How Do I Recover from Business Financial Fraud?

Small business fraud is an unfortunately common occurrence. In fact, more fraud occurs in small businesses than in large corporations due to the lack of controls and oversight. If you have detected signs of fraud or identified a fraudster, you are halfway through the journey towards recovering from fraud.

What are the signs of business financial fraud?

Signs of fraud are often subtle or easily excused by management. As time goes on, the perpetrator will try to get away with more and more and these red flags become increasingly flagrant. Common signs of fraud include:

  • Unreconciled cash transactions over 30 days old.
  • Unidentified vendors with repeated or one-time payments.
  • A bookkeeper or accountant who
    • Never takes time off.
    • Does not give anyone else access to the books.
    • Insists on keeping paper receipts and records.
  • Frequent duplicate vendor payments.
  • Regular inventory shortfalls at physical counts.
  • Increasing vendor expenses as a % of sales.
  • Increasing payroll without hiring new staff.
  • Continuously shrinking cash despite profitable financial reporting.

For more fraud detection information, check out our article on what are the red flags of fraud.

What is proper fraud management?

Once you have detected fraudulent behavior, it is time to hire forensic accounting services. Forensic accountants investigate, identify, and document fraud. Most small business fraud is perpetrated by someone in your accounting department, so hiring third-party fraud management is essential. Forensic accounting services include a process to guide you through the fraud management and recovery process. For more information, check out our article: what does a forensic accountant do.

How does my business recover from financial fraud?

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

  1. Asset recovery.
  2. Managing cash shortfalls and business turnaround.
  3. Implementing controls to prevent future fraud.

Fraud Recovery Step 1: Asset recovery

When confronting a fraudster there are often options to recover money or other lost assets. These negotiated repayment programs are usually offered in exchange for not pressing charges through law enforcement agencies. This is the best course of action for small or unsophisticated forms of fraud, such as credit card fraud or stolen property. Simple solutions for asset recovery can save your small business legal expenses related to prosecution or civil lawsuits.

It is common for fraudsters to have already spent the money they stole (usually on wasteful things like gambling or vacations); therefore, you should expect asset recovery to occur over a period of time. Negotiations do not always recover 100% of the losses, so you will need to write off a portion of the fraud as losses.

Knowing whether to press charges is a critical decision in the fraud management process. If local law enforcement must be involved due to security concerns or major felonies like money laundering, most businesses can file an insurance claim to offset losses. Business fraud is covered by most business insurance policies, albeit with limited liability and some deductible netted out.

Fraud Recovery Step 2: Managing cash shortfalls and business turnaround.

Major cases of fraud can throw small businesses into a liquidity crisis. The average lost money for small business fraud is $114,000 – enough cash to put many small businesses at risk. Even if you do achieve some amount of asset recovery, you will likely be repaid over months or years. How will you fare until then? Fraud management services typically include cash crisis management. Depending on your situation, you may need to:

Business turnarounds are complex and time consuming; to learn more, check out our article what is a business turnaround. Turnaround consulting services are critical to quickly mitigate catastrophe.

Fraud Recover Step 3: Implementing controls to prevent future fraud.

Once your business has weathered the short-term crisis, it is time to fix the root of the problem: poor controls. Financial controls are fraud prevention rules – the most critical tool to prevent and detect fraudulent activity. Lack of controls and failure to enforce controls is the #1 cause of small business financial fraud. Failure to address control deficiencies leaves the door open to future fraudsters.

Knowing which controls to implement will depend on your business situation. In general, these are the most common controls missing for fraud detection and prevention:

  • No 3-way match on AP invoices.
  • No internal audit of credit card spending.
  • No management approval of payroll hours.
  • No fraud awareness program (especially important for preventing external fraud.)
  • Poor physical security or IT security.
  • No routine physical inventory counts.

There are dozens of financial controls to prevent fraud and embezzlement, so work with your CFO or forensic accounting service to ensure you have the proper fraud prevention processes in place.

Business after recovering from fraud

With proper fraud management, your business will survive and grow after fraud. Fraud victims can emerge with stronger accounting, controls, and business processes than before the fraud. But your success will depend 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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