Discovering financial fraud or corporate misconduct can put a business at serious financial and legal risk. Whether the suspected misconduct involves embezzlement, fraudulent transactions, misuse of company assets, breach of fiduciary duty, or deceptive business practices, taking the right steps early can help protect the company and preserve important evidence. A commercial litigation lawyer can help a business evaluate its legal options, investigate the conduct, and determine whether litigation or another resolution may be appropriate.

Harrison Davis Morrison Jones handles complex business disputes involving fraud, conversion, breach of fiduciary duty, business torts, partnership disputes, shareholder disputes, and other commercial matters.

What Counts as Financial Fraud or Corporate Misconduct?

Financial fraud and corporate misconduct can take many forms. A business may discover suspicious activity involving company funds, financial records, contracts, customers, vendors, employees, officers, directors, shareholders, or business partners.

Examples may include:

• Unauthorized transfers of company funds

• Embezzlement or conversion of business assets

• Falsification of financial records

• Fraudulent invoices or transactions

• Misuse of corporate credit cards

• Undisclosed conflicts of interest

• Self-dealing by an officer or director

• Breach of fiduciary duty

• Misrepresentation in business transactions

• Theft of company property

• Fraud involving business partners

• Improper diversion of corporate opportunities

Not every accounting mistake is fraud. However, unusual transactions or unexplained financial discrepancies can justify further investigation.

1. Secure the Company's Financial Records

The first step should be protecting relevant business records and financial information.

Depending on the circumstances, this may include:

• Bank statements

• Accounting records

• General ledgers

• Invoices and receipts

• Contracts

• Payroll records

• Tax documents

• Corporate credit-card statements

• Email communications

• Text messages

• Accounting software records

• Electronic payment records

• Vendor information

• Internal financial reports

Do not alter, delete, overwrite, or destroy potentially relevant information. Digital evidence can become particularly important when investigating suspected financial misconduct.

A business should also review who currently has access to bank accounts, accounting systems, financial software, corporate credit cards, and other sensitive systems.

2. Determine What Happened Before Accusing Anyone

A business should avoid immediately accusing an employee, shareholder, officer, director, partner, or vendor based solely on an unexplained transaction.

Instead, conduct a controlled fact-finding investigation.

Start by determining:

• What transaction or activity appears suspicious?

• When did it occur?

• Who authorized it?

• Who had access to the funds or records?

• How much money or property may be involved?

• Was the transaction consistent with company policy?

• Are there similar transactions?

• Who may have benefited?

• What documentation supports the transaction?

A careful investigation can help separate an accounting error from intentional misconduct and may uncover additional evidence.

3. Preserve Evidence Before It Disappears

Evidence preservation is especially important when corporate misconduct may lead to litigation.

Relevant evidence could include emails, financial records, electronic communications, accounting-system entries, contracts, bank records, computer files, and documents showing who approved particular transactions.

Harrison Davis explains that its litigation process begins with an initial investigation involving the collection of information, review of relevant facts, witness information, and applicable law before proceeding with legal action.

If litigation is reasonably anticipated, a business should consider appropriate measures to preserve potentially relevant information rather than allowing ordinary document-destruction practices to eliminate evidence.

4. Review Internal Controls and Access

After discovering suspected fraud, determine how the conduct was possible.

For example, ask whether one person had excessive control over:

• Company bank accounts

• Accounting software

• Payment approvals

• Payroll

• Vendor creation

• Corporate credit cards

• Financial reporting

• Checks and wire transfers

A review of internal controls may identify weaknesses that need to be addressed immediately.

A business may need to change passwords, revoke system access, require additional approval for financial transactions, separate accounting responsibilities, or implement additional review procedures.

These measures can help limit further losses while the investigation continues.

5. Consult an Experienced Business Litigation Attorney

Financial fraud can quickly become more complicated than an internal accounting issue.

The conduct may involve claims related to fraud, breach of fiduciary duty, conversion, breach of contract, or other business torts. Determining which claims may apply requires an examination of the facts, available evidence, contracts, corporate documents, and applicable law.

Harrison Davis's commercial litigation practice specifically includes fraud, conversion, breach of fiduciary duty, business torts, partnership disputes, shareholder disputes, and disputes involving limited liability companies.

Early legal guidance can also help a company avoid taking steps that could unnecessarily damage evidence or weaken a potential claim.

6. Identify Who May Be Responsible

Corporate misconduct does not always involve only one individual.

Depending on the circumstances, potentially responsible parties may include:

• Employees

• Corporate officers

• Directors

• Business partners

• Shareholders

• Vendors

• Contractors

• Financial professionals

• Other companies or individuals involved in the transaction

The relationship between the parties can affect the legal claims available to the business.

For example, conduct by a company officer or business partner may raise questions about fiduciary duties, while a third party's deceptive conduct may create a potential fraud or business tort claim.

7. Assess the Company's Financial Losses

Before deciding how to proceed, determine the full extent of the company's losses.

The financial impact may include more than the amount initially discovered.

Potential losses can involve:

• Misappropriated funds

• Diverted business opportunities

• Lost profits

• Unauthorized expenses

• Damaged business relationships

• Costs associated with investigating the misconduct

• Additional financial losses caused by the misconduct

A forensic accountant or other financial professional may sometimes be useful in reconstructing transactions and determining the scope of the losses.

For complex commercial disputes, Harrison Davis emphasizes its ability to work with clients, analyze business disputes, and use litigation resources and experts when necessary.

8. Consider Whether Negotiation or Litigation Makes Sense

Not every business fraud dispute needs to go directly to trial.

Depending on the circumstances, possible strategies may include negotiation, mediation, arbitration, or litigation.

The appropriate approach may depend on:

• The strength of the evidence

• The amount of money involved

• The relationship between the parties

• Whether the misconduct is ongoing

• The possibility of recovering assets

• Contractual dispute-resolution requirements

• The likelihood of reaching a fair settlement

Harrison Davis notes that its commercial litigation attorneys evaluate whether pursuing a claim in court or negotiating a settlement is the appropriate strategy for a particular business dispute.

If litigation becomes necessary, the case may proceed through pleadings, discovery, depositions, document requests, expert analysis, settlement negotiations, and potentially trial.

Why Is Early Action Important in a Corporate Fraud Case?

Waiting too long can create additional problems.

Financial records may become harder to obtain, electronic communications may be deleted, witnesses may become unavailable, and additional transactions may occur.

Legal deadlines can also affect a company's ability to pursue certain claims. Statutes of limitations establish deadlines for filing lawsuits, and the applicable period can vary depending on the nature of the claim and circumstances.

For that reason, a business that discovers suspected financial fraud should consider getting legal advice promptly rather than waiting until the losses become larger.

What Should a Business Do After Discovering Financial Fraud?

A business should preserve evidence, secure financial systems, investigate the suspected misconduct, determine the scope of its losses, identify potentially responsible parties, and obtain appropriate legal advice.

The goal is not simply to determine who may have committed misconduct. A thorough investigation should also determine how the misconduct occurred, whether it is continuing, what evidence supports the allegations, what financial damage resulted, and what legal remedies may be available.

Harrison Davis Morrison Jones has extensive experience handling complex commercial litigation and reports a significant prior verdict involving commercial litigation and banking fraud.

If your business has discovered suspected fraud, conversion, breach of fiduciary duty, or other corporate misconduct, consulting an experienced commercial litigation attorney can help you understand the available options and determine the most appropriate next step.

Frequently Asked Questions

1. What should a company do first after discovering financial fraud?

The company should protect its financial systems and preserve potentially relevant records. It should then conduct a careful investigation to determine what happened, who may be involved, and the potential financial impact before making accusations or taking major legal action.

2. Can a business sue someone for financial fraud?

Potentially. Depending on the circumstances, a business may have claims involving fraud, conversion, breach of fiduciary duty, breach of contract, or other business torts. The available claims depend on the specific facts and applicable law.

3. What evidence is important in a corporate fraud case?

Important evidence may include bank statements, accounting records, invoices, contracts, emails, text messages, payment records, corporate documents, financial reports, and other communications or records showing how transactions were authorized and conducted.

4. Can a business recover money lost through corporate misconduct?

Potentially. The ability to recover losses depends on the facts, available evidence, applicable law, responsible parties, and whether assets or other sources of recovery are available. A business litigation attorney can evaluate potential remedies.

5. Should a business negotiate or file a lawsuit after discovering fraud?

There is no single answer for every case. Negotiation, mediation, arbitration, or litigation may be appropriate depending on the evidence, amount of loss, contractual requirements, business relationships, and likelihood of obtaining a fair resolution. An attorney can help evaluate the available strategies.