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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. That’s why it’s crucial 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 while appearing to pay someone for their labor. An employee 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.

You and your employees are the first line of defense against corporate account frauds. Advanced cybersecurity measures paired with employee education about the warning signs, safe practices, and responses to suspected fraud are essential to protecting your company and customers.

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. They will also 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. Other times, the worker seeks loans so they can steal the money for themselves.

In any case, this type of business fraud is a serious financial crime. Pay attention to suspicious activity and react quickly. Look out for unexplained account or network activity, pop-ups, and suspicious emails. If detected, immediately contact your financial institution, stop all online activity and remove any systems that may have been compromised. Keep records of what happened.

3.   Asset misappropriation

Asset misappropriation is the most common type of employee fraud, and it’s often the easiest to commit. Let’s be clear: misappropriating assets means deliberately stealing from an employer.

There are 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 from 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 keep detailed inventory and financial records and prove any losses. Partner with your bank to prevent unauthorized transactions. With our business checking accounts at Bank Midwest, you can stay on top of your finances.

Also, talk to your banker about programs that safeguard you from unauthorized transactions. Positive Pay and other services offer device authentication, multi-person approval processes, and batch limits to help protect you from fraud. Also, follow these four tips for protecting your cash management systems.

4.   Tax fraud

The more revenue a company earns, the more it will have to pay in income taxes. Tax fraud occurs when a business avoids high tax rates because they are 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 by lying on their tax returns or submitting a falsified return. Additionally, tax evasion is when businesses or individuals avoid paying taxes altogether. This is also considered a type of tax fraud.

As a business owner, it’s essential to understand your responsibilities and liabilities of reporting on your annual earnings and hold employees and contractors responsible for following federal law.

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 their information to steal from them. Fraudsters could open a new line of credit with their social security number, make purchases with their credit card number, commit 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. At the same time, businesses can be attacked through data fraud. Employees with sensitive information might use that data to steal from a business or commit other crimes. Another company might also steal this information through a business-to-business transaction.

It is important to protect your cyber environment just as you would your cash and physical location. Do not use unprotected internet connections. Encrypt sensitive data and keep updated virus protections on your computer. Use complex passwords and change them periodically.

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 employees of a business must be alert and observant. It’s also essential that suspicious businesses are reported to and investigated by the IRS or 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 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, services are available to help stay on top of your finances and catch fraud before it hurts your business.

Want to learn more about how Bank Midwest keeps your financial accounts safe? We would love to help answer your questions.

Post updated. Originally published September 2021.


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