Common Small Business Fraud Scenarios

Fraud can cause businesses to lose money, time, and customer trust. Small businesses can be especially vulnerable when employees manage invoices, payroll, vendor records, and payments without clear approval processes. The first step to protecting your business is to recognize common fraud scenarios and build simple verification steps into everyday financial routines. 

Emailed invoice scams  

Emailed invoice scams occur when scammers pretend to be a legitimate vendor and sends a fake invoice or revised payment instructions. These messages may look convincing, especially if the scammer uses a familiar company name, a lookalike email address, or details copied from a real vendor relationship. Require staff to verify new vendors, unfamiliar invoices, and changes to payment instructions through a known phone number or trusted contact. 

Bank impersonation scams  

Bank impersonation scams happen when fraudsters pretend to be from a financial institution and contact a business by phone, text, or email about a supposed account problem, suspicious transaction or urgent security issue. They may ask someone to verify account details, share a passcode, click a link or move money to a “safe” account. Help prevent this type of fraud by training employees to stop, avoid using links or phone numbers in unexpected messages, and contact the financial institution directly using a trusted number before sharing information or transferring funds. And remember, your bank will never ask you to provide your password or secure access code. 

Payroll fraud  

Small businesses can face a higher risk of payroll fraud than larger businesses because they often have fewer internal controls. Common forms of this fraud include inflated expense reports, claims for overtime hours not worked, and fake or “ghost” employees created in the payroll system.  

Monitoring monthly reports is an essential foundation for creating accountability for payroll staff. Establish internal controls within your payroll system, such as requiring employees to get approval from two people before making any changes to payroll. It is also wise to separate certain payroll duties. For example, have two different employees write payroll checks and compute staff hours for payroll.   

Fake invoicing  

This type of fraud occurs when an employee pays a supplier but then directs the cash to a side account instead of sending it directly to the supplier. Sometimes it involves an employee creating a fake vendor within the invoicing software, then diverting the funds into a side account. Schedule regular meetings to review every vendor within your accounting system to help minimize the risk of financial loss due to false invoicing.  

Cash thefts  

Another common fraud risk for small businesses is cash theft. This type of extortion can take a few different forms, including larceny, fraudulent disbursement, and skimming. Help reduce this type of fraud by establishing a streamlined monitoring system for supervising your business’s cash flow. For example, make daily deposits and reconcile bank statements each month. This will help prevent cash from sitting around in plain sight and tempting personnel. It is also wise to require thorough documentation for travel costs and review them yourself to help ensure that company funds are not going toward employees’ personal expenses.  

Train employees to pause when a message creates urgency, requests secrecy, changes payment instructions, or asks for payment by wire transfer, cryptocurrency, gift card, or payment app. If a request seems unusual, confirm it outside the original message thread before taking action. 

With a little foresight, it’s easy to establish practical accountability checks and separate staff financial duties to protect your business from fraud. 

For more information on how to prevent fraud, visit our Five Star Bank Security Center.

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