Charles Brecque

Charles Brecque


January 17, 2024

5 Fraud Risks for Small Businesses and How To Avoid Them

This article will look at some of the most common fraud risks that small business owners face and provide tips on avoiding them.

5 Fraud Risks for Small Businesses and How To Avoid Them

Small businesses are often attractive targets for fraudsters because they may be less likely to have implemented the necessary security measures to protect themselves against financial crime. This article will look at some of the most common fraud risks that small business owners face and provide tips on avoiding them. We will also outline the various fraud prevention measures that small businesses can take to protect themselves from becoming victims of financial crime. So if you are a small business owner, read on for advice on keeping your business safe from fraudsters. 

Most Common Fraud Risks

1. Workers’ Compensation Fraud

Workman's compensation insurance is a system in the United States that provides benefits to employees injured in their employment. State governments usually administer the program as part of social welfare programs.

Workman's compensation fraud occurs when an employee deliberately files a false or exaggerated claim for a workplace injury. In some cases, employees will make fabricated claims for a nonexistent injury. In other cases, people will get hurt on personal time during off-hours but then report they got injured at work to collect on their workman's comp policy. In still other instances, an old injury will resurface, and employees will state they were hurt on the job. 

As a result of these fraudulent claims, honest businesses and workers are forced to pay higher premiums, and the overall cost of the workers' compensation system goes up. Worker's compensation fraud is a serious problem that undermines the social safety net and drives up prices for everyone.

If you suspect that an employee has filed a fraudulent healthcare claim, it is important to hire a healthcare fraud lawyer. These lawyers are experts in investigating potential fraud cases and can help you determine the truth. They will research documentation and conduct interviews to get to the bottom of the situation. Without the help of a lawyer, it would be complicated for you to prove that an employee’s claim is fraudulent. Therefore, it is always best to seek out expert legal counsel if you suspect fraud.

2. Tampering checks

Check-tampering can happen in a number of ways, with one way being an employee writing checks to fake payees and working together, so they get the money. Another example would involve changing legitimate check recipients' names or addresses on file just so that you receive your pay check more often than expected.

Ensure that the vendors you use have been verified and compare their invoice templates with authorised purchase orders before paying them, even if it means waiting longer than necessary for delivery or installation of your product or service. In addition, reconcile your bank statements monthly and investigate any discrepancies immediately. Taking these precautions can help ensure that your business is not a victim of check tampering fraud.

3. Revenue skimming

Revenue skimming is a type of fraud that commonly occurs when customers give cash to a business. Skimming is a form of revenue that occurs when customers pay cash for items or services. The employee just has to make sure they don't receive receipts, so there's no paper trail, and it goes unnoticed by management. The employee collects the money from the customer and pockets it; since there is no paper trail, there is no record of the sold item or service.

To fend against revenue skimming, businesses that accept cash sales should rotate duties among employees. By taking these precautions, companies can help to ensure that all revenue is correctly accounted for and that employees are less likely to engage in fraudulent activity.

4. Fraudulent invoicing

Be on guard for false invoicing schemes. Companies will send you a professionally constructed invoice, knowing that they didn't buy the product or service listed in their description. The con artists make off with a percentage of money spent by businesses who fall victim to this scheme - so watch your back- and check every single thing people say against what documents are available.

Be sure to check each invoice received carefully and match up invoices to products or services purchased to avoid falling victim to this type of economic crime. If you're not sure how to create a proper invoice, consider learning more about it by checking out resources such as this guide on how to create an invoice. Remember, taking these simple precautions can help protect your business from being scammed.

5. Payroll fraud

Payroll fraud is a severe issue in the workforce, with an estimated 9% occurring in businesses around the world. It can take many different forms, such as when an employee claims they worked more hours than was actually true and gets paid for those minutes that weren't present. If salaried employees also have access to company payroll systems, they may sometimes utilise this information maliciously by changing their own or others' wages without permission from management.

Another type of payroll fraud can occur when a commissioned employee reports false sales or orders. This type of fraud can be challenging to detect, but economic crime investigation experts suggest having supervisors or managers review timesheets regularly.

As it can be difficult for small companies without adequate anti-fraud measures to control this kind of crime though there are some things they could do that would significantly decrease their chances, economic crime investigation experts suggest having supervisors or managers review timesheets regularly. 

Small Business Fraud Prevention Measures

Small businesses can take several steps to protect themselves from financial crime, like implementing strong security measures and anti fraud controls, training employees and the accounts payable department to spot and report fraudulent activity and common scams, and working with a lawyer to create an anti-fraud policy.

If you are concerned that your business may be at risk for fraud, please contact an experienced attorney for more information and advice.

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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.

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