Learning Center
What Are the Most Common Business Financial Fraud Schemes?
You’ve worked hard to build your business. The long hours, sleepless nights, and countless sacrifices were all for one goal: to create something successful and sustainable. But what happens when a trusted employee or an external scam threatens all that hard work? Financial fraud isn’t just something that happens to large corporations. Small and medium-sized businesses (SMBs) are prime targets, often because of weaker controls and stretched resources.
Let’s dive into the most common financial fraud schemes targeting businesses, how you can protect your company, and why having tight financial controls in place is essential.
The Most Common Financial Fraud Schemes
1. Payroll Fraud
What It Is: Employees manipulate timesheets, inflate hours, or create "ghost employees" to collect extra paychecks.
Real-Life Example: Linda Johnson, the general manager of a Wendy’s in Pennsylvania, was caught creating a fake employee, "William Bright," who supposedly worked 128 shifts over 22 pay periods. Johnson would clock in and out for the phantom employee, allowing him to earn wages that never went to an actual worker. A forensic audit uncovered that "William Bright" had a total gross pay of $19,898.15, which Johnson transferred directly to her CashApp account.
2. Expense Reimbursement Fraud
What It Is: Employees submit falsified or inflated expense reports, claiming reimbursements for personal expenses.
Red Flags: Duplicate receipts, vague descriptions, or excessive out-of-town dining expenses.
3. Vendor Fraud
What It Is: Fake vendors are set up to receive payments, or existing vendors collude with employees to overcharge.
Case in Point: Fake vendor scheme steals $1.5 million from California company by creating fictitious accounts.
4. Phishing and Business Email Compromise (BEC)
What It Is: Fraudsters impersonate executives or vendors via email to trick employees into wiring funds to fraudulent accounts.
Impact: BEC scams caused $2.4 billion in losses in 2021, with SMBs being primary targets.
5. Asset Misappropriation
What It Is: Employees steal inventory, equipment, or company funds for personal gain.
Example: An Amazon employee exploited her trusted position at Amazon to steal nearly $10 million through an audacious fraud scheme. By creating fake vendors and submitting fictitious invoices, she siphoned off the company’s funds for personal gain.
How SMBs Can Protect Themselves
Fraud prevention isn’t just about catching bad actors—it’s about creating systems and controls that make fraud nearly impossible. Here’s how you can safeguard your business:
Separate Duties
Ensure that no single employee has control over an entire financial process. For example, one person should handle vendor approvals while another processes payments.Use Technology
Invest in accounting software with built-in fraud detection and approval workflows. Regularly update your cybersecurity measures to guard against phishing and ransomware attacks.Monitor Financial Activity
Regularly review bank statements, reconcile accounts, and conduct surprise audits. Spotting unusual activity early can stop fraud before it spirals.Train Your Team
Educate employees about recognizing phishing scams and the importance of safeguarding sensitive data. A well-informed team is your first line of defense.Vet Vendors and Employees
Conduct background checks on new hires and due diligence on vendors. It’s better to be overly cautious than to place blind trust.Maintain Tight Financial Controls
Establish a robust approval process for expenses, payroll, and vendor payments. Require dual authorizations for high-value transactions.
Why Financial Controls Are Non-Negotiable
Even the most well-intentioned businesses are vulnerable without strong financial controls. Fraud doesn’t just hurt your bottom line; it damages employee morale, ruins trust, and, in severe cases, leads to legal consequences or bankruptcy.
Having the right checks and balances ensures that your business is resilient against internal and external threats.
Partnering to Prevent Fraud
Protecting your business from fraud is a team effort. At our firm, we specialize in helping SMBs implement strong financial controls and monitor for red flags. Whether you need an audit of your current processes or advice on new systems, we’re here to help you safeguard what you’ve built.
Don’t wait until it’s too late—contact us today to protect your business and your peace of mind.
NEVER MISS A STORY.
Sign up for our newsletters and get our articles delivered right to your inbox.
Rose Tax & Financial
Cedar Crest, New Mexico 87008
Sat: 10:00am to 2:00pm
Check the background of your financial professional on FINRA's BrokerCheck
Avantax affiliated Financial Professionals may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state. Securities offered through Avantax Investment Services℠, Member FINRA, SIPC, Investment Advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. 972-870-6000.
The Avantax family of companies exclusively provide financial products and services through its financial representatives. Although Avantax Wealth Management® does not provide or supervise tax or accounting services, Avantax representatives may offer these services through their independent outside business. Content, links, and some material within this website may have been created by a third party for use by an Avantax affiliated representative. This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth Management® or its subsidiaries. Avantax Wealth Management® is not responsible for and does not control, adopt, or endorse any content contained on any third party website.
This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences.
For Important Information and Form CRS please visit https://www.avantax.com/disclosures.