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Unveiling the Most Common Corporate Fraud Schemes

Unveiling the Most Common Corporate Fraud Schemes

Corporate fraud has always been prevalent in the business world, but in the past decade, fraudulent activity has emerged as a leading threat that can wreak havoc on companies' financial stability, reputation, and overall operations. According to the New York Times, this form of fraud cost companies $831 billion in 2021 alone. And the rate for these crimes continues to rise. 

Fraudulent activities can take various forms, making it crucial for businesses to be aware of typical fraud schemes. A recent Kroll report surveying auditors determined that nearly 40% of respondents experienced increased fraud relating to asset misappropriation alone. So, how can a company reduce its risk?

Continue reading and learn more about the prevalence of corporate fraud, the most common types, and critical strategies companies can use to prevent it from happening. 

What is Corporate Fraud?

Corporate fraud refers to illegal activities done in an unethical manner by individuals or companies. Often, corporate fraud schemes go beyond an employee's stated position and have complex and far-reaching economic impacts on the business, employees, and outside parties.

Though it may be conducted in various ways, corporate fraud is frequently performed by taking advantage of confidential information or attaining access to sensitive assets and then leveraging them for personal gain. In many cases, fraudulent activities are concealed under the guise of legitimate business practices or exchanges, making it challenging to identify the illicit activity. 

A recent study found that only 30% of corporate fraud is caught yearly. This low percentage can be attributed to the involvement of multiple stakeholders, which allows for complex fraud schemes to be safeguarded by a group of complicit actors. 

What are the Most Common Examples of Corporate Fraud Schemes?

Fraud can take many forms, and often, the same form of fraud may not be accomplished in the same manner every time. This is extremely important to consider when reviewing the following corporate fraud schemes:

  • Corporate Accounting Fraud: Involves manipulating the payroll system to steal money. Perpetrators might submit false timesheets, issue unauthorized bonuses, or create fake employees to redirect funds. The FBI reports that direct deposit change requests increased more than 815% in 1.5 years.
  • Asset Misappropriation: Deliberate theft of company assets. This can involve directly stealing cash, making unauthorized purchases, or taking office equipment, inventory, or supplies without authorization. According to the ACFE's Occupational Fraud 2022: A Report to the Nations, asset misappropriation occurs at a higher rate (86% of fraud cases in 2020 and 2021) than any other form of fraud.
  • Tax Fraud: Involves misreporting or concealing information on tax returns to reduce tax liability. This can include inflating expenses, hiding income, or claiming false deductions. Tax evasion, a subset of tax fraud, involves not paying taxes altogether. Any business that attempts to evade taxes can be charged with a felony, with penalties including up to $500,000, and results in up to five years in prison.
  • Identity Theft: Stealing personal or financial information to assume another person's identity. This can involve opening credit lines, making purchases, or committing crimes using the stolen identity. A recent report found that over 13,000 data breaches and over 11 million records were exposed as a direct result of corporate identity theft. 
  • Corruption: Engaging in dishonest behavior for personal gain, often by individuals in positions of power. Corruption can include bribery, money laundering, manipulating elections, and conducting illicit business with criminals. According to the IMF, corruption costs the global economy nearly 4% of its GDP - over 2.6 trillion.
  • Financial Statement Fraud: Exploiting financial records to misrepresent the company's financial health. This can include inflating assets, understating liabilities, and misreporting income to deceive stakeholders, lenders, or investors. Although this fraud occurs at a lower rate, a 2022 survey found that the average median loss of financial statement fraud ($593,000) accounts for approximately four times the monetary loss of corruption and six times as much as asset misappropriation, respectively. 

Prevent Corporate Fraud Now

Companies can limit the extent of fraud through effective policies, a system of checks and balances, and physical security. Creating an environment that promotes communication or employing new forms of technology is a simple step that can help keep businesses, their employees, and their customers safe. But the most crucial step is knowing who is employed with the company and who it's working with. 

Criminal screening is a crucial component of a standard employment background check. Hiring an individual with a history of theft or fraud without knowledge could jeopardize a company's assets. Conducting background checks will allow the hiring manager to feel confident that new employees will maintain ethical business practices. 

Using a combination of MicroBilt's Credit Decisioning Tools and Background Screening Products, companies can feel secure in knowing that they are working alongside individuals with high levels of integrity. Remember, the best defense against fraud is a combination of awareness, diligence, and incorporating advanced technologies and best practices.