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What Is Business Fraud and How Do You Prevent It?



What Is Business Fraud and How Do You Prevent It?

Whether you’re the owner of one of the 33.2 million U.S. small businesses or in the C-suite of a large business, financial health is a key concern. You want a sustainable ratio between your revenue and your debts. You also need a steady revenue stream to keep things running smoothly.

Yet, a lot of things can threaten that financial health. Broad economic changes can undermine your incoming revenue. Bad customer service or product failures can do the same.

Yet, business fraud represents the most insidious threat to your business’s financial health and long-term survival. Not sure about the exact nature of business fraud? Keep reading for a breakdown of business fraud and how you can prevent it.

What Is Business Fraud?

Business fraud is a bit of an umbrella term that covers a variety of criminal activities. At its heart, the term generally refers to crimes conducted under the mask of legitimate business activity.

Business fraud can also mean crimes carried out by a business, by employees of a business, or even by customers against a business. Let’s dig into some specific kinds of fraud.

Types of Business Fraud

Business owners must remain very vigilant against business fraud conducted by employees or even by customers. It’s a big job because there are so many kinds of potential fraud.

Payroll Fraud

Payroll fraud is unfortunately common among small businesses. In most cases, the fraud involves employees falsifying their time sheets in some way to get a bigger paycheck.

For example, the employee could enter more hours than they worked in a manual system. The employee could also enlist another employee to help by clocking them in when they aren’t actually on-site.


Skimming means that someone in the business diverts money from, for example, daily sales. The diverted money ultimately goes into the person’s own accounts. To cover the skimming, the person manipulates the reported totals of daily sales.

Invoice Fraud

Another common type of fraud is invoice fraud. With this kind of fraud, someone in the business generates fake invoices and submits them for payment.

The invoice might say that the business bought inventory from somewhere or used a service. The payment typically goes out to another business that only exists on paper and will direct the money into an account controlled by the person creating the fake invoices.

A variation on this is when a person creates inflated invoices that pay out to a business owned by a friend or family member.

Tax Fraud

Sadly, this kind of fraud typically involves the business owner or a trusted person very high up in the business. Businesses can commit tax fraud in a lot of ways, but it usually boils down to underreporting their earnings or taking fake deductions.

Financial Statement Fraud

Financial statement fraud can pop up in multiple parts of a business. A small business might overstate its value or understate its liabilities to get additional financing.

In a business that operates multiple departments, the department leadership might manipulate the financial statements to avoid reporting losses, missing targets, or to protect their jobs.

Return Fraud

A common type of fraud perpetrated on businesses by customers is return fraud. With this kind of fraud, a customer may purchase a product at the business. Then, after they use the product for a time, they return it for it refund.

They may claim the product is defective even though it still works fine.

A variation on this is when someone outright steals something from a store. Then, they bring it back and ask for a cash refund on the product.

Identity Theft

Businesses can also face problems with identity theft. Someone can potentially steal a business’s identity to access funds or secure credit lines. Businesses can also face problems with people creating accounts using stolen identities.

Preventing Business Fraud

While very important, preventing business fraud doesn’t have a single, simple solution. It takes a group of methods and tactics to minimize your vulnerability to fraud. Let’s look at some of the more common methods and tactics.

Third-Party Services

One of the most common ways that businesses prevent things like internal financial fraud is through the use of third-party services. For example, the business may handle bookkeeping internally but outsource its tax preparation to an independent accounting service.

While the accounting service may not catch every instance of fraud, it’s much more likely they’ll spot oddities in your books because they’re coming at it with fresh eyes.

Third-party services like positive pay service and ACH filters can also help prevent payroll fraud.

If you want to minimize identity theft problems, you can use a service like TMT Analysis to do identity verification for telephone numbers.

You can also use third-party services to conduct background checks on your employees, particularly those with access to sensitive or financial information.

Segregation of Duties

You can also minimize payroll fraud by using segregation of duties. One person preps the payroll, while someone else reviews and approves it.

The same principle applies to things like deposits. One person preps the deposit, a different person verifies the deposit, and someone else makes the deposit.

Minimize Cash

Limiting or eliminating on-site cash can help prevent impulsive thefts and attempts to cover it up. If all of your payments go through a third-party service, there’s nothing to grab.

Leverage Tech

There are a number of anti-fraud technologies available for your business that can spot strange financial or network activity. You can also use technology to limit access to financial information to those who absolutely need access.

Ultimately, you must identify the areas of your business where you are most vulnerable and take steps to manage those risks.

Business Fraud and You

Business fraud can prove an existential threat to your business. You need a clear view of what kinds of fraud are most likely in your business. Once you know what those are, you can institute procedures, internal controls, or third-party services to block them.

Remember, you can often lean on software to help you spot and prevent fraudulent activities.

Looking for more business security tips? Check out the posts in our Business section.