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Top 6 Fraud Risks for Small Businesses


Many small businesses today don't understand the risks that fraud can have on their bottom lines. Similarly, a new business in its infancy may not have the resources available to manage fraud and cater to fraud prevention. Small business owners should be aware of many different types of fraud in order to better protect their employees, their finances and themselves.

Here are six types of fraud that economic crime investigation professionals encourage small businesses to be aware of:

1. Workman's Compensation Fraud
Many small businesses offer workman's compensation insurance for their employees' benefit, in case someone gets hurt while on the job. Unfortunately, some employees cheat the system for personal profit. In some cases, employees make fabricated claims for a false or exaggerated workplace injury. Some people will get hurt on personal time during off hours, but then report they got hurt at work in order to claim on their workman's comp policy. In other instances, an old injury will resurface and employees will state they were hurt on the job. As a result, these employees stay out of work and have their medical bills paid for by an insurance company. To help avoid these scams, be sure your employees work in a safe environment and use all the proper safety equipment necessary to complete a task.

2. Check tampering
Another type of fraud that economic crime investigation experts advise small businesses to learn about is check tampering. There are a few ways check-tampering fraud can occur; the most blatant type happens when an employee writes checks to fake payees and then works with those people or businesses to get the money. Another way check tampering ensues is when an employee tampers with legitimate checks by changing the payee name to their own name, a false name or a shell company set up to collect the fraudulent funds. To protect yourself from check tampering fraud, have more than one person check the company's finances and have the business owner sign each check personally.

3. Revenue skimming
Skimming revenue is a type of fraud that most commonly takes place when cash is given by customers at a business. Skimming revenue occurs when customers pay cash for an item or service. The cashier just has to make sure the customer does not receive a receipt. The employee collects the cash from the customer and pockets it; since there is no paper trail, there is no record of the item or service being sold. To safeguard against revenue skimming, businesses that partake in cash sales should segregate and rotate duties among employees.

4. Fraudulent invoicing
Economic crime investigation professionals warn small businesses about fraudulent invoicing schemes. In a false invoicing arrangement, a person or business will send a professionally constructed invoice for products or services that were never purchased. In some cases, businesses pay these invoices without thinking or checking that the purchase was actually made. The trickster on the other end of the ploy makes out, as a percentage of companies go on to pay these fake invoices. Be sure to check each invoice received very carefully and match up invoices to products or services purchased to avoid being caught in a fraudulent invoicing scam.

5. Payroll fraud
Unfortunately, payroll fraud makes up about 9 percent of occupational fraud worldwide. Small businesses have a high risk of falling victim to payroll fraud, as most do not have anti-fraud controls in place. As a result, it is increasingly important for small businesses to be aware of this type of fraud. Payroll fraud can present itself in many different ways. For example, an employee who is paid hourly wage states that they worked more hours than they actually did and in return gets paid for hours they did not work. Additionally, payroll fraud can occur when salaried employees have access to payroll records and change their salaries. Another type of payroll fraud can occur when a commissioned employee reports false sales or orders. In order to prevent payroll fraud, economic crime investigation experts suggest having supervisors or managers review timesheets on a regular basis.

6. Vendor billing fraud
Vendor billing fraud happens when an employee creates a shell company and then pays their shell company with business checks from their workplace. Vendor billing fraud can be similar to check tampering fraud or fraudulent invoicing fraud. Some warning signs to consider are checks that are written out to cash or a business listing the same address as an employee's home. An additional type of vendor fraud can occur when someone hires a friend or family member with a business of their own for products or services. The friend or family member may be overcharging in order to make more money, and the person at the small business agrees to it in order for their connection to benefit. One way to avert vendor billing fraud is to vet all vendors before signing a check.

There are many different types of fraud that could potentially affect small businesses. Some of the best forms of small business fraud prevention are hiring trustworthy employees and having the business owner personally review invoices, billing and employee timesheets. Some economic crime investigation specialists recommend employing extra steps in hiring and business dealings to ensure fraud deterrence. For instance, always perform background and reference checks on potential employees. Additionally, consider having more than one level of management check business and financial paperwork. Though these supplementary steps can take time and effort - they could prove worthy in the long run.