Understanding Business Fraud: Types and Prevention

Fraud cost U.S. businesses a whopping 6.7% of their total annual revenue in 2023, according to a  TransUnion report. Business fraud happens when bad actors commit illegal activities that result in significant financial losses for companies. 

For business owners aiming to safeguard their financial statements and clientele, it is essential to comprehend, identify and prevent business fraud.

Common Types of Business Fraud

Here are some of the most common types of business fraud, how they work and how you can protect your company.

1. Payroll Fraud

Payroll fraud happens when a company employee siphons money away from a small business’s payroll system for their own financial gain. Several different types of payroll fraud exist, including:

• Ghost employees: Adding a fictitious employee to a payroll list.
• Timesheet fraud: Manipulating your timesheet or another person’s timesheet.
• Overtime fraud: Manipulating your overtime hours.
• False expenses fraud: Reporting false expenses to an employer for reimbursement.
• False workers compensation claims: Filing false claims for workers compensation insurance.

Payroll fraud can result in fines and legal action against your business. Regularly auditing payments to your team and relying on programs that automate payroll can lower your risk.

2. Asset Misappropriation

Asset misappropriation happens when fraudsters take company funds and misuse or steal them for their own gain. Some examples of asset manipulation include:

• Embezzlement: Stealing a business’s money by making bad faith changes to its accounting records.
• Skimming: Stealing company money before it’s entered into the balance sheet.
• Fake disbursements: Issuing false disbursements, including fake checks or payment requests.
• Credit card abuse: Misusing company credit cards for personal spending.

Asset misappropriation can negatively impact a business’s cash flow, result in financial reporting mistakes and reduce investor trust and confidence in a business. You can help prevent this fraudulent behavior by putting proper financial controls in place for your company, routinely reconciling your books, conducting employee background checks and scheduling regular ethics training for your team.

3. Invoice Fraud

Invoice fraud involves a bad actor impersonating a supplier or vendor; they either send fake invoices for products and services or try to modify legitimate invoices to steal money from your business. This type of fraud can seriously harm your company’s bottom line if it’s not identified promptly. To protect your business, carefully review all payment changes, even if they seem to come from a trusted source. Compare payment details with prior invoices and reach out to your points of contact with vendors and suppliers to confirm any changes.

4. Financial Statement Fraud

Your business may also be susceptible to financial statement fraud schemes, which involve the deliberate misrepresentation of information on your financial statements.

 It’s common for this type of fraud to be carried out by company owners, but it can also be perpetrated by others with budgetary authority, such as CFOs or other financial leaders. Consequences can range from serious legal action to the erosion of customer trust.

Properly vetting every employee involved in managing your finances, reviewing and reconciling your books regularly, installing fraud prevention software and scheduling regular ethics training for your team can help reduce your risk of fraudulent behavior.

5. Cyber Fraud

Cyber fraud happens when cybercriminals illegally access sensitive business information, such as financials or employees’ private data. Bad actors may use phishing emails or text messages, ransomware attacks or malware attacks to gain access to this information.

This type of fraud can have serious consequences for businesses and employees. Not only can cyber fraud result in theft of company finances, reputation damage and employee identity theft, but you may be subject to potential legal action. Conducting employee training to promote security and implementing email protocols can help prevent cyber fraud.

How to Prevent Business Fraud

1. Internal Controls

Internal controls are systems your company puts in place to help prevent fraud. These controls may include ensuring strict access to sensitive company data and the separation of duties among employees, with the aim of creating a checks and balances system so that one employee doesn’t solely control multiple aspects of company finances.

2. Employee Training

Employee training is another important fraud prevention tool. These training sessions should cover common tactics scammers use to try and breach company systems, tools and systems your company has in place for fraud prevention and proper responses to suspected fraud.

Likewise, employees with access to business financial data should also be properly trained on all systems. So if your business implements a new financial software, for example, request that the software company provide training for a point person at your company or your team.

3. Regular Audits

Auditing your business finances regularly can also help prevent fraud—or identify potential discrepancies in your financial reporting, either accidental or intentional. You can work with an external auditor to analyze your balance sheet or use an auditing software like SAP Audit Management.

4. Use of Technology

Employ fraud prevention technology to protect your business, which uses machine learning and artificial intelligence (AI) to monitor transactions for anomalies that could indicate fraud. If it identifies a potentially fraudulent transaction, it can flag it for your review.

Most Vulnerable Payment Types

Certain payment types are more vulnerable to fraud than others. If your business accepts any of the following, taking steps to protect yourself is important.

1. Check Fraud

Checks are a popular payment method, but they could leave your business vulnerable to things like mail fraud, counterfeit checks and duplicate deposits. According to the 2024 AFP Payments Fraud and Control Survey, 65% of respondents reported that check fraud was a problem for their company in 2023.

Unfortunately, it's impossible to completely prevent check fraud. However, you can lower your risk by choosing a secure mailbox and checking it routinely. Also, learn how to recognize check fraud and make sure all checks clear before spending those funds. Seacoast Bank also offers Positive Pay, which can help protect your business from check fraud.

2. ACH Credits

While ACH credits may seem less vulnerable than checks, there are still some potential risks with this payment type. Risks include unauthorized debits by fraudsters outside and within a company, email scams tricking employees to initiate unauthorized ACH transfers and fraudulent chargebacks by vendors causing financial losses.

To reduce these risks, your business can use tools like multi-factor authentication and encryption and set up transaction controls limiting ACH dollar amounts or restricting transactions to certain countries. For further protection, require that multiple employees review and approve ACH transfers before your company sends them. Also learn how Seacoast protects your business via its ACH network.

3. Wire Transfers

Wire transfers are also a common way for businesses to accept or make payments. That said, these transfers carry some risk. Hackers may pose as legitimate vendors or suppliers requesting payment via wire transfer, making your business vulnerable to telemarketing schemes, online phishing scams, money laundering and advance fee scams.

If your business accepts or sends wire transfers, be vigilant about verifying vendor or supplier payment information. Do not accept any suspicious transfers and always confirm account information and payment amounts with trusted contacts before you send a wire transfer.

Also, be mindful about phishing emails and text messages. Bad actors often send links via text and these links can seem legitimate but often aren’t. Learn more about how to understand and prevent wire transfer scams.

4. Mobile Banking

While mobile banking offers significant convenience, it also presents certain risks.

 A determined hacker could compromise your business banking data in a few different ways, including with the use of malware or viruses. It can also be difficult to authenticate and authorize business mobile users accurately and securely.

To help minimize your risks, it’s important to monitor your accounts regularly, use multi-factor authentication or biometrics technology and set up fraud alerts on your business accounts.

Fraud Prevention Tips

While business payment fraud is concerning, you can take steps to mitigate your risks by following some best practices for secure transactions.

• Train your team to spot fraud and be aware of common tactics criminals use to steal data, including phishing, use of urgent language or requests for personal information.
• Implement fraud detection and prevention tools to protect your company finances.
• Use tools like encryption and multi-factor authentication.

Also consider implementing a secured payment gateway or accepting multiple payment types. Remember that no payment type is risk-free. That said, many businesses accept credit card, digital wallet and ACH payments, and these are generally considered low-risk with proper safeguards in place.

Conclusion

Business fraud is a problem, but implementing proper controls can help your business protect itself. Stay up-to-date with the latest technologies employing AI and machine learning to identify and flag fraudulent transactions. For more fraud prevention tips, visit Protecting Your Business from Fraud.

Respond quickly if you're worried your business has been targeted by a fraudster. Report the incident to the Federal Trade Commission and your state attorney general’s office. Seacoast Bank also offers business fraud prevention tools to protect your business bank accounts from malicious individuals.