How a Business Fraud Allegation Could Affect Your Company

Serious fraud can occur in a number of ways for a business. Whether it be fraud within your business from the upper levels, fraud from an employee or external fraud, the effects on a company can be devastating.

In this article, we’ll break down the types of business fraud your company might face and detail the myriad of ways this can have a drastic effect on your business.

Potential types of business fraud

Before we dive into how fraud can have a huge impact on a business, it’s important you understand the number of ways business fraud can occur. Here’s a short list to give you a deeper insight:

• External fraud: Companies can be the victim of external sources of fraud through spam emails, cyber criminals and the like
• Insurance fraud: A company might file false or exaggerated claims for an insurable event, e.g. a fire in the business building
• Tax fraud: Deceptive reporting of income to reduce tax liabilities
• Billing fraud: Similar to above, but is based on the false reporting of expenses in the hope of financial gain
• Accounting fraud: False reporting of income, profits and expenses to deceive investors
• Identity fraud: Assuming a business's identity to utilise their financial resources illegally

The effects of fraud allegations on your business

The above types of fraud can occur both at an external level and an internal level. Whether it's an external source manipulating the business or someone within the business manipulating the books, there are a number of potential outlets.

Either way, the effects on a business can be devastating. Here’s how:

1.    Loss of reputation and brand image

For starters, loss of business reputation is inevitable after a fraudulent act. This is the case if the fraud occurred both internally and externally.

For example, a business being victim to fraudulent activity can make customers and clients lose trust in the integrity of the business’ systems. On the other side of the coin, an internal fraudulent crime can lead customers and clients to lost trust in the company’s workers.

Overall, people are much less likely to want to deal with a company who has fraud in their history, thus decreasing reputation in the sector.

2.    Loss of repeat customers

Fraud can be a traumatic experience for clients, and can have irreversible impacts on the client’s mental health and their life. Because of this, even after the whole situation blows over, it’s likely that those involved with your business will be far less confident in dealing with you.

For businesses, they may feel worried about being associated with you, and the effect this might have on their own brand image. What’s more, for individuals, they might be concerned about the impact continued dealings with you will have on their careers, family and mental health.

As a result, it’s likely that they’ll find a new business to deal with for the services you offered them.

3.    Reduction in new customers

Similarly, it’s unlikely that new customers will feel safe to seek your services if you’ve been involved in a fraud allegation. They might be concerned about being associated with you, as well as having concerns over whether their information is safe with you. This is likely to limit the influx of new customers in future.

4.    Huge financial impact

The lack of repeat and new customers after a fraud allegation will have a huge financial impact on your business. However, that’s not the only way this can have an impact.

In fact, international estimates show that public bodies can lose between 0.5 and 5% of their budget to losses from fraud. But how?

For starters, the legal fees incurred to support your business after a fraud allegation can be huge. This, of course, depends on the nature of the fraudulent activity, and whether it was external or internal. It also depends on how many people, including employees, clients and customers were involved.

On top of this, a business will have to put strict measures in place to avoid this happening again, whether that’s hiring new talent to deal with accounts and systems properly, or putting new processes and checks in place to avoid this.

Some fraudulent activity, especially external cases, can involve monetary fines from the ICO, or even ransoms having to be paid. Ultimately, the financial loses are untold and affect businesses in a variety of different ways.

5.    Company morale

Morale within the company can be affected in a variety of ways. For example, employees may feel guilty for not detecting the fraudulent activity, affecting their confidence in their abilities. This can have a knock-on impact on employee productivity.

What’s more, if the fraud came from high up in the company, employees will likely feel a lack of trust towards their superiors. Ultimately, it’s unlikely to be positive for any of the employees currently working there.

6.    Loss of employees

You might even find that the impact is enough for you to lose employees. For example, if employees are concerned about their own reputation in dealing with your business, they may feel that leaving is the best course for their career.

Alternatively, they might feel that they no longer have trust or faith in the company and the company message. As a result, employees may decide to seek work elsewhere, further increasing the financial strain and resourcing on the company.

7.    Digital affects

When fraud – especially that from an external source – is detected, this can have a knock-on effect on the business’s digital activities. Not only can data be lost or compromised, new systems and fail-safes will need to be put in place to avoid it happening again.

There will also be a lot required to potentially recover lost information, and rebuild the systems to fix the problem. Lengthy audits and staff training will be required to get this right.

The effects of serious fraud on your company are numerous

As we’ve made clear in this article, allegations of fraud within your company are likely to have a huge, untold impact on every aspect of the business. From finances, to brand image and employee morale, there’s a myriad of ways things can spiral out of control.

As such, avoiding fraudulent actions at all costs is paramount. Having the correct processes, training and systems in place to avoid external fraud is paramount. What’s more, keeping an eye on accounts and employee activity to avoid internal fraud are a good place to start.