums over time can result in significant financial losses.

As a result, having knowledge is the first step towards taking preventative action. If your company has a comprehensive set of checks and balances in place, it may be able to realise significant cost savings, reduce the risk of fraudulent activity, and experience a significant decrease in the amount of hassle experienced by the business.

How To Stop Fraud

The establishment of systems can be an essential step in the fight against fraud. Here are some steps you can take to safeguard your company from con artists and prevent falling victim to their schemes.

Electronic Security

If you follow these guidelines, there is a much smaller chance of you falling victim to a digital fraud. Nevertheless, it is always important to remain vigilant. Protect yourself against viruses with a reliable anti-virus programme and back up your documents in a secure location, preferably offsite. Be sure to change your passwords on a regular basis and employ two-factor authentication wherever it's an option.

Ensure that all of the gadgets are up to date, and educate all of the workers on any newly discovered information. Never open attachments that come from unknown sources, and even if the provenance is known, you should still confirm the information by contacting the sender. Work should be done on personal devices only as little as possible, and you should never work on unsecured public WiFi networks. Think about contracting out your information technology needs to a reliable third party.

Existing Accounting Systems

No matter how reliable an individual is, it's never a good idea to put all of your accounting and bookkeeping duties on the shoulders of just one person. You should give some thought to employing a reliable outsourced accounting staff in order to put in place checks and balances and conduct regular accounting audits. A reliable accounting system offers a good foundation that can assist you in preventing fraud and avoiding problems in the future.

Internal Controls And Audits

In spite of access to information, there is an argument for employees just being privy to the information that is pertinent to their jobs. It is quite reasonable to limit access for personnel who have no requirement for knowledge of the company's financial standing or its inventory levels. Make sure you have a sound framework in place to conduct frequent accounting audits that will analyse the activity and statements of your bank accounts.

Digital Files Locked

Put oneself in the shoes of the criminal and try to imagine how simple or difficult it would be to acquire access to data that is not authorised. Not only is it necessary to protect digital information with a password, but it is also essential to make certain that paper records, if they are required, are kept securely and behind a lock and key.

Teach Your Staff To Recognize Frauds

Not only is it essential to provide new hires with training in how to spot and report fraudulent activity, but it is also essential to maintain an ongoing training programme in this area. Staff personnel should participate in frequent training sessions to learn how to identify various fraudulent actions, including those that take place online. Your staff members need to be educated on how to recognise the red flags of fraudulent activity and who they should report it to if they find it.

Con artists are crafty, but they are not immune to being caught. If you are aware of how financial scams are carried out and put in place comprehensive preventative measures, your company will have a great deal of success defending itself against instances of fraudulent financial activity.