6 types of fraud in business

What is business fraud?

Business fraud is a broad term. It can refer to crimes committed by high-ranking employees in a business, or it can describe attacks committed against the businesses themselves. At the end of the day, business fraud almost always involves someone stealing money from someone else under the guise of business dealings.

In either case, it’s a serious issue, and it comes in many different forms which is why it’s important to be alert to the types of fraud in business today.

Blog Illustration 6 Types Of Fraud In Business

Different types of fraud in business

1.   Payroll fraud

Payroll fraud occurs when someone exploits your company’s payroll system to steal money under the guise of paying someone for their labor. Someone who has access to the payroll system will have the easiest time committing this type of fraud, but it can also be committed by anyone inside or outside the company with extensive hacking skills.

Someone can commit payroll fraud by:

  • Submitting false timesheets to pay themselves or someone else more than they earned.
  • Issuing unauthorized bonuses.
  • Sending money to a fake employee or ex-staff member.

Payroll fraud is almost always committed electronically, so having advanced cybersecurity measures in place is a good way to prevent this type of theft.

2.   Financial statement fraud

An employee or business owner may commit financial statement fraud for a variety of reasons. Most commonly, the fraudster will manipulate financial records to make their assets, income or total net worth seem greater, and paint their debts, liabilities and losses as more minute. This type of fraud is typically committed to secure loans or avoid consequences for not reaching financial goals.

Sometimes, a staff member will manipulate a financial statement to achieve loans that will help their business. Other times, the worker seeks loans so they can steal the money for themselves. Either way, this type of business fraud is a serious financial crime.

3.   Asset misappropriation

Asset misappropriation is the most common type of employee fraud, and it’s often the easiest to commit. To misappropriate assets is to deliberately steal from an employer. Asset misappropriation can be broken down into two categories:

  • Cash misappropriation: Stealing money directly from the company, whether it is transferring funds from company bank accounts, making unauthorized purchases on a company card or taking cash right out of the safe.
  • Non-cash misappropriation: Stealing non-cash assets from the company. This could be in the form of taking office equipment, supplies or inventory without being authorized.

The best way to prevent asset misappropriation is to have detailed inventory and financial records so you can catch misappropriation before the company loses too much money. With our business checking accounts at Bank Midwest, you can stay on top of your finances.

4.   Tax fraud

The more revenue a company earns, the more they will have to pay in income taxes. Tax fraud occurs when a business is avoiding high tax rates as a result of being in a higher tax bracket. Business owners will sometimes strive to pay less in taxes by downplaying their business’s earnings or claiming false deductions. Someone can commit tax fraud by lying on their tax return or submitting a falsified return.

Tax evasion is when businesses or individuals avoid paying taxes all together, and it is considered a type of tax fraud.

5.   Identity theft

Identity theft is a complex form of business fraud because a business can be either the perpetrator or the victim.

Identity theft is when someone steals personal information from another person and uses that information to steal from them. This could be in the form of opening a new line of credit with their social security number, making purchases with their credit card number, committing crimes under a false identity and much more.

A business can commit identity theft by stealing bank account information or other personal data from its customers. On the other hand, businesses can also be attacked through data fraud. Employees with sensitive information might use that data to steal from a business or commit other crimes, or another company might steal this information through a business-to-business transaction.

6.   Corruption

Corruption is a blanket term for many different types of business fraud. Essentially, when a person in power at a business deliberately mishandles funds or engages in any kind of dishonest behavior, it is considered corruption.

Some examples of corruption are:

  • Money laundering.
  • Manipulating public elections.
  • Accepting bribes.
  • Making unreported transactions.
  • Conducting business dealings with criminals.

Business owners might become corrupt if they seek to make as much money as possible with little regard for morality or justice. It’s rare, but sadly, it happens. That’s why it’s important that employees of a business are alert and observant. It’s also essential that suspicious businesses are investigated by the IRS or even the FBI.

Protecting your company from fraud

Corporate fraud is a serious matter. Whether the business is the victim, or a company leader is the one committing crimes, it’s important for everyone involved in an organization to be on the lookout.

The best way to protect your business from fraud and corruption is to understand the risks and put preventative measures in place. Regularly reviewing financial records is one important step, and often updating technology and software is also essential.

It’s important that you hire trustworthy employees as another method of fraud prevention. Run background checks on everyone you hire, and only disclose sensitive information to workers who need it to perform their jobs.

Your Bank Midwest business checking account comes with fraud monitoring tools that can help reduce your worry about security breaches or asset misappropriation. From security and positive pay alerts to employee permissions and access controls, we’ll help you stay on top of your finances and catch fraud before it hurts your business.

For more information on our services, contact us today.

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