How to mitigate business fraud risk: Common types of fraud to look out for and preventative measures

Wednesday, June 21, 2023

8 Minutes reading time

Whistlehub content team

Protect your company reputation and finances with effective anti-fraud measures! Check out our guide on detecting and preventing common forms of fraud.


In today's highly competitive business landscape, small businesses face numerous challenges - one of which is the ever-present risk of fraud. Fraud not only harms a company's reputation but can also lead to significant financial losses.

As a savvy business owner, it's crucial to be aware of common types of fraud and take preventative measures to mitigate these risks effectively. This blog post will discuss various forms of fraud that small businesses need to watch out for and explore effective strategies for preventing them from impacting your bottom line.

Key Takeaways

  • Fraud risk management is essential for small businesses to identify and assess potential fraud risks that could harm their assets, financial statements, or regulatory compliance.
  • Common types of business fraud to look out for include workman's compensation fraud, check tampering, revenue skimming, fraudulent invoicing, payroll fraud, and vendor billing fraud.
  • Preventative measures such as implementing strong internal controls like segregating duties and limiting access to financial systems and conducting regular financial audits can help deter fraudulent activities. Employee training programs can also educate staff on how to spot potential fraud schemes.

Understanding Business Fraud Risk

Fraud risk management is the process of identifying and assessing potential fraud risks that could harm a business's assets, financial statements, or regulatory compliance.

What Is Fraud Risk Management?

Fraud risk management refers to the process of identifying, evaluating, and addressing an organization's potential exposure to fraudulent activities. This comprehensive approach aims to protect a business from both internal and external threats that can lead to financial, reputational, or material loss.

For example, consider a small business owner who implements robust internal controls over financial transactions. They may introduce measures such as segregation of duties among employees in charge of handling money or requiring multiple approvals before significant expenditures are approved.

Another aspect could involve leveraging cutting-edge technology such as AI-powered fraud detection and data analysis tools provided by companies like Inscribe.

The Importance Of Fraud Risk Assessment

The importance of fraud risk assessment cannot be overstated, as it serves as the foundation for creating an effective fraud risk management program. By conducting a thorough fraud risk assessment, businesses can identify their unique vulnerabilities and potential threats to their financial stability and reputation.

A comprehensive fraud risk assessment involves analyzing various aspects of the organization's operations such as internal controls, financial statements, regulatory compliance processes, and company assets.

This allows business owners to gain valuable insights into where they might be susceptible to both internal and external fraudulent activities. With this knowledge in hand, organizations can then prioritize areas requiring immediate attention and effectively allocate resources towards implementing robust preventative measures against each type of identified fraud.

For example, if a business uncovers instances of payroll fraud during its risk assessment process, measures like strengthening timesheet monitoring procedures or investing in automated payroll systems can help prevent further occurrences.

Common Types Of Fraud To Look Out For

Workman's compensation fraud, check tampering, revenue skimming, fraudulent invoicing, payroll fraud, and vendor billing fraud are some of the common types of business fraud to watch out for.

Workman's Compensation Fraud

Workman's compensation fraud is a prevalent issue that can have devastating financial consequences for businesses. This type of fraudulent activity occurs when employees deceitfully claim workplace injuries, exaggerating or even fabricating the extent of their harm to receive undeserved compensation.

For instance, an employee might feign severe back pain from lifting heavy items at work, only to be seen playing sports without any discomfort during their time off.

These fraudulent claims not only cost companies money through increased insurance premiums but also hamper productivity due to unnecessary absences. To combat workman's compensation fraud effectively, employers must foster a culture of honesty and accountability within their organizations while implementing thorough investigative processes for all injury reports.

Check Tampering

Check tampering is one of the most common forms of fraud and involves altering or forging checks. Fraudsters may alter amounts, payees, or even create fake checks to collect funds illegally.

To prevent check tampering, small businesses should have more than one person review company finances and require the business owner to personally sign each check. Additionally, using secure check stock with built-in security features can make it harder for fraudsters to alter checks.

It's also important for owners and managers to regularly review bank statements and canceled checks for any signs of fraudulent activity before it spirals out of control.

Revenue Skimming

Revenue skimming is a type of fraud where employees collect cash payments from customers without providing receipts, allowing them to pocket the money without any record.

This fraudulent scheme is particularly common in small businesses that lack anti-fraud controls. To prevent revenue skimming, small businesses must segregate and rotate duties among employees.

Regular financial audits and reviews can also help detect this type of fraud.

For example, a small retail store owner noticed a significant discrepancy between actual sales figures and the amount of cash in the register after closing each day. Upon investigating further, he discovered that one employee had been collecting cash payments from customers but not recording them properly or depositing them into the company's account.

Fraudulent Invoicing

Fraudulent invoicing is a type of business fraud that occurs when an individual or organization receives invoices for products or services they never purchased. This type of fraud can be perpetrated by individuals within the company or through external entities posing as legitimate vendors.

Small businesses are particularly vulnerable to fraudulent invoicing due to their limited resources and lack of anti-fraud controls.

It's also important for small businesses to review all financial paperwork carefully before making payments. By maintaining accurate records and reconciling accounts regularly, it becomes easier to identify any discrepancies early on.

Additionally, ensuring that there are multiple levels of approval required for payment processing can help reduce the risk of fraudulent invoice payments being processed without scrutiny.

Payroll Fraud

Payroll fraud is a common type of fraud that affects businesses of all sizes. This occurs when employees overstate hours worked, change salaries, or report false sales or orders to increase their pay illegally.

Payroll fraud accounts for about 9% of occupational fraud worldwide. Small businesses are at higher risk due to the lack of anti-fraud controls in place.

Small businesses can prevent payroll fraud by hiring trustworthy employees and reviewing financial paperwork regularly. Performing background and reference checks on potential employees is recommended before they join the company's payroll system.

Additionally, having more than one level of management review business and financial paperwork can help detect errors or signs of possible fraudulent activity early on.

Vendor Billing Fraud

Vendor billing fraud is a common type of fraud where employees create shell companies and pay them with business checks. To prevent this, small businesses should vet all vendors before issuing checks and ensure that they are legitimate entities.

Warning signs of vendor billing fraud include checks written out to cash or businesses with the same address as an employee's home. Small businesses often underestimate the risks of fraud and lack the resources to manage and prevent it, making them easy targets for economic crime perpetrators.

Therefore, it's important for business owners to review invoices thoroughly, perform background checks on potential employees to ensure their trustworthiness, and have more than one level of management review financial paperwork.

Preventative Measures To Mitigate Business Fraud Risk

Implement strong internal controls, such as segregating duties and limiting access to financial systems, to prevent fraud from occurring in the first place. Regular financial audits and reviews can also catch fraudulent activities early on, while employee training and awareness programs can educate your staff on how to spot potential fraud schemes.

Implementing Strong Internal Controls

Implementing strong internal controls is crucial to mitigating business fraud risk. Here are some essential steps to consider:

  1. Assign specific job responsibilities to employees and establish clear lines of authority.
  2. Conduct background checks on all potential employees before hiring them.
  3. Establish a code of ethics that outlines expected behaviors and consequences for non - compliance.
  4. Create policies and procedures that outline how financial transactions should be processed, including employee expense reports, purchase orders, and invoices.
  5. Use secure computer networks and programs to protect sensitive data from cyber attacks.
  6. Limit access to financial records, bank accounts, and company credit cards to only those who need it.
  7. Use two - factor authentication for important financial transactions or changes made in the company's system.
  8. Have regular meetings with managers and staff members to discuss processes, procedures, and the importance of ethical behavior in the workplace.

By implementing these strong internal controls, businesses can reduce their fraud risks while also promoting ethical behavior within their organizations.

Regular Financial Audits And Reviews

Regular financial audits and reviews are crucial in detecting potential fraud within a business. These audits can identify errors, misstatements, inconsistencies, and anomalies in financial statements or operational procedures.

Moreover, financial audits and reviews help ensure regulatory compliance to prevent legal issues that could arise from non-compliance. It is also essential to leverage data analysis tools such as AI and ML to detect patterns of fraud before they become major problems.

In conclusion, implementing regular financial audits and reviews serves as an added layer of protection against fraudulent activity in small businesses.

Employee Training And Awareness Programs

Small business owners can implement employee training and awareness programs to help prevent fraud in their operations. These programs can include:

  1. Providing regular fraud prevention training sessions for employees, including how to identify and report suspicious activity.
  2. Conducting background checks and reference checks on new hires to ensure that they have a clean background.
  3. Regularly reviewing financial documents, such as invoices, billing statements, and employee timesheets, with employees to ensure accuracy and identify potential errors or discrepancies.
  4. Encouraging employees to report any suspicious activity immediately and implementing a whistleblower policy that protects those who come forward with information about fraudulent behavior.
  5. Involving the IT team in cybersecurity measures like data analysis tools, identity solutions, reporting, and analysis necessary to mitigate risks for small businesses.

By implementing these preventative measures, small business owners can create a culture of transparency and accountability among their employees while reducing the risk of fraud within their organizations.

Establishing A Whistleblower Policy

One of the most critical components of a comprehensive fraud risk management program is establishing a whistleblower policy. This policy encourages employees to report any suspicious activity or wrongdoing they observe in the workplace without fear of retaliation.

A whistleblower policy should be well-defined, readily accessible to all employees, and frequently communicated through training programs or written communication. Additionally, it must guarantee anonymity and protection from reprisals for whistleblowers who come forward with concerns about possible fraudulent activities.

Leveraging Technology To Detect And Prevent Fraud

One of the most effective ways to detect and prevent fraud is by leveraging technology. With advancements in data analytics, AI, and machine learning, businesses can now use cutting-edge solutions like Inscribe to identify fraudulent activities.

In addition to these features, Inscribe also provides identity verification tools that help businesses authenticate employee credentials before onboarding them. It also has a credit analysis solution that examines vendors' financial stability before initiating payments or approving invoices.

Overall, implementing technologically advanced anti-fraud programs like Inscribe can significantly improve an organization's risk management capabilities. By utilizing analytical tools to monitor suspicious activity, organizations can quickly detect fraud attempts and take corrective action promptly.

Building An Effective Fraud Risk Management Program

To build an effective fraud risk management program, it is essential to assess your business's unique fraud risks and develop policies and procedures to address those identified risks with the full support and commitment of management, while continuously monitoring and updating the program.

Assessing Your Business's Unique Fraud Risks

To effectively mitigate fraud risk, assessing your business's unique fraud risks is the first critical step. This involves identifying potential areas where fraudulent activities can occur and evaluating your company's vulnerabilities to such actions.

For example, if you run a small retail business that accepts credit card payments, you may be vulnerable to payment processing fraud.

Assessing your fraud risks requires careful analysis of financial statements, regulatory compliance requirements, and other factors that influence operational activities within your organization.

Utilizing data analytics tools and implementing identity solutions can help identify patterns or anomalies in employee behavior or transaction activity that might indicate fraudulent activity is taking place.

Developing Policies And Procedures To Address Identified Risks

After identifying the potential fraud risks, it is essential to create policies and procedures that address them effectively. Here are some steps that can help develop strong policies and procedures for mitigating fraud risk:

  1. Define Fraud Risk Management Policy: Establish a clear policy statement that communicates the business's commitment to preventing and managing fraud risk.
  2. Assess Internal Controls: Determine whether your existing internal controls are adequate or need to be modified to mitigate identified risks.
  3. Create Standard Operating Procedures (SOPs): Develop SOPs for various business processes that can help detect, prevent, or respond to fraudulent activities.
  4. Conduct Background Checks: Perform background checks on new employees and third-party vendors who will interact with your business.
  5. Implement Reference Checks: Conduct reference checks on job applicants' work history and verify qualifications provided on their resume or other application materials.
  6. Establish Management Controls: Ensure managerial oversight of critical areas such as billing, invoicing, employee timesheets, financial paperwork, etc., through regular approvals and verifying documents' authenticity before signing off on them.
  7. Train Employees: Develop training programs for employees to educate them about fraud risks specific to their roles in the company and measures they can take to prevent it.
  8. Implement Ongoing Monitoring Processes: Establish ongoing monitoring processes using data analysis tools like Inscribe, which can spot unusual patterns in transactions or abnormal behavior by employees.
  9. Use Automated Systems: Deploy automated systems that perform secure identity verification using AI and ML technologies that reduce dependence on manual checks and speed up transaction processing while minimizing errors.
  10. Regularly Review Policies and Procedures: Review policies and procedures periodically against industry standards or regulatory compliance audit findings; consult an external expert if necessary.

Developing sound fraud risk management policies is integral to protecting your company's assets from fraudulent activity by internal or external actors alike. By following these steps, businesses of all sizes can ensure maximum protection from fraud risk while fostering a culture of trust and transparency that inspires confidence in employees, customers, and investors.

Ensuring Management Support And Commitment

An effective fraud risk management program requires strong support and commitment from upper-level management within a business. Management must prioritize the implementation of anti-fraud measures by providing adequate resources, communicating the importance of fraud prevention to all employees, and leading by example.

For instance, they can ensure that internal controls are in place, conduct regular audits and reviews, and take prompt action when incidents of fraud occur.

Additionally, managers can demonstrate their commitment to preventing fraud by encouraging employees to report suspicious activities without fear of retaliation. Establishing an open-door policy for reporting concerns or suspicions may facilitate early detection and shorten the duration of fraudulent activity before it causes significant damage to company assets or reputation.

Continuously Monitoring And Updating The Program

Creating a solid fraud risk management program is just half the battle. To ensure its effectiveness, it is essential to continuously monitor and update the program as new risks emerge or existing ones evolve.

This means conducting regular audits and reviews of financial statements for any inconsistencies or irregularities.

Another critical aspect of monitoring and updating the program is implementing identity solutions that can verify employee identities during onboarding and regularly check their credentials throughout their employment.

Additionally, HR teams should stay up-to-date with emerging fraud trends by attending seminars, reading industry publications, and networking with other professionals in their field to identify potential weaknesses in the company's anti-fraud measures.

Finally, being proactive about sharing experiences among employees can raise awareness within your organization about common scams like phishing attacks or online payment frauds while spotlighting effective ways they were dealt with.

The Role Of Certified Fraud Examiners In Mitigating Fraud Risk

Certified Fraud Examiners help businesses mitigate fraud risk by assessing unique fraud risks, developing policies and procedures to address these risks, monitoring and updating the program, leveraging technology for detection and prevention, and providing actionable insights for effective fraud risk management.

How Certified Fraud Examiners Can Help Your Business

Certified Fraud Examiners (CFEs) are professionals trained in fraud risk management and economic crime investigation. They can help small businesses mitigate the risks of fraud, which are often underestimated and lack the resources to manage and prevent fraud effectively.

CFEs can conduct enterprise-wide audits, use data analytics tools to identify potential fraudulent activities, develop policies and procedures for preventing future incidents, and provide employee training on how to detect and report suspicious behavior.

In addition, hiring a CFE sends a strong message to employees that your business takes fraud prevention seriously and is committed to upholding ethical business practices.

The Benefits Of Hiring A Certified Fraud Examiner

Hiring a Certified Fraud Examiner can be highly beneficial for small businesses in mitigating fraud risk. Here are some of the benefits of hiring a certified fraud examiner:

  1. Expertise and knowledge: Certified Fraud Examiners possess specialized knowledge in fraud prevention, detection, and investigation techniques. They can provide valuable insights into your business operations and help identify potential risks.
  2. Objective analysis: Certified Fraud Examiners can provide an objective analysis of your financial statements, internal controls, and business processes to detect any irregularities or suspicious activity.
  3. Customized solutions: Based on their assessment, Certified Fraud Examiners can develop customized solutions that are tailored to your specific business needs.
  4. Enhance compliance: Hiring a Certified Fraud Examiner can help ensure regulatory compliance and prevent legal consequences resulting from noncompliance.
  5. Cost-effective: Investing in a Certified Fraud Examiner's services is cost-effective as it can save you money in the long run by detecting and preventing fraudulent activities that could potentially cost your business significant losses.
  6. Peace of mind: By hiring a Certified Fraud Examiner, small business owners can have peace of mind knowing they have taken necessary steps to protect their company's assets and reputation.

Overall, hiring a certified fraud examiner is not only beneficial but essential for small businesses looking to mitigate fraud risks and safeguard their finances against fraudulent activities.


In conclusion, mitigating business fraud risk requires a proactive approach that involves understanding the common types of fraud and implementing preventative measures. Small businesses need to be aware of their vulnerability to economic crime investigation and take steps to safeguard company assets.

To achieve this, it's crucial for business owners to be familiar with regulatory compliance requirements and establish effective internal controls. Hiring Certified Fraud Examiners can also provide added benefits in detecting potential fraud risks and preventing them before they occur.

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