Employee fraud causes billions of dollars in business losses each year. According to the Association of Certified Fraud Examiners (ACFE) 2016 Global Fraud Study, the median loss for U.S. businesses affected by internal fraud was $120,000. Unfortunately, the risk of employee fraud is especially high for smaller businesses, the ACFE found. This is because small businesses often lack the resources to set up effective anti-fraud controls.
Accounts receivable schemes are among the most common forms of employee fraud. A business’s accounting department often handles a high volume of receivables and delayed payments, which makes it easier for dishonest employees to misappropriate funds or distort sales data. Here are the three most common types of receivables fraud:
This scam involves diverting customer payments to cover up the theft or misuse of a previous customer payment. The scheme begins when an employee misappropriates funds paid to the account of Customer A. To cover up the theft, the employee diverts funds from Customer B to cover the shortage in the account of Customer A, then diverts funds from Customer C to Customer B, and so on. This continues until the eventual discovery of the scheme, the individual falsifies accounting data to cover it up, or the return of the stolen funds.
- Fictitious Sales
There are two different motives behind reporting nonexistent sales. Individuals who receive commission-based income may pad a business’ sales numbers to increase their compensation – even though the fraudulent receivables go uncollected. Employees may also falsify sales data to make a business seem more profitable. Regardless of the motive, the legal and financial consequences can be serious for both employees and businesses.
- Timing Schemes
The practice of manipulating the timing of receivables is another scheme used either for an individual’s personal gain or to inflate the business’ sales figures. This fraud happens when employees secretly extend sales or accounting periods in order to claim more sales than actually occurred. This can also happen in contract-based transactions: A dishonest contractor may overstate the progress of a job in order to inflate his or her percentage-of-completion revenue.
Protect Your Business and Customers
Receivables schemes don’t just cause short-term financial loss. They can hurt customers, damage a business’s reputation, and lead to severe civil and criminal penalties for those involved. Fortunately, there are ways business owners can prevent receivables fraud or catch it before it escalates.
It’s a good idea to seek guidance from legal, accounting, and corporate fraud experts, who can help you set up accounting controls and best practices to boost transparency and accountability. Also, it’s important to stay aware of your employees’ needs and watch out for the warning signs of employee fraud.