Fraud Happened at Your Business – Now What?

The following is adapted from Protect Your Profit.

It can happen to any business owner—things are going well when you notice something wrong in the books. You investigate and uncover something you never expected to happen at your business: fraud.

Now what? If fraud has already happened at your business, you should fire your CPA and hire a new one. In fact, hire a whole new finance team. Now is the time to bring in expert help.

Then, consider doing a thorough audit of all your books. Once you know fraud has occurred, you need to determine the extent of the fraud.

Next, set up good accounting practices—better late than never. If fraud has happened once, it could happen again, so take measures to prevent that from happening.

Finally, start legal action. In a lot of cases, you won’t be able to recoup all the money lost, but you won’t get anything back if you don’t start legal action.

You’ve likely heard the phrase “the best offense is a good defense,” and that saying applies here in that fraud is much easier to prevent than it is to resolve. By being proactive in protecting yourself, you can avoid the legal nightmare of fraud in the first place.

Follow these tips to reduce the risk of fraud happening at your business:

• Be diligent and disciplined in reviewing accounts. Thieves go after the easy mark, and embezzlers are thieves. If you’re diligent about reviewing your accounts, people are less likely to try to steal from you. And if fraud does occur, you will be able to identify and put a stop to it more quickly if you are regularly reviewing the accounts.
• Double-check everything. You have to double-check everything. You can’t blindly trust that others will do their jobs honestly or correctly.
• Look at percentages. You should have a general idea of your gross profit margin (sales after accounting for the direct cost of producing those sales) as well as your net profit margin (your actual profit, after accounting for all costs). Once you know what the percentages should be, you can quickly review statements and see whether the numbers are in line with your expectations. If the percentages are off, it might be due to embezzlement. Even small variances in the percentage should be investigated. Just 1% of $10 million is $100,000, and if the embezzlement is spread across many years, that amount will quickly add up.
• Utilize good hiring practices. Your employees form the foundation of your business, so be diligent in your background checks and verify new hires’ qualifications. Check potential hires’ credit reports as well as criminal records. Credit reports tell a lot about a person’s character. Do they pay back their debts? Do they pay people on time? Do they take ownership of the debts they incur, or do they commit to things they know they can’t afford?
• Ask questions. Ask your bookkeeper or whoever is in charge of the financials questions about the information they’re giving you: Has every single bill been posted here? Has every single invoice been recorded? Does this report include the most recent expenditures? Have all the banking and credit card transactions been posted? Have these accounts been reconciled?

When fraud has already occurred, you’re put in the position of doing damage control. Instead, take the opportunity to establish a good system, put safeguards in place, and practice diligence before it’s too late.  

For more advice on handling fraud, you can find Protect Your Profit on Amazon.

Elizabeth Hale is the founder of eeCPA, which has been providing clients with customized accounting solutions since 2004. Hale has worked with small- to medium-sized businesses for more than twenty-five years and has owned and operated several businesses. In addition to being a member of the American Institute of Certified Public Accountants and the Arizona Society of CPAs, she serves as the finance director of the Entrepreneurs’ Organization. Hale lives in Scottsdale, Arizona, with her three children.