Being a victim of fraud is an unfortunate reality of many aspiring entrepreneurs. According to research, nearly 49.1% of respondents cited financial pressure as the biggest culprit for fraud increase. Due to fraudulent activities, businesses can lose from a couple of thousands of dollars to actual millions. The two most basic types of fraud are the misappropriation of assets by employees and fraudulent financial reporting by management. Both types often happen without the knowledge of employees or management. Let’s dig a bit deeper into different kinds of fraud.
Double check fraud
Bookkeepers are perfectly capable of committing fraud and this fraud type is very difficult to spot. For example, every time your business needs to pay for something, a bookie can write two checks at the same time, addressing one of, say, $1,000 to the actual legitimate recipient and the other of $100 to themselves. They can code both checks in the accounting system under the name of the mentioned recipient. This kind of fraud is extremely sneaky for two reasons: firstly, it is the bookkeeper’s job to take note of a business’s finances and, more often than not, these experts aren’t under anyone’s watchful eye. Secondly, sending a seemingly duplicate check for a smaller amount of money doesn’t grab too much attention.
Being careful when hiring an accountant is pretty much the only way that you can make sure that your bookkeeper is to be trusted.
This mostly relates to those employees or office managers who are in charge of placing routine orders. The person in question can start over-ordering regular office supplies that the company doesn’t need and returning them in exchange for gift cards or for a full or partial refund.
Maintaining solid contact with your supplier can easily give you the telltale signs of an ongoing over-ordering fraud, seeing as how they will have a paper trail of sold/returned merchandise with all the details. Secondly, prevent this from happening to begin with by hiring good employees and by being good to them – disgruntled workers will consider stealing a righteous move.
Fraud can be as simple as internal theft, which is basically when an employee starts taking office supplies and/or products that your company sells without paying for them. When a worker is surrounded by large quantities of the items that your company sells, it is easy for them to grow increasingly tempted and to finally start stealing your products. Keep an eye out for inventory shrinkage in order to spot this fraud type.
Payroll fraud can include either employees or management, or even the two groups working together. Here’s how it works: once a firm takes on a new client, their payroll account needs to be synced up with their time-keeping system. Without this, a cunning manager can round up a couple of workers and have them work massive hours while getting paid huge amounts of overtime. Essentially, this way, the employees can claim to be working on two separate construction projects at the same time, which is, of course, absolutely impossible and will cost you a ton.
It’s not a question of finding who’s responsible for obvious financial loss – the culprit(s) is bound to surface; it’s a question of not getting into this type of a situation to begin with, seeing as how once the money is gone, it’s gone for good. Not letting anything slip through the cracks is essential here as well as investigating any discrepancies. An expert opinion is always welcome, so opting for forensic accounting is an investment well worth the price.
This is pretty much the worst fraud type as it directly affects a business owner’s personal and professional life. Good and trusting people are usually the victims of this kind of fraud. Although being backstabbed by the best friend is an absolutely realistic scenario, this usually happens when hiring your friend’s relative as a favor. While employing people that you know is in no way a mistake (knowing someone personally can give you an even clearer picture of how they might perform at work), doing this solely as a favor automatically implies that you might not have done so without knowing this individual prior to recruiting them.
Being able to switch between your business and personal “face” is a trait that many natural entrepreneurs have, but also a skill that is best learned from other people’s examples. Hiring someone solely because of friendship, family, obligation or sympathy is never a good idea.
Do not give your employees a reason for talking about nepotism and know when to socialize and when to show a cold-hearted business face.
Fraud can easily cause your finances to plummet and even destroy your business. Knowing the fraud types and how to spot them is essential in making sure that your business remains afloat.