Unfortunately, since business includes so many moving parts, there are dozens if not hundreds of types of fraud. And that holds true as much for small organizations as for large ones. In fact, over half of all businesses report having experienced fraud in the last two years. With those odds, organizations might as well flip a coin to determine whether they’ll become victims themselves.
Of course, a large part of preventing fraud is recognizing what to look for. So, we’ve listed ten of the most common types of fraud. Though some begin externally, most of them come directly from within an organization. So, if you’re hoping to stem fraud before it happens, make sure you recognize the signs and know how it occurs.
10 Types of Fraud Your Business Should Watch For
1. Asset Misappropriation
Asset misappropriation is by and large the most common form of organizational fraud. And that’s partially because so many employees don’t understand that it’s a major form of theft. Reports suggest that around 75% of employees have stolen from their employers, and 86% of all fraud is asset misappropriation.
Essentially, misappropriation is a form of theft where employees use different company resources for personal purposes. It can be anything from printing personal documents on the company printer to cooking extra food at a restaurant. However, there are many forms in between.
Most instances of asset misappropriation are occur because they seem benign, or because employees feel a company owes them in some way. That is to say, the majority of people committing this type of fraud probably don’t even realize they’re doing it. And for those who do, it seems like such a minor offense that it isn’t worth worrying over.
However, those sorts of costs can quickly add up – especially with multiple individuals in the same company adopting that mindset. So, unless corporate authorities have granted express permission to use company assets for personal use in a specific way, make sure to watch for theft of resources.
2. Cash Theft
On the opposite end of the “benign” spectrum from asset misappropriation, there’s cash theft. This type of fraud is exactly what it sounds like. Employees sense an opportunity to profit off the company by illegally pocketing cash. Generally, this fraud method is far more obvious in its ill intent, because most employees recognize it as theft. In other words, in most cases, stealing cash isn’t a form of fraud that happens accidentally.
Unfortunately, companies who deal in cash assets at any point open themselves up to this sort of situation. So, the threat of cash theft is largely unavoidable. However, organizations can put certain systems in place to try to minimize the opportunity and discourage this sort of behavior. Furthermore, knowing who you’re hiring can help ensure the right people are in your organization in the first place.
Of course, these preventions will never entirely eliminate the potential for cash theft. Because situational factors can always tempt someone to steal from the company. However, they can help discourage it and better protect the organization.
Another common type of fraud is forgery – signing someone else’s name on checks or important documents. This act is damaging because employees can create false company records that cover up theft over a long period of time. In effect, forgery is both a means of fraud and way to cover up fraud.
Any time a document looks “off”, corporate leaders should check with the individuals who signed off to make sure they actually did so. Otherwise, they might be letting multiple types of fraud slip right under their noses.
Forgery by itself might not seem like a particularly offensive form of fraud. However, the act alone carries steep penalties. Forgery in the first degree is a felony, punishable by seven to twenty years’ imprisonment. And even second-degree forgery can result in up to seven years of prison time. So, this type of fraud isn’t one to take lightly.
4. Payroll Fraud
Payroll fraud is somewhat of a broad topic, covering different instances under the same banner. Typically, it includes acts such as timesheet tampering or adding bonuses so employees receive more compensation than owed.
Companies themselves can also commit payroll fraud in cases where they misclassify employees to the IRS. So, it’s important to determine whether individuals perform contracted work or are fully employed by the organization.
Ultimately, payroll fraud pits employers against employees. Because on one side, it leads to individuals stealing more than they’re owed. But on the other, it entails an attempt to pay someone less than what they deserve.
5. Invoice Schemes
Like the other types of fraud, invoicing schemes come in many different shades. For example, it covers the manipulation of invoices for actual services rendered. That is, charging more for services than the company should. Alternatively, it can mean creating fake invoices for products that were never sold.
Also similar to other forms of fraud, invoice schemes can happen on an individual, employee basis or a company-wide scale. Either way, the recipient profits off the false sales and benefits at the expense of an outside party. So, typically invoice schemes hurt the customers rather than the organization.
6. Tax Fraud
In an organizational setting, tax fraud is generally committed at the top level. That is, corporate leaders rather than low-level employees. Essentially, it represents the misreporting of annual revenue or other areas, which in turn decreases the taxes the business owes.
Though reporting for both individuals and businesses, the IRS notes that around 17% of taxpayers fail to comply with codes. And of those who fail, the largest number are those in the top brackets.
If convicted, tax evasion schemes can lead to up to $500,000 in organizational fines, and between one and five years of jailtime.
Interestingly, bribery can originate within an organization or come from outside. Regardless the point of origin, though, it’s a major type of fraud. Essentially, it entails one of two things in exchange for some personal benefit:
- The promise of something good
- The threat of something harmful
For example, an individual who discovers tax evasion at the top levels of a company might threaten to go to the IRS unless leaders pay a monthly fee. Alternatively, a company might promise exclusive distributor rights to another party in exchange for off-the-books compensation.
Bribery, like other forms of fraud, comes in many shades. So, it’s not possible to list them all here. Making matters worse is that some countries actually allow bribery as a common business practice. So, it’s important to understand customs and recognize how it can still result in penalties.
If you want to learn more about this topic, be sure to check out our Business & Culture course.
8. Financial Statement Fraud
Typically, financial statement fraud occurs when an employee misrepresents information in order to secure loans or other funding. For example, misreporting numbers to convince investors to feed into a business. This might occur on a company-wide scale, where the funding goes directly to the business. However, it also covers employees who apply for business loans that go directly to themselves.
Regardless, financial statement fraud carries misdemeanor charges and can result in fines and jailtime. So, it isn’t something for companies to take lightly. In order to prevent this type of scheme, pay close attention to emails, accounts, and other activities.
9. Procurement Fraud
Procurement fraud is a method primarily used by employees to profit at the expense of the company. It involves ordering stock that can then be resold personally for a profit. Alternatively, it might mean returning products for a refund that then goes into individual accounts rather than corporate ones.
In other words, procurement fraud is largely about the mishandling of products ordered from external providers. So, if you start noticing variances in product stock reports that don’t match up, be sure to thoroughly investigate to insure against loss.
10. Worker’s Compensation Schemes
Finally, the last type of fraud we’ve listed is false worker’s compensation. This also comes in various forms, most commonly whenever an employee exaggerates or entirely lies about the severity of an injury to receive unnecessary worker’s compensation. As with most other types of fraud, this form carries penalties of potential imprisonment and fines.
However, it’s important to recognize that organizations themselves can commit this form of fraud, typically by misclassifying workers. So, on the other end of the spectrum, instead of individuals profiting off companies, organizations attempt to keep from paying fees that they should.
Learn More About Various Types of Fraud
Here, we’ve covered ten types of fraud that both organizations and employees often commit. However, that hardly begins to discuss the absolutely vast real-life cases of fraud. If you want to learn more about fraud, as well as how to detect and prevent it, make sure to visit our shop.
We offer several helpful courses, including:
- Psychology of Fraud
- Fraud Prevention and Detection
- Cyber Security
Be sure to check them out today.
Article written by Braden Norwood
Last updated November 13, 2023