Types of Small Business Fraud
Employee Fraud
Employee fraud occurs when employees are the perpetrators behind fraudulent activity. In a recent study, 22% of small business owners reported employee theft/fraud.
Embezzlement occurs when employees dishonestly take money or property entrusted to them from a business. Typically, employees who handle money or property are in prime position to embezzle. If you notice missing funds, unauthorized changes in account details, or unexplained discrepancies in financial documentation, investigate immediately. Acting quickly could save your business if it's at risk.
Another common type of small business fraud is payroll fraud. This occurs when employees intentionally falsify their timesheets to receive pay for hours that they did not work, or to qualify for additional overtime pay. Payroll fraud often goes undetected by business owners due to lax oversight, limited access to dedicated personnel who thoroughly review payroll information, and unchecked levels of trust in employees. Additionally, with the increase of digital timesheets and remote documentation, payroll fraud has become easier to commit.
Customer Fraud
It’s not just employees who can be culpable. Some small business fraud falls under the responsibility of the customer. There are multiple methods that customers can use to scam a business. Chargebacks occur when the customers lie about one of the following in order to avoid paying or receive refunds: claiming they didn’t authorize a charge, claiming they didn’t receive the product/service or that the product/service received didn’t match what was requested, or claiming they were charged for something they never purchased.
Customers can also use false payment methods to scam a business. Some methods include purchasing items on stolen credit cards, using fake checks, using fake funds to overpay and request a refund, and requesting alternative payment methods such as PayPal.
As technology improves, small business owners are increasingly worried about payment frauds, with a recent study finding that 44% of those surveyed were concerned about unauthorized transactions or unauthorized electronic fund transfers.
Vendor Fraud
Vendor fraud is one of the most common forms of small business fraud, with 29% of small businesses reporting vendors attempting to take money for products or services not rightfully earned. This can happen when fraudsters impersonate vendors through identity theft or the use of AI technology. In other cases, the real vendor acts alone to falsify documentation to collect illegitimate payment. On average, vendor fraud can take up to 18 months to detect.
How to Protect Yourself
The best way to stay protected is to educate yourself and your team. You and your employees should be able to detect red flags that might indicate fraudulent behavior and have a system in place to report the suspected fraudulent activity as quickly as possible. The Federal Trade Commission offers free publications for you and your employees to further educate yourselves on common scam tactics.
Always verify payment methods, and train staff to evaluate invoices closely. Before doing business with new parties, be sure to research them. The Federal Trade Commission recommends researching the business name with terms such as “scam” or “complaint” to see if they have been reported for fraudulent activity. Lastly, avoid clicking any links, opening attachments, or downloading files from unexpected sources.
Overall, staying vigilant, and training your staff to remain attentive will help protect your beloved business from fraudulent acts.
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