Natalie S. Lewis, CFE, CPA/CFF
Fraud is a pervasive issue that affects businesses, organizations and individuals across various industries. Often, an organization is surprised to find itself a victim of fraud, especially when the perpetrator is a trusted employee. According to the Association of Certified Fraud Examiners Occupational Fraud 2022: A Report to the Nations, organizations lose approximately five percent of revenue to fraud each year with the average loss per case totaling more than $1.78 million. Chances are if an organization has not yet discovered fraudulent activity within the company, it is only a matter of time. It is important for organizations to remain vigilant and prepared to handle the situation carefully and responsibly once fraud arises. Fraud investigations are complex and multifaceted processes that require a systematic approach. For many companies and owners, this is unfamiliar territory, and most are unsure what to do once fraud is discovered.
The Initial Steps
As a business owner or executive, it is important to follow these initial steps in order to protect your company from fraud, as they are crucial to a successful investigation:
Assemble your team of professionals. Once you suspect fraud has occurred within your organization, your first step should be lining up your team of professionals skilled in conducting fraud investigations. The team should be comprised of outside legal counsel, a forensic accountant and a computer forensic specialist. While in-house counsel and accounting staff may be included in meetings and discussions, attorneys and forensic accountants experienced in investigations can independently conduct interviews and perform analysis with a neutral perspective. For further consideration, an employment attorney can guide you on the appropriate and legal way to handle the suspected employee.
The investigative team will define the scope of the probe, establish clear communication about the division of responsibilities and ensure compliance with legal and ethical requirements. Investigators must collaborate with legal professionals to ensure compliance with applicable laws, regulations and rules of evidence. When selecting your team of professionals, certain skillsets should be considered, such as interviewing, financial analysis and data analytics, and potentially other technical specialties depending on the facts and circumstances.
Forensic accountants and fraud investigators are trained to examine and analyze financial records. These records will include financial statements, bank records, transactional data and other relevant documents to identify irregularities, discrepancies or patterns indicative of fraudulent activities.
Throughout the investigation, the team will likely need to interact, or possibly interview, key personnel within the organization and from various departments. Interviews play a crucial role in uncovering fraudulent activities. Interviewing witnesses, victims, suspects and relevant individuals can provide valuable insights, help corroborate evidence and aid in identifying potential perpetrators. Selecting a team of professionals skilled in interviewing techniques and behavioral analysis should be considered.
Information should be distributed with care and consideration. In addition, the investigation team should establish confidentiality guidelines for all parties involved to prevent leaks and/or misinformation.
Inform necessary parties. Once your organization learns of a substantiated fraud claim, certain parties should be notified of the investigation, such as your company’s board of directors, internal audit department, human resources and management. While certain key personnel may need to be informed about the allegations, your team of professionals may wish to keep most information related to the investigation concealed as they determine all involved parties, including if suspects were colluding together in the scheme.
Another party that should be notified as soon as a loss is determined is your insurance company. For many organizations, their business insurance policy includes coverage for employee dishonesty or other coverage for fraudulent activity, known as fidelity or commercial crime insurance. To file a claim, you must notify your insurance carrier once a loss has been discovered. You will want to review your policy to ensure you adhere to the requirements necessary when filing a claim, such as the notification window and the company’s response once a loss is discovered. Further, your policy may include coverage for claims preparation which would reimburse the company for professional fees incurred to investigate and quantify the covered loss.
Restrict suspect’s access. When assembling your team, ensure that you protect your organization from further damage by removing the suspected employee’s access to the company’s systems, corporate credit card and other physical assets. In addition, your human resources officer and employment attorney may advise you to place the suspect employee(s) on a leave of absence during the investigation before termination.
Gather and preserve evidence. Gathering and preserving all evidence is crucial for possible civil and/or criminal court proceedings and potentially a fidelity insurance claim. Investigators must promptly secure physical and electronic evidence while ensuring proper documentation, chain of custody and forensic best practices to maintain integrity and admissibility. This involves seizing documents, electronic data, conducting interviews, using specialized tools and capturing ephemeral messaging.
Document investigative procedures and findings. Thoroughly document all actions, interviews, findings and evidence collected throughout the investigation. Comprehensive records of the investigation process support the development of a cohesive narrative and facilitates effective communication with stakeholders and legal authorities. The investigative team should compile a final report detailing the investigative process, interviews, witness statements, documents, financial analysis and recommendations for strengthening internal controls.
Implement Recommended Corrective Measures. Investigative reports assess vulnerabilities and recommend corrective measures to strengthen internal controls. It is essential to leverage the lessons learned from each investigation to continuously improve fraud prevention and detection mechanisms, enhancing organizational resilience. Evaluate existing internal controls and security measures to identify any weaknesses that may have allowed the incident. Strengthen these controls to prevent future fraud and protect the company’s assets.
Conducting a successful fraud investigation requires meticulous planning, thorough execution and collaboration among investigators, experts and legal professionals. Throughout the investigative process, it is important to handle the situation legally, professionally and ethically. By following the outlined steps and adhering to best practices, investigators can maximize their chances of uncovering fraud, mitigating losses and implementing preventive measures to safeguard against future fraudulent activities.
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SOURCE: ACFE Insights – A Publication of the Association of Certified Fraud Examiners