What To Do After You Discover Business Fraud Has Occurred

Imagine the following scenario: You discover that your accountant has been embezzling funds by submitting personal expenses for reimbursement. Their fraudulent activity is discovered because your co-owner notices a steady rise in business expense reimbursements over the last six months and asks them about it but isn’t given an explanation that makes sense and decides to investigate. Your co-owner brings this information to you along with unequivocal supporting documentation to back it up. What do you do now?  

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​Find out what to do after fraud happens at your organization using this 5-step guide:

Let HR Handle the Employee
Different legal requirements will need to be followed when terminating an employee depending on your location. Let your HR staff or HR service handle these issues to avoid running afoul of employment regulations. Your company will likely also want to consult with a lawyer about prosecuting the crime if significant funds were stollen or a whole network of employees was involved. Leave these types of employee-related issues to the professionals!

Instead, as a business owner or manager, focus your efforts on what needs to be done from an accounting perspective. Aim to first determine the extent of the fraud and correct any errors that have resulted, and then try to understand how the fraud was committed and plug the holes so it can’t happen again!

Audit Financial Activities
Business fraud can sometimes be an iceberg-type situation. What do we mean by that? Often, the fraud that is initially discovered is just the most visible indication of a mishandling of business finances, while the full extent of the issues lies beneath the surface.

Think about it, if your bookkeeper, accountant, or accounting/finance manager is stealing from your business, how dedicated do you think they are to doing their job well? Typically, in cases of fraud, there will not only be errors and discrepancies discovered elsewhere in the organization’s books but there will also be neglect around accounting best practices in the day-to-day activities of the organization. In some cases, this may be part of the scheme to hide the fraudulent activities that are occurring. And in other cases, this may be due to simple apathy because an employee that’s stealing from the company won’t invest too much effort into their role because they may not plan to stick around very long.

For these reasons, you should assess other financial activities that aren’t directly related to the fraud because they may have been done incorrectly or ignored. The most common areas to keep an eye out for are month-end close procedures, bank and credit reconciliations, and tax filings, although other accounting areas can be affected as well. Fraud can poison a company’s financial activities in a way that has wide-reaching effects.

If you can’t determine the full extent of the fraud, or you want the peace of mind of having an expert check your work, bring in an accounting firm to audit and assess your financial records.

Hire a Third-Party Accounting Company
An external accountant with forensic accounting experience can help your organization to determine the extent of the fraud that was perpetuated so you can try to recoup as much of your lost funds as possible. As a result, an accounting provider can be instrumental in recovering from fraud (which is one reason many lawyers will recommend hiring a company to investigate details around the timeframe over which the fraud was committed and how much was taken.)

Sure, an accounting company can help to identify and isolate fraud after it has occurred, but their job doesn’t just end there! They can also help you to take the next steps in undertaking activities like preparing an accurate budget, cleaning up reporting, reforecasting, and making new growth projections. Remember, the sooner your organization can fix the problems created by fraud and move on, the better!

Understand What Happened
Now that you know what has been affected, aim to understand how the fraud was able to occur in the first place. What happened?

In most instances of fraud, the thief isn’t a hardened career criminal that managed to get past background and reference checks to get their foot in the door without anyone noticing. Most of the time fraud is committed by people whose circumstances changed so they made the decision to act unethically for their own gain. So, the more you aim to understand what kind of vulnerabilities allowed them to do it and why it wasn’t noticed sooner, the more successful you’ll be in mitigating future fraud risk to protect your organization.  

We know that for fraud to exist, three things need to be present: pressure, opportunity, and rationalization. We call these “the fraud triangle.” Our colleague Todd Kimball has written extensively about these factors, but we’ll quickly summarize them for you:

1. Pressure – A person faces a financial problem that is either real or perceived. This financial stressor could be medical bills, an addiction, a desire to elevate their social status, legal trouble, etc.
2. Opportunity – The ability to commit a crime that is unlikely to be detected is realized. Thinking that they won’t get caught is a key component here because people are far more likely to commit a crime if they think they’ll get away with it.
3. Rationalization – The person finds a way to justify their crime to themselves to ease their conscience. Their justification can be short-sighted (“I’m only borrowing the money, I’ll pay the company back!”), apathetic (“The company wastes so much money anyways, they won’t miss it.”), or malicious (“I hate this company!”).

As you can see, simply having financial pressure and the ability to rationalize their illegal activity doesn’t create the right conditions for someone to commit fraud. Fraud also needs opportunity! This is the area that your organization can control through better fraud management practices.

Improve Fraud Prevention Efforts
Investigate exactly how the fraud was perpetrated so you know what needs to be fixed with your internal controls. Look at your organization’s key internal controls for areas where they can be improved. At a minimum, every organization’s internal controls should include:

• Segregation of duties across accounting responsibilities.
• Restricting physical access to areas and digital access to systems.
• Requiring manager approval for transaction authorizations.
• Auditing physical assets and financial records.
• Standardizing templates for financial documents.
• Reconciling bank accounts, credit accounts, and supplier statements.

Strengthening these internal controls can help to protect your organization from the most common types of business fraud including asset misappropriation, vendor fraud, accounting fraud, payroll fraud, and bribery.

Get the Fraud Prevention Checklist Now!

When your organization needs help rebounding after fraud has occurred, please reach out to us! Our team of experienced accounting consultants can help you understand the extent of the fraud and help close the door on future fraudulent attempts. Let our team provide the outsourced accounting services that you need to better mitigate fraud risk. Contact us today to find out more! ​