What are the different types of business fraud?

Unfortunately, when you run a business in any sector and of any type, there are plenty of areas in which fraud can occur, and owners must be vigilant of the risks. In this article, we will look in detail at the business fraud categories that must be monitored and protected against through robust anti-fraud procedures and policies.

The main types of business fraud Internal theft and embezzlement

This type of fraud can take many forms, such as:

– Theft of inventory meant for onward sale to customers 

– Theft of internal operational resources

– Direct theft of cash

– Illegal procurement of services, such as accessing digital services and paying for them using corporate funds.

Payroll fraud

Studies show that businesses in the private sector are being cheated out of £12 billion in payroll fraud alone every year.

Examples of low-level payroll fraud may involve adding some extra miles onto an expense claim or additional time onto a timesheet. Other reported incidences are more significant, such as payments made to fictional employees, together with systemic expenses fraud. This type of fraud is most common for hourly-paid employees as it is relatively simple to adjust hours worked, fake start times or claim to have been present on a shift. Commission-based workers can also falsify their records. 

Salaried employees can claim trips away as work expenses when they are actually for personal purposes. 

Workers compensation fraud

There are plenty of incidents which can result in compensation claims. These include fictional or exaggerated accidents, pretending that an injury sustained elsewhere was sustained on the job and other types of false claims. 

Return fraud

This type of fraud occurs when someone returns a product to a retailer under false pretences for a refund. For example, someone could steal an item and attempt to return it for cash, or take someone else’s receipt to obtain a refund. There are also unethical practices such as ‘wardrobing’, which occurs when serial offenders buy clothing to wear once and then return it for a refund after claiming that it was damaged or not fit for purpose. Wardrobing costs the retail industry billions every year.

Commission fraud

Organisations with salespeople who are paid on a commission basis are exposed to this form of fraud. Some will find ways to adjust their results to falsely claim higher commission payments. It can be hard to validate the data being provided for a commission, which makes it tempting for some salespeople to inflate their earnings falsely. 

Procurement fraud

This is one of the oldest types of organisational fraud. At its most basic level, a procurement manager over-inflates the value of a contract award and then takes a kickback. Alternatively, they may award it at actual cost, but accept a financial bonus from the firm with which they are colluding.

A wide variety of other types of fraud also exist, and businesses must keep up to date with these threats, particularly with the rise of digital technologies which may serve to increase the risk. It is estimated that 41 different types of business fraud exist and the challenge is for managers to implement robust systems that prevent them from occurring at all.

How to deal with fraud cases

Many fraud cases are an immediate police matter and should be escalated as such. Other incidences may be caught before a theft takes place and dealt with internally, in accordance with company policy. Others may occur in a ‘grey’ area, where an employee has bent the rules to favour themselves, for example through receiving a bribe or some form of service without charge.

How to prevent fraud from happening in the first place

Most modern businesses will now have systems in place that combine processes, protocols, regular audits and due diligence to ensure that work is being carried out in a measurable, accountable fashion.

Technology can also aid fraud prevention by logging different steps, requiring internal sign-off controls and flagging up any queries in the system, for example, where payroll is being run or expenses submitted.

Good practices for fraud avoidance within your business

– Create robust procedures and policies which direct daily management of tasks and make it clear how whistleblowing should occur if fraud is identified.

– Define who is responsible within your organisation and for what.

– Ensure responsibilities within a process are clear so that there are different levels of sign-off and authorisation.

– Implement systems that make the management of processes intelligent and which flag up areas of concern, in addition to logging sign-off activities and progress.

– Carry out regular internal audits.

– Consider hiring a permanent in-house auditor and compliance manager to implement, manage, audit and review all necessary safeguarding processes.

– Train your staff thoroughly in fraud identification, highlighting the implications of fraud and the policies that are in place, to act as a deterrent.

It is also worth using specialist external consultants to help build a robust fraud avoidance and risk management culture within your business. They can help you to implement an accredited best-practice framework to safeguard everything about your business, not just your finances, but your people, your customers and your reputation in the process.

Don’t risk your business by allowing fraud to go undetected; plan your approach to combating fraud now for a safer, more successful business.

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