Fraud

Corporate and business fraud can occur in several ways:

Asset Misappropriation occurs when an employee takes or misuses any company assets for their own gain. It often appears as simple theft or the abuse of company goods or services. Unfortunately, asset misappropriation can repeatedly occur unless proper controls are in place, like robust inventory management. Any size company can be a victim to this form of fraud.

Forgery often involves falsified business or financial records used to steal company funds. Official badges or identification may also be falsified to steal company property or goods.

Inventory Theft occurs when an employee steals goods from the company for personal use or to sell. Employees with access to inventory records may change them to cover the theft or claim to have lost relevant documentation and receipts.

Account Fraud is typically from an external source. Hackers gain access to bank accounts via malware, fraudulent emails, or other means, and attempt to make unauthorized purchases or transfer funds before the issue is recognized and account credentials are updated.

Invoice Fraud occurs when an employee creates a fake invoice to steal money from a business. Essentially, the individual will submit an invoice for products or services that were never actually purchased, create a fake supplier or company to route the money to, or award overpriced contracts to personal friends and family.

Payroll Fraud is the embezzlement of company funds using the company payroll system. Employees may steal funds using falsified timesheets, issuing unauthorized bonuses, or paying fictitious or terminated employees. Misclassifying employees to the IRS is also considered payroll fraud and can lead to legal ramifications for the company.

Tax Fraud, or tax evasion, occurs when the earnings and expenses of an individual or company are misreported to the IRS in an attempt to take advantage of a lower tax bracket and special exemptions.

Data, Intellectual Property, and Identity Theft are all real possibilities for companies that handle sensitive information. Employees may leak trade secrets or patents, harming your business. Hackers stealing personal data can lower customers’ trust and lead to a damaged reputation.

Insurance Fraud occurs when employees try to profit off insurance by filing false claims or lying about injuries and illnesses. These claims result in more out-of-pocket expenses for business owners and higher premiums for every participant.

Bribery and Corruption can come from several avenues, including getting kickbacks from projects, using money to influence major company decisions, and manipulating contracts to favor one group over another.

Cash Theft, also known as skimming, may be difficult to detect immediately as it typically occurs a few dollars at a time. Companies that frequently handle cash payments, such as restaurants and retail stores, are most at risk for cash theft. Business owners may also skim cash to reduce the reported business profitability to lower the income tax liability which ends up becoming tax fraud.

Credit Card Scams occur most often with businesses that hand out company cards for company incidentals. Employees may use the card for unrelated purchases and, if not caught or stated in an expense report, could lead to continued fraudulent use. This form of fraud can end up costing the business thousands of dollars unless caught early.

Business Email Compromise is a phishing scam where fraudsters hack, spoof, or impersonate legitimate business email addresses in an attempt to get an unsuspecting individual to share information they can use for their own financial gain.

Most often, fraud is identified once someone submits an internal tip and an investigation is performed. Your team members should feel they are in an environment where they are safe and comfortable reporting anything they see as inappropriate or a potentially illegal activity. Within internal systems, create alerts or red flags that will send a notification to appropriate individuals whenever any financial data doesn’t quite add up.

Establishing an internal audit team can be a valuable resource when looking to mitigate and identify internal fraud. Additionally, look to hire external auditors to conduct unannounced fraud-detection audits. If any internal fraud is happening, these will catch the offenders off guard.

Corporate fraud prosecution is often a collaborative effort. The Federal Bureau of Investigations (FBI) typically partners with other agencies such as the IRS, US Postal Inspection Service, and the Securities Exchange Commission (SEC) depending on the matter. The FBI is mainly focused on detecting and preventing corporate fraud due to tax violations, asset misuse, insider trading, accounting falsification, and obstruction of justice.

All of these forms of corporate fraud carry severe penalties. If the fraud is specifically related to taxes, securities, commodities, accounting, larceny, or embezzlement, they will be more vigorously prosecuted. Fraud attempting to deceive the government may be prosecuted under the False Claims Act.

Depending on the nature of the offense, the guilty party may face imprisonment, millions of dollars in fines, seizure of assets, and restitution charges.

Various individuals within an organization may be involved in corporate fraud, and liability may extend to these different parties depending on their involvement and responsibilities. Generally, those who can be held liable for corporate fraud include:

• Executives and Officers: Individuals holding key positions such as CEOs, CFOs, and other top executives who knowingly engage in fraudulent activities or fail in their duty to prevent fraud within the company may be held liable.
• Employees: Any employee who actively participates in fraudulent activities, whether through falsifying records, misrepresenting financial information, or other deceitful actions, can be held liable for corporate fraud.
• Board of Directors: Members of the board who are aware of fraudulent activities within the company and fail to take appropriate action to stop them may also be held liable for corporate fraud.
• Auditors and Accountants: External auditors or accounting firms responsible for reviewing the company’s financial statements and detecting fraud may face liability if they negligently or intentionally overlook fraudulent practices.
• Third Parties: Individuals or entities outside the company, such as vendors, contractors, or business partners, who collude with insiders to commit fraud or knowingly aid and abet fraudulent activities may also be held liable.

If you suspect corporate fraud is occuring within your organization, it’s crucial to take prompt and appropriate action to address the situation.

• Document Your Concerns: Keep detailed records of any evidence or observations that lead you to suspect fraudulent activities. This may include financial statements, emails, memos, or any other relevant documents.
• Report Your Suspicions: Depending on the severity of your suspicions and the internal company policies, report your concerns to the appropriate authority within the organization. This could be your supervisor, HR department, compliance officer, or an anonymous tip line if available.
• Seek Legal Advice: Consider consulting with legal professionals experienced in corporate fraud investigations, such as those with Simon Law. They can provide guidance on how to proceed and ensure your rights are protected throughout the process.
• Cooperate with Investigations: If an internal or external investigation is initiated, cooperate fully and provide any information or assistance you can to help uncover the truth. Avoid tampering with evidence or discussing the matter with unauthorized individuals to maintain the integrity of the investigation.
• Protect Yourself: If you fear retaliation or adverse consequences for reporting fraud, familiarize yourself with whistleblower protection laws in your jurisdiction. These laws are designed to safeguard employees who report illegal or unethical activities from retaliation by their employers.

Protecting against corporate fraud requires a comprehensive approach that involves implementing preventive measures, fostering a culture of integrity, and maintaining effective oversight. Here are some strategies companies can use to safeguard against corporate fraud:

• Establish Clear Policies and Procedures: Develop and communicate clear policies and procedures outlining expected conduct standards, ethical guidelines, and reporting protocols for suspicious activities. Ensure that employees receive regular training on these policies and understand the consequences of fraud.
• Implement Internal Controls: Establish robust internal controls to safeguard assets, prevent and detect fraud, and ensure the accuracy and reliability of financial reporting. This may include segregation of duties, regular audits, reconciliations, and approval processes for significant transactions.
• Promote Ethical Culture: Foster a culture of honesty, transparency, and accountability throughout the organization. Lead by example, and encourage open communication, ethical decision-making, and whistleblowing without fear of retaliation. Recognize and reward employees who demonstrate integrity and ethical behavior.
• Conduct Due Dilligence: Conduct thorough due dilligence when hiring employees, selecting business partners, or engaging in mergers and acquisitions. Verify credentials, conduct background checks, and assess the reputation and integrity of individuals and organizations prior to entering into a significant relationship.
• Monitor Financial Performance: Implement systems for monitoring financial performance and detecting anomalies or irregularities in financial data. Use technology tools like data analytics and monitoring software to identify potential red flags and investigate further as needed.
• Engage External Auditors: Engage reputable external auditors to independently review the company’s financial statements and internal controls. Ensure that auditors have sufficient access and resources to perform thorough examinations and provide reliable assurance to stakeholders.
• Enforce Consequences: Establish and enforce disciplinary measures for violations of company policies and ethical standards, including fraud-related offenses. Consistently apply consequences for misconduct to deter fraudulent behavior and maintain accountability.
• Stay Informed and Adaptive: Stay informed about emerging fraud schemes, regulatory requirements, and best practices in fraud prevention and detection. Continuously assess and update internal controls and fraud prevention measures to address evolving risks and vulnerabilities.