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Common Business Fraud Risks For Small Businesses

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Small businesses are more vulnerable to fraudulent activities, mainly due to the lack of legal protection and simply the lack of knowledge on how to avoid fraud in the first place. This makes fraud protection a very critical part of running a business to avoid the negative and potentially crippling effects of small business fraud.

Being aware of the common types of fraud for small businesses is the best first step. Here are some of the most common fraudulent activities plaguing small businesses today:

Financial fraud in divorce

This type of fraud is committed by business owners themselves. Spouses who run a business together should be aware of this type of fraud, regardless of the level of trust they have for each other.

Financial fraud in divorce starts with concealment. In this case, one spouse hides income and assets from the other spouse and the divorce lawyer in an attempt to defraud the other spouse of their entitlement. While this may be difficult to do when both spouses are fully engaged with the business, it is certainly not impossible for a person dedicated to claiming more than they should in the separation. Avoiding this type of fraud should start with hiring a reputable family law attorney from firms such as Lewis & Matthews, P.C. as well as a financial expert who can comb through records to uncover hiding places.

Cash theft

Cash theft is one of the most common types of fraud for businesses of any size. This type of fraud can be done through many ways, including larceny (stealing cash that has been reported), skimming (taking cash that has not been reported), or fraudulent disbursement (releases unauthorized funds). Disappearing cash, no matter how small the amount is, adds up. That said, business owners should have an adequate cash monitoring system in place to ensure proper supervision of how cash revolves in the business.

Check tampering

Check tampering usually occurs when an employee writes checks to fake payees who work with them to cash out the money. Another way that this type of fraud happens is when an employee changes the name on legitimate checks to their own name, a fake name, or a shell company.

The best way to avoid check tampering is to have business owners thoroughly analyze checks before signing them. Moreover, there should be more than one person handling the business’ finances to ensure that they don’t have full reign of the money coming in and out of the company.

False invoicing

In this type of scam, fraudulent employees create fake vendors or suppliers to get money from false invoices. Or they pay the legitimate payee but send the money to an alternative account, be it their own or a fake one under another name.

Fortunately, there are many ways to avoid invoice fraud. One is to use 3-way matching wherein each invoice is matched to a purchase order and receipt of goods to make it more difficult for fraudsters to fabricate documents. Another way is to track invoice activity on a regular basis to monitor for any drastic changes. For example, if a vendor usually sends 10 invoices per month and there are suddenly 30, that’s enough of a red flag to raise suspicion.

Payroll fraud

Payroll fraud can occur in several ways. An employee who is paid hourly could say that they worked more hours than they actually did. A salaried employee who has access to payroll records could change their salaries on the system. A commissioned employee could include fake sales or orders to get more money than they actually deserve. Whatever the case may be, regular monitoring of timesheets and payroll systems is the best way to avoid this type of fraud.

man hand cuffed

Workers’ compensation fraud

Workers’ comp is designed to provide coverage for employees when they get injured or sick on the job. However, some employees take advantage of this system by faking or exaggerating injuries or illnesses to receive unjust compensation. Some also try to get compensation when an old injury resurfaces and say that they got it while on the job.

Avoid workers’ comp fraud by ensuring a safe working environment for all employees, placing adequate security cameras (to capture “injuries” if they happen), and watching out for red flags such as “injured” employee refusing to go to the doctor or reporting the injury long after it happened.

Fraud can have detrimental losses for small businesses. In worst cases, fraud can even close a business down and put owners in severe debt. That said, business owners must have a system to defer fraud that includes thorough background checks, multi-level management, and regular financial monitoring.

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