What should you do if you suspect an employee is stealing assets or cooking the books? Here’s how business owners can handle fraud suspicions to minimize disruptions, preserve evidence and mitigate losses.
How to Investigate Fraud
Managing the Business Risk of Fraud: A Practical Guide, a joint publication of the Association of Certified Fraud Examiners (ACFE), the American Institute of Certified Public Accountants and the Institute of Internal Auditors, outlines the approach a qualified expert will take to execute an effective, coordinated fraud investigation. According to the guide, fraud investigations generally follow a basic 10-step process:
- Categorize issues.
- Confirm the validity of the allegation.
- Define the severity of the allegation.
- Identify types of information that should be kept confidential.
- Define how the investigation will be documented.
- Manage and retain documents and information.
- Escalate the issue or investigation (when appropriate).
- Refer issues outside the scope of the program (when appropriate).
- Conduct the investigation and fact-finding.
- Resolve or close the investigation.
Work with legal counsel and your forensic accounting expert to determine the appropriate process for the particular matter at hand. You’ll need to give the expert authority to conduct the investigation and work with internal departments, including human resources, in-house counsel, senior management, IT and internal audit.
How Investigations Work
A forensic expert typically starts by interviewing third-party witnesses, corroborative witnesses, the alleged perpetrator and any co-conspirators. The expert will also gather relevant evidence from internal documents, such as personnel files, internal phone records, email, financial records, security camera tapes, and physical and IT system access records. External sources of evidence could include public records, customer and vendor information, media reports and private detective reports.
Then, the expert will review and categorize the information collected, conduct computer-assisted data analysis and test various hypotheses. He or she will document and track every step in the investigation. Appropriate documentation covers:
- Privileged or confidential items,
- Requests for documents,
- Electronic data and other information,
- Memoranda of interviews, and
- Analysis of documents, data, interviews and conclusions drawn.
Finally, the expert will deliver a report of his or her findings. Discuss with your attorney the appropriate format for the report and how distribution will be affected by the need to protect legal privileges and avoid defamation.
How to Prevent Future Losses
To minimize its legal liability, a company must take some corrective action in response to an expert’s fraud findings. The company may even consider taking action before the investigation is complete, when necessary to maintain confidentiality, preserve evidence or mitigate losses. Management could, for example, suspend or reassign an employee or commence legal action to restrain specific assets.
After the expert has completed the investigation, the company can make a criminal referral and may even be required to do so by law. Alternatively, the company might pursue civil litigation, impose disciplinary action, file an insurance claim, extend the investigation, or revise business processes or internal controls.
Why Pursue Prosecution
More than 40% of fraud victims choose not to formally refer perpetrators to law enforcement authorities for prosecution, according to the 2016 Report to the Nations on Occupational Fraud and Abuse published by the ACFE. Why? Many victims fear negative publicity. Others felt internal discipline (usually termination of employment) was sufficient, or they settled the case privately.
However, failing to pursue prosecution of white collar crime sends an undesirable message to other employees. That is, if you commit fraud against this employer, management is unlikely to report it to the police. Without fear of prosecution, other employees may feel emboldened to test the waters.
Moreover, when management doesn’t refer fraud cases to law enforcement, there’s no criminal record created for the perpetrator, allowing him or her to commit similar crimes against future employers. Fraudsters tend to be habitual offenders — and they become craftier and bolder with each new scam.
If fraud strikes, a formal investigation can protect your company (and others) from future scams. By understanding how your expert will conduct the investigation, you can ensure you’re providing the information and assistance necessary for it to be successful.