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How to Prevent Your Business from Financial Fraud?

Muskan Agrawal

| Updated: Nov 24, 2022 | Category: Finance & Accounting

How to Prevent Your Business from Financial Fraud?

Financial fraud is quite frequent in an organisation regardless of strict regulatory requirements. Frauds are not always extraneous, like phishing; fraud can be internal and done by the employees or management of the company.

Identification of financial fraud helps take remedial action and stop the occurrence of corporate fraud liability.

If the company does not monitor and restrict these illegal activities, they can lead to substantial capital losses and affect its position in the market. 

What is Financial Fraud?

Financial fraud occurs when another deprives money or harms a company’s financial health by misleading, deceitful, or other illegal practices. Fraud can be done by different methods, such as identity theft or investment fraud.

As per the fact, the following are the significant risk components that can lead to fraud in a small business:

  • Need for proper screening of employees before recruiting them. Background check of employee is a must. 
  • Inadequate financial controls like record-keeping, bank accounts, and cash handling are risks that can lead to fraud in an organisation.
  • Trust their employees. But, the thing that makes a small business a pleasant workplace also helps increase fraud.

Types of financial frauds in business

Financial fraud is built in many shapes. For the business’s protection, the company must frequently identify the scam they are being looped into and continue entrusting their financials to their employees or other people.

Before protecting themselves from financial fraud, people should understand what comes under it. Following are a few familiar fraud business owners must learn to stop corporate fraud liability. 

Payroll fraud

Payroll fraud means when an employee tricks the HR department into receiving the salary they haven’t earned in the first place. Employees can submit false figures related to targets, sales counts, and units produced to receive additional pay.

Moreover, some employees can do timesheet filling to change their punch-in and out times. 

Skimming

Skimming[1] is when employees make invoices but don’t tell the organization, keep all the payment for themselves and update a false entry in the accounting books. 

Financial statement fraud

In this, companies that falsify the sales, revenue, income, assets, and expenses data in the financial statement. 

The companies doing financial statement fraud because of deceive the public and investors, manipulate stock prices, and enhance the company’s market value. 

Tax fraud

Tax fraud is the most common type of corporate fraud, where the finance department files fictitious tax returns to avoid paying the actual sum obligation. Companies do this to pay small amounts of taxes and take advantage of low tax slabs.

The finance department shows less income in the financial statements, claiming false tax deductions, showing personal expenses as business expenses, and more.

Invoice fraud

Invoice fraud happens when an employee creates fake invoices to procure money from the finance department.

It means submitting invoices for the goods and services that never happened and were brought into the company, creating dummy suppliers to source the money into their accounts, and passing high-dollar contracts to known suppliers or family members. 

How to Prevent the Financial Fraud?

Here are some methods for protecting the business against financial fraud:

Financial checks and balances. 

Perform a monthly internal review of company finances. Ensure all payment match all invoices and examine for missing documents. Conducting random audits or a third-party audit of the books annually. It indicates to employees that the company is always an eye on everyone and is serious about fraud and deters thieves.

Safeguard computer systems and practice web awareness. 

Being confident about cyber protection has cost many small companies profoundly. The latest firewalls and anti-virus programs are installed in every system. Beware of “phishing” schemes that try to access confidential details from the company. These mainly happen through an email that comes out to be from a financial organization or service provider but is malware practices. Although most are easy to catch, some contain appealing headlines or come from a genuine address.

Protect sensitive hard copy documents.

The digital platform is one of many places where information is not safe. Employees and others can hack company mail, credit card details or cheques. Printed financial statements and other confidential papers should be shredded or kept securely. Many financial organizations now let others not receive documents entirely, so that’s something to consider. “Most photocopiers developed since 2002 have a hard drive that keeps every scanned copied or emailed image. The machine is usually repaired when a person sells or upgrades the copier, but the hard drive is left intact. Once the machine is resold, anyone can take out the hard drive and obtain confidential details like income tax and bank accounts record, social security numbers (SSN), and medical documents.

Use secure online banking. 

Online banking is a confidential approach to handling small companies’ finances. The big banks now offer several levels of online security. Advantages include 24/7 obtain to real-time details, Money transfers and payment handling. A person can easily schedule and control payments and will have an audit line of all the transactions. Ensure to inspect accounts activity frequently. Having immediate access to past payment transactions helps to monitor outgoing for any disparity.

Get insurance.

Property insurance policies don’t cover crime and fraud-related losses, so it’s essential to safeguard money losses from workplace fraud. “Fidelity Insurance” protects the business as opposed to criminal acts like robbery, forgery, misuse, and credit card fraud. Liabilities secured under this type of insurance usually comprise money loss coverage and employee dishonesty.

SCORE is a non-profit organization committed to helping small companies dream of, grow and attain their goals with the help of education and mentorship.

Conclusion

Financial fraud is widespread and frequent in organizations and with ordinary people. It’s essential to control this and prevent financial fraud within and outside the organization. The company can prevent fraud with various methods such as getting an insurance policy, a strong background verification check of the employees, randomly conducting an audit, checking their financials frequently and many more. The organization safeguard their financials and always keeps an eye on its company. If Companies do not monitor or restrict misleading activities, it impacts their income and overall financial health.

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Muskan Agrawal

Muskan has completed a Bachelor of Commerce and MBA with a specialisation in Finance and Marketing. She is very dedicated, focused and attentive towards her work. She has a decent knowledge of Finance and Accounts with a prior experience in the finance domain. She secures experience in research work which enhances her knowledge and skills.

Business Plan Consultant


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