A guide to corporate fraud liability

Payroll fraud is when an employee deceives the HR department in order to receive the payment they haven’t earned in the first place.

Employees can submit false figures related to targets, sales count, and units produced to receive additional pay.

Moreover, some employees can do timesheet padding where they change their punch-in and out time. 

It refers to companies that fudge the numbers of sales, revenue, income, assets, and expenses.

Financial statement fraud is done to mislead the public and investors, manipulate stock prices, and enhance the company's goodwill. 

Skimming is when employees create invoices and keep the full payment (or a part of it) for themselves — making false entries in the accounting records.

Tax fraud is the most common type of corporate fraud where the finance department files fictitious tax returns to avoid paying the actual sum obligation.

Companies do this to pay fewer taxes and take advantage of low tax slabs.

The finance department does this by reporting less income in the financial statements, claiming false tax deductions, showing personal expenses as business expenses, and more.

Invoice fraud happens when an employee creates fake invoices to procure money from the finance department.

It means submitting invoices for the goods and services that were never realized and brought into the company, creating dummy suppliers to source the money into their account, and passing high-dollar contracts to known suppliers or family members. 

A limited liability company is a business where the owners and company have separate legal entities.

If the company fails to pay its debts and liabilities, creditors can procure it from the company’s assets and not from the owner’s assets. 

However, in case of any business fraud, LLC's legal owners can be held responsible for concealing information and committing unlawful acts.

The scope of punishment is limited only to the guilty partner. Repercussions include ceasing of assets and penalty amount as decided by the court. Other partners who are not directly involved in it cannot be held guilty. 

Despite high-end software and technology, large corporations still find ways to steal money and do financial scams. But, in such multinational companies, the strict policies against financial fraud come to play first before any law. 

After the person is found guilty of committing the crime, he is no longer liable to work in the company. His work permits or licenses can also be banned temporarily or permanently, depending on the severity of the scam.

Companies can pursue legal actions such as imprisonment, fines, returning the amount of scammed money, and any other equivalent punishment as decided by the regulatory body. 

In partnerships, business fraud is typically witnessed in the partnership agreement to be signed.

Suppose one of the partners misinforms about their earnings, past experiences, and background or intentionally fails to disclose crucial information that can impact their company’s well-being. It may not be viewed as a severe crime but can lead the agreement to be considered null and void with immediate effect.

If other partners defraud one partner, the partnership agreement must be dissolved. The affected partner can then claim the firm’s assets through a lawsuit or arbitration. 

There are two types of partners in a limited partnership - General and limited. The general partners are the primary decision-makers of the firm, while a limited partner’s duties are restricted to voting and are liable for the capital invested by them. 

If the partners were engaged in fraudulent activities, the firm and the guilty partners would be held accountable by the court.

Along with heavy fines and imprisonment, corporate fraud liability can also lead to the dissolution of the partnership firm.  

In a sole proprietorship, the chances of scams rise significantly as only one person is responsible for all the business activities.

Since there are no agreements, clauses, or partners, the owner is not answerable to anyone and can easily steal the company out of business. 

But here’s the catch — being the only owner of the business, committing fraud does not necessarily mean extracting illegal money; it implies unfair means of saving money such as tax evasion. If the regulatory body learns about such illicit practices, the business could be shut down entirely and attract fines. 

Strong passwords are your shield against deception and every type of fraud, whether personal or business.

Creating a strong password with a combination of upper and lower case, numerical, and special characters decreases the chances of malware attacks and hacking.

Two-factor authentication adds a layer of security with dual verification and is highly recommended for banking and financial credentials. 

Internal controls are a useful measure to prevent and detect business fraud. It includes creating rules and policies to safeguard your company’s fiscal health.

Additionally, companies can create a strict environment for fraud identification through a multi-level approval system for critical information, restricting access to financial data, regular scrutiny of accounting books, and audits. 

Responding to or clicking on phishing emails redirects you to an unverified website that traps you and encourages providing financial information. The information is then used to exploit your bank accounts and financial data.

Multiple hardware can be hacked and used to steal information in an office space. An antivirus program detects and prevents malicious software from corrupting your computer system.

Whereas installing a firewall provides external security from getting access to your systems. 

Employees often unknowingly get caught in embezzlement activities due to a lack of knowledge of corporate financial fraud practices.

Companies need to ensure that every employee receives knowledge related to fraud behaviors and how to report them immediately.