You worked hard to establish your company. The grueling hours, sleepless nights, and many sacrifices were all for the same goal: to build something profitable and sustainable. But what happens when a valued employee or an external swindle jeopardizes all that hard work? Financial fraud isn't limited to major organizations. Small and medium-sized companies (SMBs) are frequent targets, frequently due to lax controls and limited resources.
Let's look at the most frequent financial fraud schemes targeting companies, how to safeguard your firm, and why having strict financial controls in place is critical.
Most Common Financial Fraud Schemes
1. Payroll Fraud
What It Is: Employees alter timesheets, exaggerate hours, or establish "ghost employees" to get more money.
Real-Life Example: Linda Johnson, the general manager of a Wendy's in Pennsylvania, was discovered establishing a bogus employee
named "William Bright," who allegedly worked 128 shifts throughout 22 pay periods. Johnson would clock in and out for the phantom employee, enabling him to receive pay that were never paid to a real employee. A forensic analysis revealed that "William Bright" earned a total gross salary of $19,898.15, which Johnson deposited straight to her CashApp account.
2. Expense Reimbursement Fraud
What It Is:Employees submit fraudulent or exaggerated expense reports, claiming payment for personal costs.
Red flags Include duplicate receipts, ambiguous explanations, and significant out-of-town meal bills.
3. Vendor fraud
What It Is: Fake merchants are put up to accept payments, while existing vendors cooperate with staff to overcharge.
Case in Point:
A fake vendor fraud takes $1.5 million from a California corporation by setting up false accounts.
4. Phishing and Business Email Compromise(BEC)
What It Is: Fraudsters use email to impersonate executives or suppliers, tricking staff into sending payments to phony accounts.
Impact : BEC scams cost $2.4 billion in 2021, with small and medium-sized businesses being the principal targets.
5. Asset Misappropriation
What It Is: Employees steal business assets, equipment, or finances for personal benefit.
Example: An Amazon employee used her trusted position to Amazon embezzle approximately $10 million in an elaborate fraud scheme. She stole the company's finances for personal advantage by establishing bogus suppliers and submitting fraudulent invoices.
How SMBs Can Protect Themselves
Fraud prevention is more than simply capturing bad actors; it is about developing systems and procedures that make fraud almost impossible. Here's how to protect your business:
1. Separate duties
Ensure that no one person has complete authority over the financial process. For example, one person should manage vendor approvals, while another handles payments.
2. Use technology
Invest in accounting software with integrated fraud detection and approval protocols. To protect yourself against phishing and ransomware assaults, you should update your cybersecurity procedures on a regular basis.
3. Keep track of your financial activity
Regularly analyze bank statements, reconcile finances, and do surprise audits. Early detection of anomalous activities may help to prevent fraud from spiraling out of control.
4. Train your team
Educate staff on how to recognize phishing schemes and the necessity of protecting sensitive data. A knowledgeable team is your first line of defense.
5. Inspect vendors and employees
Perform background checks on new employees and due diligence on suppliers. It is better to be exceedingly cautious than to have blind faith.
6. Maintain tight financial controls
Create a thorough approval procedure for costs, payroll, and vendor payments. Dual authorizations are required for high-value transactions.
Why Financial Controls are not negotiable
Even the best-intentioned firms are susceptible without solid financial controls. Fraud not only hurts your financial line, but it also harms employee morale, destroys trust, and, in extreme circumstances, leads to legal ramifications or bankruptcy.
Having the appropriate checks and balances guarantees that your company is robust to both internal and external challenges.
Collaboration to Prevent Fraud
Protecting your organization against fraud requires a collaborative effort. Our company specializes in assisting small and medium-sized businesses to create robust financial controls and identify red flags. Whether you want an audit of your present procedures or guidance on new systems, we are here to help you protect what you've created.
Don't wait until it's too late; call us right now to preserve your company and your peace of mind.
