Must-Know Facts About Business Financial Fraud

By Kristen D. Berdar

Business financial fraud is a concern for most businesses. We detail common fraud schemes and offer tips for avoiding and recovering from fraud.

Must-Know Facts About Business Financial Fraud

If your business has not been hit by financial fraud—yet—consider yourself fortunate. According to a 2018 report by the Association of Certified Fraud Examiners, 42% of private companies and small businesses have suffered financial fraud, with a median loss of $164,000.

The ACFE found that corruption was the most common fraud scheme for small businesses of under 100 employees, with billing schemes (such as false payments) ranking second. Along with those types of financial fraud, businesses need to be aware of many other schemes, including those involving:

  • Payments to unapproved vendors
  • Fake invoices for products that were never purchased
  • Unapproved purchases on company credit cards
  • Cash larceny
  • Check tampering

Another way to look at types of financial fraud is to break schemes into three broad categories: corruption, financial statement fraud, and asset misappropriation. Corruption involves schemes such as bribery and extortion, and financial statement fraud involves misstating information on financial reports, including inflating the value of assets.

The third and most common category of fraud is asset misappropriation — which is basically a fancy term for theft. Common schemes include stealing cash before it’s recorded, swiping inventory, or filing inflated or fake expense reimbursement claims.

Tips to avoid financial fraud

There are several steps businesses of any size can take to avoid and deter business financial fraud. One of the most important is setting up internal controls, such as segregating duties so that there are at least two sets of eyes on any transaction.

Another helpful step is automating common accounting processes, such as accounts payable. Best-in-class accounting solutions like Sage Intacct come with internal systems of checks and balances and built-in controls so only authorized employees can access sensitive data. Outsourcing your accounting to a reputable CPA firm also offers additional controls with your systems.

What to do when fraud hits 

If you become suspicious of financial fraud, it is critical to investigate the matter in a swift and confidential manner, which may enable you to catch the perpetrator in the act or at least put the issue to rest without undue business disruption.

Depending on the type of fraud and other details of the crime, you may need to file a criminal complaint to seek restitution. In addition, if the fraud scheme is covered by your insurance policy, you will want to submit a claim as soon as possible. In some cases, it is also necessary to engage outside experts such as forensic accountants to document and quantify your business losses. You may also need legal counsel to pursue civil remedies.

Get expert support

BST offers a broad portfolio of accounting and auditing, tax, consulting, and wealth management services to small businesses, including forensic accounting and litigation support that can help if your business is a victim of financial fraud. We also offer Virtual Accounting Solutions to assist with everything from managing daily accounting operations to collaborating on strategic planning and budgeting.