According to the FBI, business fraud consists of dishonest and illegal activities perpetrated by individuals or companies in order to provide an advantageous financial outcome to those persons or establishments.1 Also known as corporate fraud, these schemes often appear under the guise of legitimate business practices.
While fraud can harm any type of business, it can be especially devastating for small businesses. Often having family-type environments and less checks and balances, small businesses are more vulnerable to fraud and identity theft. The Association of Certified Fraud Examiners (ACFE) found that 30 percent of fraud cases occurred in small businesses — those with fewer than 100 employees — in its 2016 Global Fraud Study.2 Plus, sixty percent of small businesses didn’t recover any of their losses, averaging $150,000, from fraud risks such as corruption, billing schemes and check tampering.
Identity theft and fraud is also on the rise. The Department of Justice classifies this as all types of crime in which someone wrongfully obtains and uses another person’s personal data in some way that involves fraud or deception, typically for economic gain. In 2017, there were 16.7 million victims of identity fraud, a record high that followed a previous record the year before, reports Javelin Study & Research.3
In general, small businesses have less anti-fraud controls in place than larger organizations. Only 56 percent of small businesses conduct an external audit of financial statements, and 24 percent have anti-fraud policies in place, according to the ACFE. Knowing what types of fraud to look out for, putting anti-fraud policies in place and reporting fraud to the authorities can help protect small businesses from financial disaster.
Embezzlement – The most frequent form of fraud in small businesses, embezzlement is the illegal use of funds by the person in charge of those funds. This could be a bookkeeper using company money for her own personal needs.
Internal Theft – Employees stealing from the company (can include office supplies or products).
Payoffs and Kickbacks – In a form of bribery, employees accept cash for services, resulting in extra money in the employee’s pocket. A payoff is made before the sale and a kickback after the sale.
Skimming – Not recording all revenue on the books. One of the smallest forms of fraud and hardest to detect.
How Small Businesses Detect Fraud:
Account Reconciliation – Balancing and reviewing accounts on a regular basis can help ensure that money going in matches money going out.
Internal and External Audit – Management should be responsible for putting in place internal controls to detect and investigate fraud. Conducting quarterly and even surprise audits to review accounts and processes is one of the best ways to check for fraud.
Management Review – Management should review monthly financial statements for accuracy and not rely on one employee to handle this function.
Tip – Businesses can encourage employees to speak up if they suspect fraud and report it through an anonymous process. The ACFE says this is the most common way that occupational fraud schemes are detected.
How to Report Business Fraud:
Notify the Police – Go to your local police department to report the fraud or theft and file paperwork.
Report Identity Theft to the FTC – Go to IdentityTheft.gov or call 1-877-438-4338. The FTC will create an Identity Theft Report and a personal recovery plan.
Contact the FBI – For general fraud and other criminal matters, call the FBI 202-324-3000 or visit www.fbi.gov or tips.fbi.gov.
MidSouth Bank offers the EZShield Business Protection Program with an all-encompassing “secure, monitor, restore” approach to protecting you and your business’s sensitive information and finances. Secure online storage, password manager, daily internet monitoring, fraud alerts and discounted identity protection services for employees make up the benefits of this award-winning protection service. Customers can ALWAYS report any suspicious communication or transactions to MidSouth Bank by calling 1-800-213-BANK. Visit MidSouth Bank or EZShield for more information.
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