There are many warning signs of fraud in an organization. Maybe something is not adding up, the books are not balancing, and you cannot seem to get a straight answer. Now what?
What to Do (and Not Do) if You Suspect Fraud
There are no standard operating procedures when you suspect fraud in your organization. Each case presents a unique set of facts and circumstances that are complicated by professional and interpersonal relationships. It can be overwhelming, and in some cases, it can cause you to react in ways that are detrimental to you or your organization’s best interest. So, what do you do if you suspect fraud in your organization? Just as importantly, what should you not do?
Do Consider Consulting with an Attorney and/or Forensic Accounting Professional
It is almost always in your best interest to seek assistance from an experienced professional who can remain emotionally objective, and act in the best interests of you and your organization.
Attorneys and forensic accountants can help you efficiently collect key pieces of data and documentation that will be critical to the outcome of your investigation while avoiding common pitfalls and mistakes. Hiring an attorney has the additional benefit of establishing an attorney/client privilege should the situation lead to litigation.
Do Prioritize Your Goals
An often-overlooked step in the investigation process is to consider your outcome goals. Your goals will dictate the best course of action in an investigation.
For example, if your goal is to mitigate your fraud losses, you may be forced to act as quickly as possible to “stop the bleeding”. On the other hand, if your goal is to ensure the suspected fraudster is convicted, you might consider allowing the fraudulent activity to continue so that you can catch them in the act, sometimes referred to as invigilation.
Your goal may be to recover as much of the stolen funds as possible. If this is the case, you will want to carefully consider recovery options including filing an insurance claim, filing a lawsuit against the fraudster or a tax deduction.
Do Obtain, Retain, and Organize Evidence
You should treat every investigation as if it will end up in court. Courts rely solely on evidence presented at trial. It is critical that you collect and preserve relevant evidence as soon as possible. If a fraudster suspects you are on to them, they may take steps to destroy, distort or hide evidence if they haven’t already. It is also important to maintain an appropriate chain of custody of any evidence collected to ensure you are able to prove their validity in court should that become necessary.
Do Consider Reporting to Law Enforcement
This may sound like common sense, however, in practice this can be a highly emotionally charged decision. According to the Association of Certified Fraud Examiners’ (ACFE) 2020 Report to the Nations, only 59% of cases were reported to law enforcement. There are a number of reasons that cases are not reported to law enforcement including fear of bad publicity, concern of a drawn-out legal process and complex interpersonal relationships. We encourage reporting cases to law enforcement to deter future similar behavior by a fraud perpetrator.
Do NOT Immediately Confront or Terminate the Suspected Employee
Your initial impulse may be to confront the suspected fraudster at the first sign they may be stealing. Please avoid doing this at all costs! As mentioned above, once you confront the fraudster, you have alerted them to the fact that they are under investigation, and they will likely take steps to cover their tracks. They may also quit on the spot, and you will lose any leverage you may have to conduct an interview that may result in critical evidence or even a confession.
Immediately terminating the suspected employee can have even worse implications. I have seen numerous investigations stemming from a former employee suing the company for wrongful termination. You will want to ensure that you adequately investigate and document suspected fraud prior to terminating employment. A common alternative to termination is placing an employee on a temporary administrative leave while the investigation takes place.
In an ideal investigation, you will obtain and analyze all documentary and electronic evidence first. Then you will conduct interviews of uninvolved employees who may have additional useful knowledge. Only then, when you are armed with as much information as possible, will you approach the fraudster for an interview.
Do NOT Do Nothing
Unlike a fine wine, these situations do not age well. According to the ACFE’s 2020 Report to the Nations, cases that lasted six months or less resulted in a median $50,000 loss. Compare that to cases lasting more than 60 months, which resulted in a median loss of $740,000. Fraudsters tend to start out small, testing the waters, and become emboldened to steal more over time. Some may stop stealing on their own volition, but it is not something you want to count on.
Do NOT Let Emotions Cloud Your Judgement
Cases of employee theft can be extremely emotional. These cases often involve personal relationships that can go back years or decades, and such a betrayal can be extremely hurtful. Emotions can cloud your ability to objectively assess evidence and can cause you to take actions against your own best interest. It can be difficult to avoid “tunnel vision”, where you form a theory of what happened, and search out evidence to fit your model of the story.
It is important to remain objective and take a “fraud theory” approach, whereby you analyze data, create a hypothesis, test that hypothesis, and refine the hypothesis as necessary until you arrive at a fraud theory that is fully supported by the evidence.
Do NOT Forget to Implement Preventative Controls
Once the investigation is resolved, you breathe a sigh of relief, it is finally over and behind you. Or is it?When analyzing the fraud triangle, fraud cannot occur without opportunity. This opportunity is often preventable with appropriate internal controls. Learn from what happened and implement a set of internal controls that might prevent something similar happening in the future. You do not want to have to go through this again!
If you suspect fraud has occurred in your organization, contact an Anders advisor below. We would be happy to discuss your situation with you to determine appropriate next steps. Learn more about Anders Forensic, Valuation and Litigation services.
