There are many different types of frauds that can target different kinds of businesses, and each might require a different prevention approach like ATO before we can properly protect our business from these fraudulent behaviors, and thus recognizing these different types of frauds is a crucial first step.
Below, we will review 5 of the most common types of business frauds, and discuss how we can prevent them.
1. Fraudulent Statements
This type of business fraud involves manipulating a financial statement so it’s not accurately reporting financial or non-financial aspects of the statement.
This can involve manipulating the amount of revenue, assets, liabilities, and profits. This can be done to increase the company’s stock price for a publicly-traded company or to defraud a potential investor about the company’s actual value. This type of fraud can also be performed to lower or increase bonuses that should be shared with staff and employees (for the personal gain of CEOs for example).
Other examples of financial statement frauds include:
- Falsifying invoices
- Lowering or increasing the value of a transaction
- Implementing a specific accounting method to lower or increase the reported profit, assets, or liabilities.
While the financial statement is relatively rare among other types of business frauds, it is also one of the most damaging types of fraud.
How to avoid fraudulent statements: implement a proper control process by delegating different accounting functions to different employees so no one has absolute control in creating financial statements. Always cross-check financial statements for inaccuracies before publishing.
2. Return/Refund Fraud
A very common type of business fraud in the retail businesses that offer refund or exchange policy that allows customers to send back and refund defective products. This also includes businesses that offer a money-back guarantee, including digital services.
In this type of business fraud, the fraudster might return stolen goods, stealing receipts, lying about purchases, or simply returning the used item before the return period is over to get their refund.
How to avoid refund fraud: In the case of refunds, it’s best to give store credit/voucher instead of cash. Always require valid receipts for all returns and product exchanges.
3. Insurance Fraud
Most companies are legally required to offer insurance or at least worker’s compensation benefits to their employees.
This type of fraud happens when employees fill false insurance claims, for example by faking illnesses or job-related injuries. This may result in higher premiums and additional expenses that must be paid by the company.
How to avoid insurance fraud: establish a clear rule about the requirements for filing insurance claims, and always cross-check all submitted claim documents.
4. Counterfeit Money Fraud
This is a type of business fraud where customers or clients purchase your product or service with counterfeit money bills. This is one of the most common business frauds especially in businesses that often involve cash-based transactions. Quite often we don’t notice the bills are fake until it’s too late.
How to avoid counterfeit money fraud: if your business often involves cash transactions, invest in a proper counterfeit bill detector tool. Train your staff on how to properly check for counterfeit notes.
This type of business fraud can include different variety of fraudulent practices including bribery, skimming, getting kickbacks, and manipulating contracts to favor certain parties over others.
We can generally differentiate corruption frauds into two different types:
- Conflict of interest: when someone inside a company (typically with a relatively high position in the company hierarchy, i.e. managers) or a group of individuals has a special relationship with someone outside the company. When the company conducts transactions with this outside party, this individual/group of individual may take a certain decision to favor this outside party, while at the same time harming the company’s interest.
- Briberies and excoriation: both offering and receiving bribes is a type of business fraud. Receiving kickbacks/commissions, leaking company’s data or sensitive information for financial gain, and other similar forms belong in this category.
How to avoid corruption: it’s very important to implement strict guidelines in gifting and receiving gifts. Regularly conduct due diligence with members of management, employees, and third-party vendors.