What Are the Most Common Business Financial Fraud Schemes?

You’ve worked hard to build your business. The long hours, sleepless nights, and countless sacrifices were all for one goal: to create something successful and sustainable. But what happens when a trusted employee or an external scam threatens all that hard work? Financial fraud isn’t just something that happens to large corporations. Small and medium-sized businesses (SMBs) are prime targets, often because of weaker controls and stretched resources.

Let’s dive into the most common financial fraud schemes targeting businesses, how you can protect your company, and why having tight financial controls in place is essential.

The Most Common Financial Fraud Schemes

1. Payroll Fraud

• What It Is: Employees manipulate timesheets, inflate hours, or create "ghost employees" to collect extra paychecks.
  
  
• Real-Life Example: Linda Johnson, the general manager of a Wendy’s in Pennsylvania, was caught creating a fake employee, "William Bright," who supposedly worked 128 shifts over 22 pay periods. Johnson would clock in and out for the phantom employee, allowing him to earn wages that never went to an actual worker. A forensic audit uncovered that "William Bright" had a total gross pay of $19,898.15, which Johnson transferred directly to her CashApp account.

2. Expense Reimbursement Fraud

• What It Is: Employees submit falsified or inflated expense reports, claiming reimbursements for personal expenses.
  
  
• Red Flags: Duplicate receipts, vague descriptions, or excessive out-of-town dining expenses.

3. Vendor Fraud

• What It Is: Fake vendors are set up to receive payments, or existing vendors collude with employees to overcharge.
  
  
• Case in Point: Fake vendor scheme steals $1.5 million from California company by creating fictitious accounts.

4. Phishing and Business Email Compromise (BEC)

• What It Is: Fraudsters impersonate executives or vendors via email to trick employees into wiring funds to fraudulent accounts.
  
  
• Impact: BEC scams caused $2.4 billion in losses in 2021, with SMBs being primary targets.

5. Asset Misappropriation

• What It Is: Employees steal inventory, equipment, or company funds for personal gain.
  
  
• Example: An Amazon employee exploited her trusted position at Amazon to steal nearly $10 million through an audacious fraud scheme. By creating fake vendors and submitting fictitious invoices, she siphoned off the company’s funds for personal gain.

How SMBs Can Protect Themselves

Fraud prevention isn’t just about catching bad actors—it’s about creating systems and controls that make fraud nearly impossible. Here’s how you can safeguard your business:

1. Separate Duties
   Ensure that no single employee has control over an entire financial process. For example, one person should handle vendor approvals while another processes payments.
   
   
2. Use Technology
   Invest in accounting software with built-in fraud detection and approval workflows. Regularly update your cybersecurity measures to guard against phishing and ransomware attacks.
   
   
3. Monitor Financial Activity
   Regularly review bank statements, reconcile accounts, and conduct surprise audits. Spotting unusual activity early can stop fraud before it spirals.
   
   
4. Train Your Team
   Educate employees about recognizing phishing scams and the importance of safeguarding sensitive data. A well-informed team is your first line of defense.
   
   
5. Vet Vendors and Employees
   Conduct background checks on new hires and due diligence on vendors. It’s better to be overly cautious than to place blind trust.
   
   
6. Maintain Tight Financial Controls
   Establish a robust approval process for expenses, payroll, and vendor payments. Require dual authorizations for high-value transactions.

Why Financial Controls Are Non-Negotiable

Even the most well-intentioned businesses are vulnerable without strong financial controls. Fraud doesn’t just hurt your bottom line; it damages employee morale, ruins trust, and, in severe cases, leads to legal consequences or bankruptcy.

Having the right checks and balances ensures that your business is resilient against internal and external threats.

Partnering to Prevent Fraud

Protecting your business from fraud is a team effort. At our firm, we specialize in helping SMBs implement strong financial controls and monitor for red flags. Whether you need an audit of your current processes or advice on new systems, we’re here to help you safeguard what you’ve built.

Don’t wait until it’s too late—contact us today to protect your business and your peace of mind.

 

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