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Financial fraud is a serious issue for business owners, who often lack the resources to protect their finances and investments. Business financial fraud can take many forms, from simple scams and burglaries to sophisticated cybersecurity thefts.
Being aware of the potential for fraud and taking proactive steps to protect yourself can help ensure that your business remains safe from criminals looking to make a quick profit at your company’s expense.
In this guide, we will explore some of the most common forms of financial fraud and provide tips on minimizing the risk of becoming a victim.
Common Types of Financial Fraud in Business
Business financial fraud can be employee embezzlement, Ponzi schemes, or identity theft. Business owners must be aware of these common scams and should take steps to guard against them.
Employee Embezzlement
This type of fraud involves an employee stealing money from their employer, either through skimming money from receipts and books or by creating fictitious invoices that are then paid out. It is important to ensure proper internal control systems such as employee background checks and regular audits are in place to prevent this type of fraud.
Ponzi Scheme
A Ponzi scheme is a fraudulent business practice in which funds from new investors are used to pay returns to existing investors instead of profits from underlying business operations.
As a business owner, it is important to verify the legitimacy of investment opportunities and ensure that any firms you hire for investments are properly registered with the government securities regulator.
Identity Theft
This type of business financial fraud involves stealing sensitive personal information such as Social Security numbers, credit card numbers, and bank accounts to open new accounts under false pretenses or use existing accounts without authorization.
Business owners should secure their company’s network structure so that identity theft cannot occur. It is also important for employees not to keep any sensitive information live on workstations or in filing cabinets accessible by unauthorized personnel.
Warning Signs of Business Financial Fraud
Financial fraud crimes are increasing, making it important for business owners to know the warning signs of this type of criminal activity.
Recognizing suspicious behaviours and being able to spot any red flags that indicate fraudulent behaviour can help you prevent becoming a victim of business financial fraud.
Common indicators of fraud include:
- Sudden and unexpected changes in financial information or reports
- Unusual transactions or activity in the accounting department
- Suspicious activity related to personal expenses made in the name of the business
- Overstating sales figures, inventory, or restructuring finances without disclosing pertinent details
- Unexplained cash transactions, unexplained wire transfers, and unknown large checks written by employees.
A system of internal controls that encourages strong double-checks on all financial records is an effective way to combat potential company accounting fraud.
Business owners must establish clear procedures that involve multiple people inside and outside the organization to ensure accuracy and credibility when it comes to bookkeeping practices.
Steps to Take to Protect Yourself from Business Financial Fraud
Business financial fraud can be a costly experience for victims. To reduce the risk of becoming a victim of business financial fraud, here are some steps you can take:
Implement Adequate and Effective Internal Control Systems
Develop internal controls that allow for more oversight and monitoring of financial activities. Establish procedures for authorizing, approving, and recording financial transactions — all of which will create layers of security that fraudsters have difficulty penetrating.
Enforce Policies Among all Staff Members
Ensure that your staff adheres to the prescribed policies and procedures at all times; any deviations should be addressed immediately by management.
While financial fraud often involves upper-tier management staff, it can also involve other staff members, such as middle-level managers and accountants who handle finances directly or indirectly on behalf of the organization or its customers/clients.
Utilize Reliable External Sources
Fraudsters count on businesses not doing enough background checks when they hire new employees or enter into vendor agreements with outside service providers.
To prevent fraud, always run background checks on any potential hires or vendors before engaging in business with them – don’t just rely on promises made during interviews or informal negotiations; verify credentials whenever possible using reliable outside sources like government bodies, professional associations, etc.
Educate Personnel Regularly
Learning about areas prone to fraud is the key to detecting it early in the process before losses occur – whether through workshops conducted internally or via external resources such as consultants engaged for this purpose—regular employee education reduces chances significantly that naive unwitting employees will fall victim to scams perpetrated by clever swindlers out there looking for easy prey.
Online Security Tips to Prevent Business Financial Fraud
In this digital age, thieves use a vast array of methods to steal our financial and confidential information. It is more important now than ever that all businesses ensure their online security by taking the steps outlined below to protect them from being victims of business financial fraud.
Implement Strong Password Policies
Ensure your employees use robust, difficult-to-crack passwords for their accounts and networks, including those available onsite and remotely. Also, ensure employees change their passwords regularly so those with malicious intent cannot gain access.
Use Two-factor Authentication (2FA)
When logging into an account or application, 2FA requires users to provide two pieces of information—usually a document and password—to gain access.
This provides an extra layer of security for you and your employees’ accounts since it requires something you know (your password) and something you have (phone, email address, etc.).
Update Software Regularly
Keeping your software up-to-date is one of the best ways to protect yourself from potential threats since hackers target known vulnerabilities or outdated versions of software programs.
Ensuring any needed patches or updates are applied promptly will help protect everything from your operating system (OS), browser plug-ins, anti-virus programs, and more.
Develop Internal Policies
Making policy changes directly related to technology use within your organization can also keep security top of mind for staff and ensure consistent standards across the board.
These policies should include topics such as how often passwords need to be changed; approved methods for downloading files; acceptable use practices for outside networks; device encryption practices; acceptable uses for company devices; education on common scams; etc.
Developing these practices will provide a uniform approach to onboarding new staff members or as a refresher course when issues arise throughout the year.
Hire a CPA in Ottawa to Keep Your Business’ Finances on Track
With the proper knowledge and education, businesses can protect themselves from becoming victims of fraud.
Working with an experienced financial professional is another great way to help protect your business from fraud. At Smith & West Chartered Professional Accountants, we offer a variety of services, from corporate income tax to payroll and bookkeeping, to help you manage your business’ finances. Contact us today at 613-425-8871 for more information.