Strategies for Preventing Corporate Fraud

Businesses face enough hurdles. Fraud may be the last concern you want to worry about, but it’s a worry for every business, as it can result in the loss of significant amounts of money. No matter the size, type, location or industry of your company, you need to be prepared for this issue.

What exactly is corporate fraud? What is the fraudulent activity that businesses tend to face? How can fraud be prevented or detected? By learning how to detect fraud, you can reduce your company’s risk of fraud. Every business should have a plan to detect and prevent fraud, as preventing fraud is significantly easier than recouping losses due to fraud.

11 Types of Corporate Fraud

You can find corporate fraud in many forms, each with different challenges and impacts. Unfortunately, fraud in business is more common than we’d like to think. Businesses may face several types of corporate fraud, such as:

1. Identity Theft

One type of corporate fraud that can cost your company thousands of dollars is identity theft. Identity theft doesn’t just happen to individuals — your company’s identity can also be stolen and used to access your credit. A person may gain access to financial statements, federal tax identification numbers, bank statements or information from your computer.

Because this common type of corporate fraud can cost your company thousands of dollars, you should take steps to prevent identity theft. How can you help prevent corporate identity theft? One step you can take is keeping your sensitive information and statements secure by keeping physical copies locked inside filing cabinets that can be accessed only by you. For digital copies, use different and strong passwords and usernames and avoid phishing scams.

You should also be wary of employees losing paychecks. Since paychecks include bank account and routing numbers, they are very sensitive and can fall into the wrong hands if lost. A lost paycheck can allow fraudsters to gain access to your bank account and withdraw money.

You can limit this risk by separating your company’s payroll account from your other business money. By doing this, you’ll ensure that even if a fraudster does gain access to your separated payroll account, they will have access only to limited funds. In this account, you should deposit only enough money for your employees’ paychecks.

Another alternative is replacing paychecks for your employees with direct deposit. Rather than write a check that your employee then has to take to a bank, you can put their wages directly into their accounts.

2. Payment Fraud

One of the causes of company fraud is payment fraud. What is payment fraud? This type of fraud refers to diverting payments or falsely creating payments. Someone in a company may create fake bank accounts or records to enable fraudulent payments. Payment fraud also includes altering and intercepting details of the payee, generating false payments or altering amounts of checks.

3. Payroll Fraud

Another type of corporate fraud that you may face is payroll fraud. How can payroll fraud occur at your company?

One way payroll fraud can occur is by employees asking for pay advances that they don’t pay back later. Employees may also lie on their timesheets about the number of hours they worked or have other employees clock in for them before they’ve arrived at work.

To combat payroll fraud, you should perform background checks on every employee before hiring them and audit payroll accounts to catch fraudulent behavior as early as possible. Use a payroll service to make approving payroll and tracking pay rates and hours easier. Start keeping track of these things early rather than waiting until your company has already sent out large sums of money.

4. Information Fraud

What fraudulent behavior falls under information fraud? Employees may commit activities that can be considered information fraud, such as taking sick leave to work somewhere else, misusing company time, abusing flexible work systems, providing false references or giving false qualifications to obtain employment.

5. Receipt Fraud

What is receipt fraud? This type of fraud refers to giving information to outsiders for your own personal gain or using the assets of a business for purposes other than business reasons. Receipt fraud does not refer to blatant theft from a company by an insider, such as stealing physical assets.

6. Workers’ Compensation Fraud

Businesses with employees, particularly mid-size and large companies with many employees, may be at risk for workers’ compensation fraud. In most states, employers are required to carry workers’ compensation to pay workers who become ill or injured on the job.

Unfortunately, some employees may attempt to commit workers’ compensation fraud by faking an injury or falsely claiming they were injured at work, even though they were injured outside of work.

To prevent workers’ compensation fraud, keep accurate records, document everything, and look for signs of a faked injury.

7. Travel and Subsistence Fraud

Travel and subsistence fraud refers to fraudulent claims for payment or false payroll records. For example, an employee may claim payment for a journey that wasn’t made. Someone may overstate claims, forge signatures, falsify an amendment to their timesheet, intentionally fail to repay a salary overpayment or add non-existent staff to the payroll.

8. Procurement Fraud

Procurement refers to third parties acquiring services, goods and construction projects that are vital to a company. In procurement fraud, collusion is involved to gain an advantage, cause a loss, avoid an obligation or rig bids. Typically, procurement fraud occurs with services and goods that are inferior to what was expected or are not delivered.

9. Money Fraud

Money fraud occurs when money is faked. In the U.S., a lot of illegal cash is in circulation. This type of corporate fraud can happen without you or your customer noticing, but this counterfeit money will be worthless when you attempt to deposit it at the bank.

Most counterfeit bills are higher value bills, and if you accept this fake money from a customer, you won’t receive revenue from your service or sale, or you may risk exchanging real currency for counterfeit money when you give someone change.

To combat money fraud, you should educate yourself on how to detect fake money. Examine different features included on legal money, such as watermarks, microprinting, raised printing or color-shifting ink. You should also train your employees on how to check cash before they accept it.

10. False Accounting Fraud

What is false accounting fraud? False accounting fraud refers to the alteration of the presentation of company accounts so the accounts don’t reflect the true financial activities or value of the business. Typically, when this type of fraud occurs, assets are overstated or liabilities are misrepresented.

Why does false accounting fraud occur? Usually, false accounting is performed to inflate share prices, report unrealistic profits or obtain financing.

11. Return Fraud

Your business may also face the risk of return fraud. Return fraud can come in different forms, such as customers purchasing a product, using it and returning it even when there’s nothing wrong with it. Your company might also deal with people who steal a product from you and try to return it for a profit.

Return fraud can damage your business by decreasing your profits. Though you may not be able to eliminate return fraud completely, you can limit return fraud by implementing effective policies. One solution you can incorporate is the requirement of receipts.

Another solution is tightening policies so customers can receive store credit only within a specific timeframe. While you want your customers to be satisfied, you don’t want to risk losing money to return fraud.

Effective Ways to Detect Fraudulent Activity

Are you wondering how to detect fraud in a company? Knowing how to detect fraud early is crucial for preventing losses. Consider implementing the following fraud detection methods at your organization:

How to Detect Corporate Fraud With Tip Lines

Among the most effective ways of detecting fraudulent activity is setting up an anonymous tip line. Tips are the most common method for initially detecting fraud. Losses due to fraud are also lower in companies that have hotlines for tips than in companies without them.

Where should tips be submitted? A tip submitted to a hotline or website should go directly to one of the following:

Internal auditor
Legal department
Inspector general
Outside legal counsel

If one of these parties receives a tip, they can investigate independently.

To implement a tip line for your organization, you should include a disclosure policy. Aim to include the following in your disclosure policy:

A list of the types of tips that will be accepted.

The protections to which the tipster is entitled, such as confidentiality and anonymity.

A list of the accused party’s rights.

Incorporate and promote tip lines in your employee training to make your organization’s tip line effective. One possibility for promoting your company’s tip line is providing relevant information about the tip line on your employees’ pay stubs.

How to Detect Fraud in a Company With Inspector Generals and Internal Auditors

The difference between internal auditors and external auditors is that the internal auditors of an organization are concerned with all fraud, not just fraud impacting financial statements. An internal auditor can help detect different kinds of fraud during their routine auditing work. Internal auditors are second only to tip lines for initial fraud detection.

An internal auditor can help flag and investigate suspicious activity, as well as provide additional protection beyond fraud by looking for violations of the policies of the company.

Internal auditors often work with inspector generals to manage fraud risks. An inspector general will monitor, detect and investigate potential incidents of fraud.

How to Detect Fraud in Business With External Auditors

External auditors usually look for financial statement fraud and verify the statements are free of misstatement caused by either error or fraud. Particularly in cases with significant losses, external auditors may detect fraud in your company.

Financial statement fraud tends to be the most costly, and asset misappropriation is generally the most common scheme. Auditors look for fraud in their work and are aware of the fraud triangle that can help determine the reason for fraud. The following are the three factors of the fraud triangle:

Rationalization
Opportunity
Pressure

Generally, rationalization is the most common excuse for fraud. Someone who commits fraud against your company will likely try to rationalize their actions by saying they’re borrowing from the company temporarily or convincing themselves that the company deserves to lose money or won’t miss the money.

Opportunity refers to an employee violating trust. You can balance the trust you must place in employees by establishing an effective system for detecting fraud. Pressure tends to occur when someone is facing a non-sharable personal problem or pressure from the company to perform or provide good results.

How to Detect Corporate Fraud With Dedicated Departments or Employees

Your company may also decide to dedicate a department to fraud detection and the security of your information. These departments may function independently or under the supervision of an internal auditor or chief information officer.

Sometimes fraud may be discovered by an organization by accident, by a notification from another party or by confession. You may find that someone who has committed fraud has failed to cover their tracks. Because of this, a company may choose to train employees to identify irregularities and report them.

Though an organization should not rely on employees as their sole method of fraud detection, they may spot incidents of fraud that other methods haven’t detected.

How Can a Business Protect Itself Against Fraud?

Considering the large-scale impacts fraud can have on an organization, it’s no surprise that businesses are seeking solutions to prevent corporate fraud or control fraud.

1. Know Your Organization’s Employees

One of the methods for corporate fraud prevention is knowing the employees at your organization. You may be able to notice behavioral cues from an employee that indicate they intend to commit fraud.

Managers should be familiar with their employees so they can be alert when they notice a change in attitude from a worker. How an employee feels at work, such as resentment toward a boss or business owner, could affect whether they are motivated to commit fraud.

2. Establish Internal Controls

To protect your organization, you should also establish internal control of fraud. You should implement programs or plans to protect your organization’s assets, detect fraud and deter theft. For accounting fraud prevention, you should establish a plan that ensures the integrity of your company’s accounting records.

3. Hire Experts

Are you wondering how to prevent management fraud? Try hiring trusted experts. Anyone who plays an important role in your company likely has access to sensitive information, so make sure you are hiring experts you can trust.

Request a Consultation From TX2 Security Group

At TX2 Security Group, we can provide your organization with the security services it needs. We aim to provide our clients with professional services at the most competitive prices. Contact us at TX2 Security Group today to make a consultation request or call us at 512-256-4952.