What are Fraud Risks for Small Businesses?

Fraud is something common in the business world; some people will look for any chance to make a few extra bucks if they are confident that their chances of being discovered are small. As a person involved with the proper functioning of a small business, remaining aware and mindful about how fraud occurs is paramount. Below are a few areas in which fraud tends to manifest and how to prevent it:

Fraudulent Vendor Billing

This is a tricky scheme in which an individual pays a false shell company with business checks from their official workplace. Some common red flags include checks written out to cash or sent to a business whose address is the same as an employee. It is important to be aware of these things when it comes to your business.

Another variation can involve a friend or family member getting in on the mix to seem less suspicious upon an initial glance. It may involve exaggerating a price to be billed from a company with people on both ends agreeing to mess with the numbers to pocket the money.

Revenue Fraud

When cash is given by customers at a business, this opens the opportunity for revenue skimming. After the transaction, all that must be done to cover the paper trail is for the customer to not receive a receipt. Thus, there is no evidence that an exchange took place and the employee is free to keep the money for themselves.

To prevent fraud like this, it’s a good idea to steer away from cash where possible and to separate the levels of currency handling between employees. This will eliminate any temptation that an employee may have to take money that is not rightfully theirs.

Workman’s Compensation

In theory, workman’s compensation is insurance that is offered to employees that are hurt on the job and can no longer perform their duties. Some people who don’t mind making some money through unsavory means may see this as an opportunity. This is a recurring issue due to the inherent ambiguities of bodily injury.

Sometimes, a person will get injured while not on the job and then show up to work and put on a charade that they sustained the injury while at work. Other times, people have a previous injury resurface and will intentionally make it seem as though it happened while on the job.

Since this is such an easy opportunity for fraud, it is important that employers make the workplace a safe and intelligently designed environment. This includes proper workflow design as well as adequate safety equipment.


Some businesses fall prey to false invoices being passed their way from people trying to make some extra cash. This may involve an individual or another business sending your company a bill for something that was never purchased, banking on the chance that you will not check to make sure it is accurate.

A great way to minimize the chances of something like this occurring is implementing an e-invoicing software. This is an invaluable tool that is fast becoming common practice in the world of business transactions and for good reason.

Manipulating Checks

There are several ways that tampered checks can pilfer money out of your business’ hard earned funds. One way involves an employee making out a company check to a colluding person or business to get the money. Another variation involves an employee changing the names or figures on an existing check to exaggerate the amount given or to alter who the check is intended for.

To safeguard against this, it is a good idea to have several tiers of financial cross-checking and to have the business owner take a personal look at them. Another option is to integrate a proven AP Automation system, which will inherently minimize the opportunities for such fraud to take place.

Fraudulent Payroll

This a big one, making up nearly 10% of occupational fraud. This also tends to plague small businesses more than larger ones because there are usually no anti-fraud measures readily in place.

One blatant instance involves an employee that is paid hourly intentionally logging more hours than they worked, thus getting extra money for nothing. Other variations may involve someone who has access to payroll records manipulating the numbers in their favor. If a commissioned employee reports false sales or orders, this too falls under payroll fraud.

Inventory Fraud

This is when physical items are stolen from your business. For example, if you work in the restaurant business–things like napkins, silverware, condiments, and food itself could be stolen from employees or those closest to them. Then, inventory records are misstated–making it easy to cover up.

Ways to avoid this from happening is to invest in inventory software. Although you trust and appreciate your employees, it’s best to let the software take care of it. Let your employees know about this change, that way it’s less likely they will steal.

Pay Close Attention

There are a multitude of avenues by which fraud can find its way into your company. It is a good idea to remain vigilant about the possibilities and to go with your gut if you think something is askew.

While being on good terms with your employees on a personal basis is a good foundation to have, it may also serve you well to implement the technological innovations available today. The more aspects of business transactions that are automated, the less opportunity there is for fraud to take place.