Building a successful business is no small feat. The long hours, sleepless nights, and countless sacrifices are driven by one goal: creating something sustainable and impactful. Yet, this hard work can be undone in a moment by financial fraud. Contrary to popular belief, fraud doesn’t just plague large corporations. Small and medium-sized businesses (SMBs) are often prime targets due to limited resources and weaker financial controls.
Understanding the common schemes, learning how to protect your business, and implementing robust financial controls are essential to securing your company’s future.
Common Financial Fraud Schemes Targeting Businesses
1. Payroll Fraud
- What It Is: Employees manipulate timesheets, inflate hours, or even create “ghost employees” to pocket extra paychecks.
- Real-Life Example: Linda Johnson, the general manager of a Wendy’s in Pennsylvania, created a fictitious employee, “William Bright.” Over 22 pay periods, Johnson clocked in and out for this fake worker, transferring $19,898.15 of wages to her CashApp account. The fraud was eventually uncovered through a forensic audit.
2. Expense Reimbursement Fraud
- What It Is: Employees submit falsified or inflated expense reports, often disguising personal expenses as business-related.
- Red Flags: Duplicate receipts, vague descriptions, and unusually high travel or dining expenses.
3. Vendor Fraud
- What It Is: Fraudsters create fake vendor accounts or collude with real vendors to overcharge your business.
- Case in Point: A California company lost $1.5 million to a fake vendor scheme where fictitious accounts were created to siphon off funds.
4. Phishing and Business Email Compromise (BEC)
- What It Is: Cybercriminals impersonate executives or vendors via email, tricking employees into wiring funds to fraudulent accounts.
- Impact: BEC scams caused $2.4 billion in losses in 2021, with SMBs being primary targets due to their limited cybersecurity measures.
5. Asset Misappropriation
- What It Is: Employees steal inventory, equipment, or funds for personal gain.
- Example: An Amazon employee orchestrated a scheme involving fake vendors and fictitious invoices, embezzling nearly $10 million.
How SMBs Can Protect Themselves
Fraud prevention is about more than catching bad actors; it’s about making fraud nearly impossible. Here are proven strategies to safeguard your business:
1. Separate Duties
Ensure no single employee oversees an entire financial process. For example, assign vendor approvals to one person and payment processing to another.
2. Leverage Technology
Invest in accounting software with built-in fraud detection and approval workflows. Regularly update your cybersecurity measures to guard against phishing and ransomware attacks.
3. Monitor Financial Activity
Conduct regular bank statement reviews, account reconciliations, and surprise audits. Detecting unusual activity early can stop fraud in its tracks.
4. Train Your Team
Educate employees on recognizing phishing scams and safeguarding sensitive data. Awareness is a powerful first line of defence.
5. Vet Vendors and Employees
Perform background checks on new hires and due diligence on vendors. Over-cautiousness in these areas can save significant trouble down the line.
6. Enforce Tight Financial Controls
Establish robust approval processes for payroll, vendor payments, and expenses. Require dual authorisations for high-value transactions to minimise risk.
The Importance of Financial Controls
Even the most honest businesses are vulnerable without proper financial controls. Fraud doesn’t just affect your bottom line; it can shatter employee morale, erode trust, and, in severe cases, lead to legal complications or bankruptcy.
Having the right checks and balances in place ensures your business remains resilient against both internal and external threats.
Partnering to Prevent Fraud
Protecting your business from fraud requires a team effort. At our firm, we specialise in helping SMBs establish strong financial controls and monitor for red flags. Whether you need an audit of your current processes or guidance on implementing new systems, we’re here to safeguard your business.
Don’t wait until it’s too late. Contact us today to protect what you’ve built and secure your peace of mind.
