Common Fraud Scenarios
February 2019
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Common Fraud Scenarios
Safeguard your business from employee embezzlement

Fraud causes businesses to lose 5 percent of their yearly revenue, according to the annual report from the Association of Certified Fraud Examiners. Fraud situations are especially threatening to smaller enterprises, since they can lack sufficient resources to support accountability systems within their accounting department and software. The first step to shielding your business from extortion is to be aware of some popular fraud scenarios.

Emailed invoice scams

Emailed invoice scams occur when someone pretends to be one of your business’s legitimate vendors and sends your business either a false invoice or a revised one that claims to have updated payment terms. Entrepreneur guest writer and head of payment solutions at OFX, David Nicholls, says that it’s important to schedule regular overviews of each account your business has with outside vendors.

Electronic banking

While online banking is a convenient way to transfer funds quickly, this method is vulnerable to cybercrime. Sometimes employees transfer money to the wrong account, or even a fake one, says Nicholls. Help prevent this type of fraud by keeping in touch with your financial institution about potential scams. It’s also wise to hold regular meetings with your accounting team to monitor transactions.

Payroll fraud

Per the ACFE’s Report to the Nations, small businesses have a 42 percent higher risk of payroll fraud than large businesses. Small Business Chron contributor Chris Bradford explains that the most common forms of this fraud are inflated expense reports, claiming overtime hours not worked and creating fake (or “ghost”) employees in the payroll system.

Monitoring monthly reports is an essential foundation for creating accountability for payroll staff. Bradford advises establishing internal controls within your payroll system, such as requiring employees to get approval from two people before making any changes to payroll. He also recommends separating certain payroll duties. For example, have two different employees write payroll checks and compute staff hours for payroll. 

Fake invoicing

This type of fraud occurs when an employee pays a supplier, but then directs the cash to a side account instead of sending it directly to the supplier. Sometimes it involves an employee creating a fake vendor within the invoicing software, then diverting the funds into a side account. Nicholls recommends scheduling regular meetings to review every vendor within your accounting system to help minimize the risk of financial loss due to false invoicing.

Cash thefts

Another common fraud risk for small businesses is cash theft. According to Nicholls, this type of extortion can take a few different forms: larceny, fraudulent disbursement and skimming. Help eliminate this type of fraud by establishing a streamlined monitoring system for supervising your business’s cash flow. For example, make daily deposits and reconcile bank statements each month, advises The Balance contributor Jean Murray. This will help prevent cash from sitting around in plain sight to tempt personnel. Murray also suggests requiring thorough documentation for travel costs and reviewing them yourself to help ensure that company funds aren’t going towards employee’s personal expenses.

With a little foresight, it’s easy to establish some practical accountability checks and separate financial duties of staff to protect your business from fraud.


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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.
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