Basic Types of Financial Fraud in Businesses

Too often, a business owner finds out too late that even the most loyal employee may commit financial fraud and steal from the company if the opportunity arises and the temptation becomes too great — or if the employee finds himself caught up in a serious personal financial dilemma and needs fast cash.

The four basic types of financial fraud are:

  • Embezzlement, also called larceny, which is the illegal use of funds by a person who controls those funds. For example, a bookkeeper may use company money for his own personal needs. Many times, embezzlement stories don’t make it into the paper because businesspeople are so embarrassed that they choose to keep the affair quiet instead. They usually settle privately with the embezzler rather than face public scrutiny.

  • Internal theft, which is the stealing of company assets by employees, such as taking office supplies or products the company sells without paying for them. Internal theft is often the culprit behind inventory shrinkage.

  • Payoffs and kickbacks, which are situations in which employees accept cash or other benefits in exchange for access to the company’s business, often creating a scenario where the company that the employee works for pays more for the goods or products than necessary. That extra money finds its way into the employee’s pocket who helped facilitate the access.

  • For example, say Company A wants to sell its products to Company B. An employee in Company B helps Company A get in the door. Company A prices its product a bit higher and gives the employee of Company B that extra profit in the form of a kickback for helping it out. A payoff is paid before the sale is made, essentially saying “please.” A kickback is paid after the sale is made, essentially saying “thank you.”

  • In reality, payoffs and kickbacks are a form of bribery, but few companies report or litigate this problem (although sometimes employees are fired when deals are uncovered).

  • Skimming, which occurs when employees take money from receipts and don’t record the revenue on the books.

Although any of these financial crimes can happen in a small business, the one that hits small businesses the hardest is embezzlement. Embezzlement happens most frequently in small businesses when one person has access or control over most of the company’s financial activities. For example, a bookkeeper may write checks, make deposits, and balance the monthly bank statement.

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