(Updated 20 November 2024)
Running a business is a mammoth task, even when things are running smoothly. To ensure your business has the best chance of success you need to prepare for unexpected challenges and potential problems. A leading concern for businesses today is fraud. It is so prevalent that it can be considered a part of your overall business cost. Fraud has become such a monumental problem that it could lead to the critical failure of your otherwise successful business.
At MarisIT, we strive to provide our clients with accurate and actionable information so that they can make better credit decisions. So, we have created a comprehensive article breaking down the types of fraud your business may face and how to deal with it. Preventing fraud may seem like a daunting and unachievable task, but with the right information, you will be better equipped to do so.
Types of fraud businesses should look out for
With so many variations and types of fraud currently out there, staying on top of these trends can be a little overwhelming. This is why we’ve compiled a list of the top 10 most common types of fraud that business owners should be aware of to effectively protect your business.
1. Payroll Fraud
Payroll fraud occurs when employees manipulate the payroll system to receive unauthorized payments. It can involve falsifying work hours, creating “ghost employees,” or misclassifying roles to claim benefits, among other methods. According to most studies available, payroll fraud directly affects a company’s financial health by draining its financial resources, inflating labor costs, and undermining trust in internal processes. Detecting payroll fraud is especially challenging in smaller businesses without robust accounting systems.
2. Invoice Fraud
Invoice fraud occurs when an employee (typically in the sales or accounting department) creates or submits fake or inflated invoices to steal money from the business. It can involve generating invoices for specific products or services that were never purchased, colluding with vendors or suppliers by paying for services or supplies not received, creating fake suppliers / shell companies, or submitting inflated invoices to skim off the top. Invoice fraud can cost businesses significant amounts while damaging supplier relationships. Repeated incidents may signal weak internal controls, leading to reputational harm.
3. Asset Misappropriation
Asset misappropriation is considered one of the most common types of business fraud, where employees try to exploit their position for personal gain. This type of fraud comes in many forms and can include embezzling funds, stealing inventory or equipment, falsifying expense reports, or misusing company resources like vehicles or credit cards. If left undetected, it can pose major financial and operational risks to a business by reducing profitability, inflating operational costs, creating stock shortages, disrupting supply chains and impacting customer satisfaction.
4. Financial Statement Fraud
Financial statement fraud occurs when an employee falsifies financial documents such as sales reports, business revenue reports, asset and liability statements to misrepresent their financial position. This is typically done to attract investors, secure loans, manipulate stock, or increase bonuses. The impact of financial statement fraud, although rare, can lead to regulatory penalties, loss of stakeholder trust, and potential bankruptcy if undetected.
5. Procurement Fraud
Procurement fraud occurs during the purchasing process when employees exploit the procurement system for personal or financial gain. It can involve unethical practices like bid rigging, collusion with vendors or suppliers, submission of inflated invoices, or awarding contracts in exchange for bribes or kickbacks. The impact of procurement fraud can be devastating for businesses as it inflates costs, drains budgets, and diverts funds from legitimate business operations. Furthermore, frequent instances of procurement fraud can erode trust in the company’s governance, damaging relationships with honest suppliers and stakeholders. Reputational harm is also a significant risk, especially if fraud is exposed publicly.
6. Cyber Fraud
Cyber fraud occurs when an individual or employee exploits technology and digital systems to commit fraudulent activities. This type of fraud is typically associated with syndicate activity and comes in a variety of forms such as phishing, ransomware, hacking, and data theft. Cyber fraud, unlike other types of fraud, can have devastating effects. Cyber fraud can completely disrupt business operations, impact financial status, and breach customer data, leading to loss or trust, reputational damage, and potential lawsuits.
7. Expense Reimbursement Fraud
Expense reimbursement fraud occurs when employees falsify or exaggerate expenses to claim unjustified reimbursements. Common tactics include submitting fake receipts, inflating travel costs, claiming personal expenses as business-related, or submitting duplicate expense claims. Though it may appear minor, expense fraud can accumulate into significant losses, particularly in organizations with lax monitoring of expense claims. Beyond the financial toll, it also reflects poorly on the company’s internal controls, creating a culture where dishonesty might flourish. In addition, uncovering such fraud can damage employee trust and relationships, especially if the fraud involves senior staff.
8. Vendor Fraud
Vendor fraud occurs when an external supplier or internal employee working with a vendor utilise dishonest practices to defraud a company. It can include practices such as overbilling, charging for goods or services not provided, or colluding with employees to approve inflated payments. Ghost vendors (non-existent suppliers) may also be created to siphon funds. Vendor fraud inflates operating costs, compromise quality control, and jeopardizes client and stakeholder trust in the company, impacting the company’s reputation in the market.
9. Insurance Fraud
Insurance fraud occurs when individuals or employees falsify insurance claims or exaggerate losses to benefit financially. It can include staged incidents, inflating damage costs, or submitting claims for non-existent assets. Employees may also engage in this fraud by claiming fake workplace injuries or illnesses. Insurance fraud increases premiums for businesses and strains financial resources. Staged incidents can disrupt operations and tarnish reputations, especially if fraud investigations become public.
10. Return Fraud
Return fraud occurs when an employee or individual exploit the returns or refund policies of a business for financial or personal gain. It can involve an employee or individual lying about goods purchased, returning stolen goods, falsifying receipts, switching price tags, or purchasing an item, using it, and returning it as “unused” (also known as “wardrobing”). Return fraud can impact a company’s bottom line, disrupt inventory levels, increase operational expenses, create trust gaps between the company and the customer, and potentially impact price increases of various products.
How to deal with fraud
The number one way to protect your business against fraud is to be proactive. You cannot bury your head in the sand and hope for the best. Prevention is always better than cure, as such you need to be constantly vigilant and aware of the trends in scams and fraudsters.
Here are a couple dependable ways to keep your business protected:
- Run a background check: Background checks should be a vital step in your onboarding process, whether you are hiring a new employee, considering a new business partner, or signing up with a new vendor. Know who you are dealing with and avoid the risks associated with a bad hire.
- Do a credit report check: Credit reports will bring up any red flags associated with a potential client or employee. If they have defaulted on any payment or been convicted of any crime, you will be able to find this information in a credit report check. Additionally, you can make use of our partnership with the SAFPS to give you additional fraud prevention strategies. The SAFPS has saved its members R8 billion in attempted fraud in the last 5 years.
- Know your client: Opt for a KYC report to reduce the risk of possible data breaches, identity theft, account takeover fraud, money laundering and more by being able to verify the address provided by a customer by matching addresses found in the bureaus consumer database supplied by SACCRA (Banks, Telco’s) and NLR (Micro Financing) members in real time.
- Implement policies to safeguard your business: Institute an employee policy that outlines expected employee behaviour anytime they are representing the company, including any mention on their social networks. When it comes to your payroll have clear policies set up that safeguard your business against potential fraud. Your business should enforce rigorous key control and computer-system access.
Conclusion
Fraud detection and prevention must be a continuous effort for businesses to combat this ever-growing challenge. Regardless of your business’s size or industry, fraud can pose a significant threat, particularly if you’re unaware of how it can take shape. By understanding the various types of fraud, you can take the critical first steps toward implementing stronger security measures and reducing fraud risks in your daily operations.
How MarisIT can help you
MarisIT provides robust fraud detection solutions through its WebServices platform, empowering businesses with advanced analytics and real-time data insights for smarter decision-making. With MarisIT, you benefit from transparent pricing and flexible usage—no hidden fees or fixed contracts. Protect your business from fraud and stay prepared to tackle modern threats. Contact MarisIT today to learn more!
