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What Is Fraud? How It Can Hurt Your Business

elderly-man-fraud-business

Fraud is one of the most concerning risks businesses face. A recent study by the Association of Certified Fraud Examiners (ACFE) found that fraud costs businesses an estimated $4.5 trillion each year. The same report revealed that the average loss per case of fraud was $1.5 million. No matter how successful your company is, the financial and reputational impact of fraud can be difficult to overcome.

While fraud is a commonplace feature, that doesn’t mean your company is powerless against it. When you take the time to gain clarity on the types of fraud in business and how they function, you can implement relevant safeguards to protect both your company and its stakeholders.

Definition of Occupational Fraud

Occupational fraud is the general description of fraudulent behavior committed by employees of a business. This doesn’t just mean misappropriation or theft by entry-level workers. Such unethical behavior can be performed by representatives of any level. This includes executives, managers, visiting consultants, and volunteers. 

Employee fraud doesn’t occur via a single method, either. There are multiple ways company representatives can take advantage of vulnerabilities, which is why fraud can be so damaging. Your first step to safeguarding against occupational fraud is to understand these vulnerabilities a little better.

Types of Fraud in Business

There are multiple types of fraud that you should be aware of:

Invoice Fraud

Invoice fraud occurs when a company is issued a fake invoice from a party claiming to be a supplier. This can be difficult to spot, particularly in large corporations that work with a lot of vendors. In many cases, a forensic accountant needs to analyze company finances to identify the deception.

Employees who are aware of lax invoicing vigilance or in a position of autonomous seniority can take advantage of this method. Business email compromise (BEC) is a particularly common approach to invoice fraud. This is where fraudsters spoof supplier email addresses and issue invoices to the business for wire transfer payment. A recent Federal Bureau of Investigation (FBI) report found that U.S. businesses have lost more than $2 billion to BEC.

Payroll Fraud

In payroll fraud, employees or employers steal money from the company payroll system. This can occur in a variety of ways. 

A manager or executive may create a “ghost employee” and send a salary to an account for a worker that doesn’t exist. Employees could also falsify their timesheets to get more payment than they’re entitled to. A human resources (HR) manager could also collaborate with an employee to pay them a higher wage rate than they’re entitled to and share the difference. The average cost per case of payroll fraud is around $70,000.

Asset Misappropriation Fraud

Asset misappropriation is a form of occupational fraud involving workers stealing company goods or funds. Any executive, vendor, or employee with access to company assets could be in a position to misappropriate assets. This could include embezzling company finances or theft of products and equipment. One report found that asset misappropriation costs U.S. businesses $50 billion a year.

Data Theft

Data is one of the most valuable assets a company possesses. Unfortunately, it’s also increasingly a common target for occupational fraud. Workers with access to customer financial information can sell these details or use them personally for further fraud. 

This can also take the form of intellectual property (IP) theft. Employees could sell vital company operational data to competitors in a form of industrial espionage. Between 2019 and 2020, the average cost of data theft to businesses was $3.86 million.

Return Fraud

Return fraud involves company goods being illegitimately returned to receive a refund. Employees could steal products and provide a partner with a duplicate receipt to return the item in exchange for cash. In a process called “price switching,” a worker can replace the price label of a low-cost item with that of a higher-priced item. This allows a partner to return the goods and get a refund at a higher price than purchased. In 2019, return fraud cost North American businesses around $33.9 billion

Fraud Prevention Measures for a Company

The range of occupational fraud your company is exposed to can be a worrying prospect. However, by understanding the risks, you can better choose and implement the right solutions to mitigate them.

Conduct Employee Background Checks

It’s vital to perform appropriate background checks on potential employees. This should include identity verification and criminal record checks. Depending on the access to assets the role requires, you may also need to perform credit reviews. Poor credit scores alone are of limited use, as only 26% of those who committed occupational fraud experienced financial difficulties. 

A qualified HR professional is a vital tool here. Company leaders with a master’s in business administration (MBA) degree in HR Management, or a similar degree, will have the necessary knowledge to strategically implement these checks. Just as important, they can design hiring and review practices that include the most appropriate background assessments for different roles and circumstances. 

Receive a Regular Financial Reporting Package

When it comes to occupational fraud, inconsistencies in your accounts can highlight areas for further potential investigation. However, waiting for the yearly report can mean the damage is done long before you notice it. As such, it’s important to receive a regular financial reporting package outlining real-time profit and loss. 

You may not know to assess these reports for signs of fraud. A member of staff with an MBA in business analytics has the skills to capture, assess, and interpret this type of company information. They can utilize your regular financial reports alongside other data on business activities to identify areas of potential fraud concern for timely investigation. They can also highlight points of vulnerability that need to be addressed.

Limit Access to Company Funds

You naturally want to make your employees feel trusted. However, it’s important to make sure workers don’t interact with finances unless their role strictly requires it. Even in positions involving finances, you must implement strict thresholds to access. These must be both proportional to the position and require sign-off from senior staff.

Your success here can depend on your level of business expertise. If you’re operating a small business, gaining a general MBA can help you develop entrepreneurial skills geared toward solid leadership. This can help you to more effectively assess the structure of your business and establish appropriate limitations and thresholds for asset access. 

Mutual accountability is one of the most powerful tools to tackle occupational fraud. A business is particularly vulnerable when executives, managers, and employees are left to operate with autonomy. As such, it’s important to implement segregation of duties, particularly where finance and asset handling are concerned. Make sure protocols are constructed so any significant financial activity requires sign-off from managers or colleagues. Maintain full transparency among departments so there is no room to conceal fraudulent behavior.

Leaders that have an MBA in project management have the expertise to strategically build teams in this way. They understand how to encourage effective interactions between employees that both boost productivity and minimize risks. While segregation doesn’t necessarily address the potential for employees to collaborate in fraud, it can make inconsistencies more visible to teams.  

You are never going to completely eliminate the risk of fraud in your business. Luckily, with a robust selection of preventative measures, you can reduce the potential negative impact on your company and its stakeholders.

Contact Information


Toby Burris
Montclair State University
Student Recruitment Manager

973-655-6015
onlinemba@mail.montclair.edu

Do you have questions about the online MBA? You may find it helpful to watch a webinar hosted by Student Recruitment Manager, Toby Burris.

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