3 Common Business Fraud Risks and How to Mitigate Them

According to a recent survey, businesses lose about 5% of their revenue due to fraud. The average cost is $1.5 million per case. Too often, companies are unprepared or lack the appropriate internal monitoring controls to detect and prevent it. Therefore, it is vital for organizations to understand the different types of fraud and how to recognize suspicious activity.

What Is a Business Fraud?

Business fraud is also called corporate fraud. It refers to the act of deceiving an organization, business, or individual to gain a personal or financial advantage. Fraudulent activities can be hard to identify, especially for small businesses, as they lack the resources necessary to implement control measures. When fraud occurs, whether a small or large event, it damages the overall image of a company and therefore it is imperative to have controls in place. However, whether you are a small business or large corporation, there are some easy steps to take to mitigate fraudsters from taking advantage of the gaps in your company’s process and procedures.

What Are Some Types of Business Fraud Risks?

Business fraud presents itself in different forms, including:

1. Asset misappropriation/skimming

Asset misappropriation refers to the theft of company assets. It's one of the most common types of business fraud, accounting for about 86% of reported cases. It includes issues such as missing inventory, forged checks, and missing accounts.

Skimming refers to taking money from an organization, customer, or company without recording the transaction. This form of business fraud mainly occurs in the accounting department or mailroom, where funds can be easily seized unsupervised. Because there is no paper trail, it is difficult to prove these transactions ever existed. For smaller companies, it can occur with cash transactions that are not properly handled.

2. Payroll fraud

About 27% of all businesses experience payroll fraud, and it's 50% more common in small businesses than in larger ones. This form of fraud manifests in different ways. For instance, employees can lie about the hours they worked, productivity, and sales to get higher pay. In other cases, they may request an advance payment and not pay it back. Also, they may use co-worker(s) to manipulate attendance lists and clock them in and out, yet they are not at work.

3. Fraudulent invoicing/ billing

False invoicing is a popular form of fraud in which an employee creates fake suppliers or pays a legitimate supplier but channels the cash into a different account. On the other hand, billing fraud is when an employee submits fake personal inflated invoices for services or goods to the employer. For example, an employee creates and submits an invoice for payment of goods or services they never provided. For these reasons, business owners should always scrutinize invoices to limit fraudulent activity.

How Can Businesses Mitigate These Risks?

Business fraud can significantly affect your revenue, leading to losses and legal issues. Additionally, the reputational risk to a company that has been accused of or caught committing or allowing fraud to happen can be devastating.

Companies need to adopt different solutions to mitigate these risks, including:

1. Anti-fraud policy

Each company should create a comprehensive anti-fraud policy and implement it fully. Furthermore, they should train their employees on the matter, have them sign an acknowledgment form, and make known the consequences of violating this agreement.

2. Enhanced Communication

Businesses should strive to create clear lines of communication within their organization to prevent fraud. Companies who make fraud reporting an integral part of their culture typically see faster fraud reporting. You can even consider rewarding employees who raise red flags and report fraudulent activities.

3. Audits and Inspections

Another way of detecting fraud is to conduct regular and surprise audits and inspections. Such activities can help to detect fraudulent behavior and mitigate the risks. Businesses need to review their financial records regularly and update the technology used in the accounting department. Similarly, they should consider introducing internal controls to make it easier to detect and mitigate business fraud.

4. Digital management systems

Cultivating a culture of honesty is a great step in preventing fraud. Business owners need to learn each step on how their financial processes work and ensure there is accountability at each level. As your company grows, the complexity of your financial activities increases. A payroll management system can be an excellent remedy to mitigate fraud in such cases.

In addition, businesses can adopt document management systems to enhance compliance, data security and efficiency, and monitoring of document transactions and information exchange. These systems minimize manual work when capturing, organizing, and retrieving information. Along with this, businesses should create distinct data access rules to prevent misuse of information and limit document falsification.

Are you facing challenges of business fraud in your organization? Lutz can help your company become compliant to prevent and mitigate fraud. Contact us if you have any questions or learn more about our Risk Assessment services.