Business Fraud: What Are the Types and How to Prevent It

0
549

According to the latest report by the Association of Certified Fraud Examiners (ACFE), businesses all around the world lose more than 5% of revenue every year due to various frauds.

5% might sound small at first glance, but in total it is estimated that the total annual loss due to fraudulent behaviors has exceeded $5 trillion. We have to also consider the fact that frauds don’t only cause financial losses, but also other losses like negative reputation and company morale. 

Below, we will discuss 5 of the most common types of business frauds, and how to prevent them.

  1. Asset Misappropriation

Skimming, or the technical term asset misappropriation fraud, is essentially a misuse of assets owned by the organization and is one of the most common types of business fraud throughout history. 

There are various different subtypes of skimming frauds, but commonly the asset is stolen or used for the thief’s (i.e. employee’s) personal gain without the authorization of the organization. When, for example, an employee performs an unauthorized act of taking money from the company, customer, or vendor without recording the transaction, we can consider it as skimming. 

How to prevent asset misappropriation: while there’s no one-size-fits-all approach in stopping skimming, in general, we shouldn’t entrust financial authorizations to one employee, rotation of cash-handling and financial tasks to different employees can be effective in preventing this type of fraud. A proper system in place is required so employees can’t bypass administrative recording in any transactions.

  1. Data Breach and Intellectual Property Theft

Data is the most valuable asset for modern businesses, and so it is now a lucrative target for criminals (cybercriminals) looking to try to profit off this sensitive data. 

A lot of businesses today handle customer’s sensitive information on their server, for example, an eCommerce website may store customer’s credit card information on its server. Hackers may target these customers’ accounts and then make an unauthorized purchase on your website using this stolen payment information. 

Alternatively, hackers can also attempt to steal your digital property (i.e. product blueprint) stored on your website so you’ll lose your competitive advantage. 

A lot of these digital frauds are made possible with the use of malicious bots, so the criminals can automatically perform the attack to target vulnerabilities on various websites and servers. 

How to prevent data breaches and digital frauds: implementing cybersecurity best practices throughout the organization is very important, and the company must also invest in the right cybersecurity infrastructure. With most data breaches are performed by bots, investing in advanced credential stuffing mitigation solution by DataDome is now a necessity. 

  1. Payroll Fraud

Payroll fraud happens when employees and/or organizations wrongfully manipulate the payroll system to gain profit. Employees trick the payroll system to receive a payment they haven’t earned, or employees can also manipulate the system to withhold rightfully earned payment. 

As we can see, payroll fraud can happen in various different ways. An employee can lie about the number of hours worked to get higher undeserved pay, or may conspire with co-workers to manipulate the attendance log by logging in and out for them.

Payroll fraud is relatively more common in smaller businesses that haven’t invested in anti-fraud security measures. 

How to avoid payroll fraud: extensive background check when hiring new employees can help, but manager supervision still works best in preventing payroll fraud. A secure automated payroll system is also recommended. 

  1. Tax Fraud

Tax fraud or tax evasion is a type of business fraud when the company (or an individual within the company) misreported the company’s earnings and expenses to the IRS so they can pay a lower tax amount. Tax fraud is a serious criminal offense and may endanger the organization’s future.

Examples of tax fraud include claiming personal expenses as business expenses (whether intentional or otherwise), using a fake Social Security Number to avoid tax, and not reporting an accurate amount of income. 

How to avoid tax fraud: file your company’s taxes accurately and on-time, and avoid over-reporting expenses and/or under-reporting earnings. 

  1. Invoice Fraud 

This type of business fraud happens when an employee with authorization to publish/create invoices create fraudulent invoices to steal money from the company. Typically this is performed by invoicing for products/services that were never bought by the company and create a shell company to receive the money. Another common method is to inflate an invoice amount with the vendor being a personal friend or family member. 

The fraudster may also be aware of the relationships between the company and its legitimate suppliers and can leverage the information of when regular payments are due. The fraudster can then create a fake invoice claiming to be this supplier. This fraud may only be discovered when the genuine supplier follows up on non-payments. 

When performed in a sophisticated way, these fraudulent invoices can be very difficult to spot, especially without a proper control process in place. Hackers can also spoof a legitimate email address of your suppliers and send fake invoices, or may also use bots and malware to gain access to genuine email accounts. 

How to avoid invoice fraud: it’s very important to have a strong control system in processing invoices and always cross-check every invoice with actual products and services purchased. Always perform in-depth background checks before purchasing from a new supplier. 

Conclusion

While certainly there are many more types of business frauds available, the ten we have discussed above are the most common (and also the most dangerous). To prevent frauds, it’s important to make fraud reporting a part of your company culture while at the same time implementing comprehensive anti-fraud and anti-bribery policies and infrastructure throughout the organization. Regularly perform inspections and surprise audits to help you spot frauds faster, allowing you to mitigate the impact.