For many, it is not a question if fraud will occur, but when. Business owners should be aware of the most common types of fraud in order to protect themselves and their company’s bottom-line.
Fraudulent invoicing
One of the most common external scams, fraudulent invoicing, is a serious risk to small businesses. This type of financial fraud occurs when a business receives an invoice for goods or services and pays it without verifying that it is legitimate. Many businesses go on paying these invoices without realizing their invalidity. In order to prevent this type of invoicing, businesses should carefully examine and track every invoice they receive.
Revenue skimming
Revenue skimming refers mostly to transactions, which are done in cash at a business. In many cases when a customer pays for the service or item, the cashier rings up a “no sale,” and pockets the cash without supplying the customer with a receipt. In the case of goods or items, these can sometimes be reported by the employee as lost or damaged. In order to protect themselves from this type of internal fraud, many employers who use cash sales should rotate and segregate their employees while limiting access to the cash drawer.
Check tampering
Check tampering is another instance of internal fraud where an employee writes unauthorized checks or makes a check out to a false payee. In many cases, the employee is working with the fraudulent company to capitalize on the missing funds. Another type of check tampering occurs when an employee creates a fake name or company and tampers with a legitimate payment meant for another vendor. To help combat this type of fraud, experts agree that more than one person should check the company’s financial statements on a regular basis and that the owner signs each check personally.
Payroll fraud
Improperly monitored payroll services provide small businesses with an increased risk of fraud and tampering. Worldwide, payroll fraud accounts for close to 10 percent of all workplace fraud. This type of fraud occurs when an hourly employee claims that they worked more hours than they actually did and are overcompensated. Payroll fraud may also be the result of tampering by someone with access to payroll records and this person may take it upon herself to change her salary or designated rate per hour. For those who are paid on commission, fraud occurs when sales are inflated or false sales are reported. In order to prevent payroll fraud, multiple members of management should review time sheets regularly, searching for any discrepancies.
Unlike other internal processes for financial skimming, vendor-billing fraud requires the help of an outside vendor or company, sometimes owned by a friend or family member. Similar to check tampering, an employee will write a check to a vendor for goods and services to be delivered to the business, which is never received. These fraudulent vendors may also overcharge in order to pocket the inflated price. To protect themselves, small business owners should thoroughly research all vendors they work with, and put them through a vetting process.
Worker’s compensation fraud
Meant to protect employees injured on the job, many small businesses are the victims of worker’s compensation fraud. While the system is designed to help those who may find themselves suddenly unable to work due to a workplace injury, some employees have been known to make false claims in order to profit. Often, when legitimate injuries occur outside of work or old injuries that have resurfaced, employees will claim they were hurt on the job and file for worker’s compensation. This system allows the employee time away from the job, all while having their medical bills paid by an employer’s insurance company. To avoid this common workplace scam, small businesses should ensure they provide a safe environment and they should use the proper equipment for all work-related tasks.
Without the resources to properly manage and prevent workplace fraud, many small businesses are at an increased risk for internal financial threats. Owners should not only be aware of the most common types of fraud they face, but take steps towards better protecting themselves. Investing in employee background checks, reviewing all invoices, and carefully tracking company financial information can go a long way in preventing these types of fraudulent activities.
