Types of Business Fraud and How to Avoid Them

Running a business is hard enough but dealing with fraud on top of it can be devastating to your bottom line and peace of mind. You may not spend time thinking about business fraud, but it’s essential to educate yourself on what can happen and how to prevent it, so you don’t become a victim.

Types of Business Fraud

Criminals are crafty and can devise extremely clever ways of defrauding a company. Business fraud may encompass dozens of different crimes, so you must learn about all the dangers to prevent them from happening to you.

Below are some of the most common types of business fraud to watch out for and ways to avoid them before they damage your business, relationships, and reputation.

Online Identity Theft

Cyber threats are in the news daily. You cannot take online identity theft lightly. Thousands of data breaches have leaked personal information online, including usernames and passwords, and some of them might belong to one of your employees. Identity theft puts your business at extreme risk of hacking, account takeovers, social engineering, or ransomware.

Sometimes data theft occurs when a staff member steals clients lists, employee details, or even vendor information to use for financial fraud. If your systems get hacked, you could be the cause of identity theft if the information used is stolen from your databases. Therefore, it’s essential to take precautionary measures and increase your cybersecurity strategy to prevent unauthorized access.

Payroll Fraud

Payroll fraud is another very serious crime that affects any size business. It occurs when someone uses your payroll system to steal money and hide the evidence by making it look like someone earned the legitimate funds. Typically, payroll fraud is committed by an insider who works in the payroll department. It may include falsified time sheets, unearned bonuses, or paying someone who isn’t even employed at the company. Shore up your payroll security processes to avoid this financially draining crime.

Financial (Taxes/Financial Statements)

Financial fraud can take the form of tax evasion or financial statement manipulation. Sometimes company owners will falsify income statements to make it appear that the company is making more money than it truly is. The goal of doing this may be to deceive board members or obtain loans from banks or other financial institutions. Financial statement fraud may be perpetrated by an employee trying to hide other theft.

When a company lies on their tax return to avoid paying taxes, this also is a form of business fraud. Tax fraud is usually managed by misrepresenting the company’s income to lower the tax rate. Not paying taxes altogether is another form of business fraud, and it is a serious crime with severe consequences.


Corruption is a general term covering many different types of fraud. Whenever an employee (usually someone in a position of power) commits a crime, it is considered business fraud. Some examples might include not reporting transactions and pocketing the cash, money laundering, working with known criminals, or taking bribes or kickbacks. Corruption can occur within legitimate companies or those acting as fronts for an organized crime syndicate. Often owners of the company initiate the corruption themselves.

Insurance Fraud

Insurance fraud is another way that people take advantage of business situations. For example, an employee might fake an on-the-job injury to receive workers’ compensation benefits. Doing so is insurance fraud. A company may also make claims on their insurance policies for missing or damaged equipment to get money when the assets are completely fine. Insurance fraud can take many forms, but it is a crime with legal consequences if you are caught.

Another instance of insurance fraud is when a company owner or trusted employee burns down a failing business to get an insurance payout. If the fire is determined to be arson and linked back to the company, they will not receive the payout, and those responsible could end up in prison for insurance fraud.

Ways to Avoid Them

Even though the business world can be fraught with sinister intentions and risks at every turn, there are things you can do to avoid business fraud. Some tips include:

  • Institute strict anti-fraud company policies and educate all staff about what to do, what to avoid, and how to report the fraud if they witness it. Then, enforce your policies whenever someone violates the rules.
  • Conduct surprise audits of every vulnerable department to check for any misappropriation of funds or assets.
  • Routinely review financial statements and put in place a checks-and-balances team, so no one person is responsible for a particular task. It makes it much harder for someone to exfiltrate funds if their work is peer-reviewed.
  • Conduct background checks on all employees (including management) and stay clear of anyone with a criminal background.
  • Employ digital fraud monitoring tools within your systems.
  • Implement security systems like surveillance cameras and biometrics to control access to valuable assets and vulnerable systems.
  • Use strong password management on all electronic systems and install network monitoring software to alert you when something out of the ordinary occurs.
  • If you have some difficulties,hire a qualified expert in cybersecurity industry to guide you through.


Business fraud is a serious issue and could potentially ruin your company. Take preemptive steps now to avoid falling prey to these scams. It could save you thousands of dollars in the long run and make the difference in your company’s success or failure.

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