Five types of fraud that could cause you a world of pain

Business fraud is more common than you make think, striking all sizes of business and potentially forcing a profitable operation into freefall without much warning.

We don’t say this to scare you. The purpose of this blog is to make you aware of the most common types of small business fraud and help you to prevent them from occurring in your business.

1. Payroll fraud

Payroll fraud accounts for around 4% of occupational fraud schemes in the Asia-Pacific region according to a recent report, with small businesses more than twice as likely than companies with more than 100 employees to fall victim to this type of misappropriation. This is because most smaller businesses do not have anti-fraud controls in place.

There are a number of different ways in which payroll fraud is carried out, from employees including more hours on their timesheets than they have actually worked, to commissioned workers reporting false sales or orders.

On average payroll fraud schemes are committed for longer than other types of fraud before being discovered. In some cases employees have successfully stolen millions of dollars over time.

So what can you do to avoid it? Controls (checks and balances) need to be in place to prevent the fraud in the first place, and act as a deterrence. A few well designed controls together with a healthy culture will mean your business is protected.

2. Fake or duplicate invoices

Fraudulent invoicing can occur when a supplier, either acting alone or in collusion with an employee, submits duplicate or inflated sales invoices with the intention to defraud the company of money. It can also occur when cyber criminals create fake invoices that look genuine and are sent from legitimate-looking emails. Scammers will often impersonate the intended recipient and provide the business with new bank account details, enabling them to receive the payment instead of the actual supplier. According to the Australian Competition and Consumer Commission (ACCC), this type of scam cost Australian business more than $7.2 million in 2018, a 53 per cent increase compared to 2017.
Fake or duplicate invoices prey on sloppy administration practices. To prevent this from happening, business owners need procedures to ensure careful checking of client invoices to check for discrepancies and to verify any request for changes to a supplier’s bank account details.

3. Fictitious suppliers or employees

Fictitious accounts may be paid when an employee sets up a “shell” company, often with a similar name to another supplier used by their business, and creates invoices in this false company’s name for the supply of goods or services.
Fake, or “ghost” employees can also be created to misappropriate funds from a business, with regular payments being made to a “worker” who has never actually been employed by the company, or alternately to a former employee who was never officially terminated in the payroll system.

These schemes often require participation from the person responsible for authorising a business’ payments, such as a payroll officer or manager.

To avoid this type of fraud we recommend regular audit of your books and a separation of duties, for example ensuring the person who processes the payroll is not the same person who changes employee records.

4. Cash theft

There are a number of ways cash can go missing from a business, from skimming (where a cash payment is pocketed by an employee before it goes on the books), to larceny (where an employee takes cash that has been receipted into the business) and everything in between.

Business owners should implement a streamlined cash monitoring process to ensure they know what is coming in and out of the business, or potentially consider no longer accepting cash payments.

5. Stock theft

Shoplifting is the scourge of retail businesses – accounting for up to 40 per cent of reported shop losses each year. Retailers are hit by both impulsive shoplifters, who are generally teenagers, and older, professional thieves who either work alone or in small groups and often steal items to obtain a false refund from the store.
Stock theft also occurs internally, when employees take something home for personal use or to re-sell it themselves. This theft often occurs under the pretence of borrowing an item or taking it home with them to work on a project after hours.
For retail businesses we recommend incorporating merchandising security on higher cost items, using modern inventory management and POS software, and ensuring employees are aware that they will be prosecuted if found stealing from their workplace. Non-retail businesses can also be victims of employee theft. Stringent background checks, the installation of security cameras and random stock audits are all ways to minimise this type of fraud.

Fraud is an incredibly common occurrence in Australia and can have a significant impact on the financial health of a business, with the most serious cases ending in outright business failure. The key to avoiding this outcome is to be vigilant against the warning signs of fraud and take action when something doesn’t seem to add up.

If you feel your business may be vulnerable to fraud, HQB can help you to audit your processes and recommend changes to minimise your risk. You work hard for your profits. Protect them!

Posted 06.08.2019

The information contained in this blog has been provided as general advice only. The contents have been prepared without taking account of your objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned in this blog, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.

Paul Chakos Limited Authorised Representative 1240159 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002.