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How Do I Recover From Business Financial Fraud?

Fraud in small companies is unfortunately not uncommon. In fact, due to a lack of controls and monitoring, fraud occurs more frequently in small businesses than in large corporations.

If you’ve spotted signs of fraud or identified a fraudster, you’re already halfway to recovering from fraud.

What are the signs of corporate financial fraud?

The signs of fraud are often subtle or easily excused by management. Over time, the perpetrator will try to get away with more and more fraud attempts, and the red flags become more prominent. Common signs of fraud include:

  • Unmatched cash transactions older than 30 days.
  • Unidentified vendors with repeated or one-time payments.
  • An accountant or auditor who
    -Never takes time off.
    -Not allowing anyone else access to the books.
    -Insists on keeping paper receipts and records.
  • Frequent duplicate vendor payments.
  • Regular inventory shortfalls on physical counts.
  • Increasing vendor expenses as a percentage of sales.
  • Increasing payroll without hiring new employees.
  • Continually shrinking cash despite profitable financial reports.

For more information on fraud detection, click here to contact our experts.

What is appropriate fraud management?

If you’ve identified fraudulent behavior, it’s time to hire an accountant. Forensic accountants investigate, identify and document fraud. Most small business fraud is committed by someone in your accounting department, so hiring outside fraud management is essential. Forensic accounting services include a process that guides you through the fraud management and recovery process. For more information, see our article: What Does a Forensic Accountant Do?

How can my business recover from financial fraud?

Fraud management is a long and intensive process that only begins with detection. Once your forensic accountant has investigated and identified the fraud, small businesses must go through a three-step recovery process:

  1. Asset recovery.
  2. Managing cash shortages and rehabilitating the business.
  3. Putting controls in place to prevent future fraud.

Asset recovery.

When confronted by a fraudster, there are often ways to recover money or other lost assets. These negotiated recovery programs are usually offered in exchange for not pressing charges with law enforcement. This is the best course of action for small or simple fraud cases such as credit card fraud or stolen property. Simple asset recovery solutions can save your small business legal costs associated with law enforcement or civil lawsuits.

Typically, the fraudsters have already spent the stolen money (usually on wasteful items such as gambling or vacations); therefore, you should expect asset recovery to take place over an extended period of time. Negotiations do not always recover 100% of losses, so you will have to write off some of the fraud as a loss.

Deciding whether to press charges is an important decision in the fraud management process. If local law enforcement must become involved due to security concerns or serious crimes such as money laundering, most businesses can file an insurance claim to recoup the losses. Business fraud is covered under most business insurance policies, albeit with limited liability and after deducting some deductible.

Manage cash shortages and business turnarounds.

Major fraud can throw small businesses into a cash crunch. The average monetary loss in small business fraud is $114,000 – enough cash to put many small businesses at risk. Even if you recover some amount, repayment will likely take months or years. How will you fare until then? Fraud management usually includes managing cash crises. Depending on your situation, you may need to:

  • Prepare a 13-week cash flow forecast weekly
  • Seek debt restructuring or apply for additional loans
  • Hire a professional to advise on how to turn your business around
  • Accelerate collections, defer payments or restructure your business.

Business turnarounds are complex and time-consuming; for more information, see our article What is a Business Turnaround? Turnaround consulting services are critical to quickly averting disaster.

Put controls in place to prevent future fraud.

Once your company has weathered the short-term crisis, it’s time to address the root of the problem: poor controls. Financial controls are fraud prevention rules – the most important tool for preventing and detecting fraudulent activity. Lack of controls and failure to enforce controls are the leading cause of financial fraud in small businesses. If control deficiencies are not corrected, the door is open to future fraudsters.

The controls to implement will depend on your company’s situation. In general, these are the most common controls missing to detect and prevent fraud:

  • No 3-way reconciliation of incoming invoices.
  • No internal audit of credit card expenses.
  • No management approval of payroll.
  • No fraud awareness program (especially important to prevent external fraud).
  • Inadequate physical security or IT security.
  • No routine inventory counts.

There are dozens of financial controls to prevent fraud and embezzlement. So work with your chief financial officer or an auditor to make sure you have the right fraud prevention procedures in place.

The business after a fraud event
With proper fraud management, your business can survive and grow after a fraud. Fraud victims can bounce back with stronger accounting, stronger controls and stronger business processes than before the fraud. However, your success depends on your willingness to handle the situation professionally.

Contact us to speak with a forensic accountant, ensure proper fraud management, and begin your recovery.


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