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What Are the Most Common Business Financial Fraud Schemes?
You’ve worked hard to build your business. The long hours, sleepless nights, and countless sacrifices were all for one goal: to create something successful and sustainable. But what happens when a trusted employee or an external scam threatens all that hard work? Financial fraud isn’t just something that happens to large corporations. Small and medium-sized businesses (SMBs) are prime targets, often because of weaker controls and stretched resources.
Let’s dive into the most common financial fraud schemes targeting businesses, how you can protect your company, and why having tight financial controls in place is essential.
The Most Common Financial Fraud Schemes
1. Payroll Fraud
What It Is: Employees manipulate timesheets, inflate hours, or create "ghost employees" to collect extra paychecks.
Real-Life Example: Linda Johnson, the general manager of a Wendy’s in Pennsylvania, was caught creating a fake employee, "William Bright," who supposedly worked 128 shifts over 22 pay periods. Johnson would clock in and out for the phantom employee, allowing him to earn wages that never went to an actual worker. A forensic audit uncovered that "William Bright" had a total gross pay of $19,898.15, which Johnson transferred directly to her CashApp account.
2. Expense Reimbursement Fraud
What It Is: Employees submit falsified or inflated expense reports, claiming reimbursements for personal expenses.
Red Flags: Duplicate receipts, vague descriptions, or excessive out-of-town dining expenses.
3. Vendor Fraud
What It Is: Fake vendors are set up to receive payments, or existing vendors collude with employees to overcharge.
Case in Point: Fake vendor scheme steals $1.5 million from California company by creating fictitious accounts.
4. Phishing and Business Email Compromise (BEC)
What It Is: Fraudsters impersonate executives or vendors via email to trick employees into wiring funds to fraudulent accounts.
Impact: BEC scams caused $2.4 billion in losses in 2021, with SMBs being primary targets.
5. Asset Misappropriation
What It Is: Employees steal inventory, equipment, or company funds for personal gain.
Example: An Amazon employee exploited her trusted position at Amazon to steal nearly $10 million through an audacious fraud scheme. By creating fake vendors and submitting fictitious invoices, she siphoned off the company’s funds for personal gain.
How SMBs Can Protect Themselves
Fraud prevention isn’t just about catching bad actors—it’s about creating systems and controls that make fraud nearly impossible. Here’s how you can safeguard your business:
Separate Duties
Ensure that no single employee has control over an entire financial process. For example, one person should handle vendor approvals while another processes payments.Use Technology
Invest in accounting software with built-in fraud detection and approval workflows. Regularly update your cybersecurity measures to guard against phishing and ransomware attacks.Monitor Financial Activity
Regularly review bank statements, reconcile accounts, and conduct surprise audits. Spotting unusual activity early can stop fraud before it spirals.Train Your Team
Educate employees about recognizing phishing scams and the importance of safeguarding sensitive data. A well-informed team is your first line of defense.Vet Vendors and Employees
Conduct background checks on new hires and due diligence on vendors. It’s better to be overly cautious than to place blind trust.Maintain Tight Financial Controls
Establish a robust approval process for expenses, payroll, and vendor payments. Require dual authorizations for high-value transactions.
Why Financial Controls Are Non-Negotiable
Even the most well-intentioned businesses are vulnerable without strong financial controls. Fraud doesn’t just hurt your bottom line; it damages employee morale, ruins trust, and, in severe cases, leads to legal consequences or bankruptcy.
Having the right checks and balances ensures that your business is resilient against internal and external threats.
Partnering to Prevent Fraud
Protecting your business from fraud is a team effort. At our firm, we specialize in helping SMBs implement strong financial controls and monitor for red flags. Whether you need an audit of your current processes or advice on new systems, we’re here to help you safeguard what you’ve built.
Don’t wait until it’s too late—contact us today to protect your business and your peace of mind.
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Get to Know Prestige Accounting Services Group (previously Prestige Wealth Accounting Group)
Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.
Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.
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