Investigating an Allegation of Fraud
by James Marasco , CPA, CFE, CIA
Director, Corporate Services
StoneBridge Business Partners
Reprinted with permission from the Fraud Matters Newsletter of CPA America.
When a fraud is suspected, organizations must proceed quickly, yet with caution. In most situations, simply calling the local police won’t help. Making false allegations or a wrongful termination may backfire against an employer and cause damage worse than the fraud itself. Prematurely tipping off an employee or co-conspirators may result in losing opportunities to obtain information and valuable documentation that can be used to substantiate the fraud. An experienced attorney and forensic accountant can help counsel you through this process.
Quickly gathering the facts is paramount to any investigation, along with safeguarding the organization from continued fraud. Documentation substantiating your losses must be complete and thorough. As your investigation begins to identify the perpetrator(s) and scheme(s) being used, you should develop your objectives. Some businesses are satisfied with a termination, while others want full restitution and prosecution. Most organizations will quantify their losses before making this decision. Be prepared to be surprised throughout the process. Your loss may far exceed what you first imagined.
Professional assistance is particularly useful in understanding your rights as an employer concerning access to a suspected employee’s office and e-mail/voicemail communication. Interviews of these individuals should be conducted by those with proper experience and knowledge of their boundaries. A trained fraud examiner can be very effective in soliciting a confession from an interviewee. The initial interview may be the last and best opportunity to obtain information. The perpetrator will likely become aware that you suspect them and the fraud, so you want to use this opportunity wisely, before they “lawyer up.”
Investigating transactions, combing through business records and interviewing employees could very quickly become overwhelming and disruptive to an organization. As the scheme is identified and developments quickly unfold, it is important for the company to remain focused on their business and identify appropriate personnel to coordinate these efforts. This is extremely important because the fact finding phase may be quick to start and end. Yet, potential litigation is often prolonged and slow moving.
As soon as it’s determined that a fraud has occurred, consideration should be given to notifying your insurance agent. The insurance company must be timely notified and usually the perpetrators must be criminally charged for a successful claim against the policy to occur. If you decide to have the person responsible for the fraud criminally charged, or if you proceed with a civil case, your documentation must be clear, concise and rock solid. Most district attorney’s offices do not have an abundance of white-collar experts. It’s even tougher for them to investigate the smaller cases. Building and documenting your case in an organized manner will help to ensure that it will move through the system quicker. A thoroughly complete and documented case may lead to a demoralizing situation for the perpetrator. Faced with solid proof, they may be inclined to confess.
Your attorney should be consulted as to whether a civil suit should be brought against the alleged perpetrator. If you are having trouble getting certain information, this may give you subpoena power to collect additional documents. For example, obtaining their personal bank statements can assist you in quantifying how much of your funds were deposited into their account. A civil claim can work parallel to a criminal case. It can be used to secure a judgment against their property so assets won’t disappear while a criminal proceeding limps along.
If your investigation produces solid results, many organizations are happy with a simple termination and a plan for restitution. Many not-for-profits choose this route. They are often concerned about negative publicity threatening their funding sources. Other organizations have a strong desire not to “air their dirty laundry.” As mentioned in the last newsletter, foregoing prosecution usually results in your problem becoming someone else’s in the future. Taking the time to carefully investigate an allegation of fraud, enlisting the help of qualified professionals and carrying through with determined prosecution will send an undeniable message throughout the organization. It may prevent having to go through this process again in the future.
James I. Marasco, CPA/CFF, CFE,
Jim is a partner at EFP Rotenberg. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners (an EFP Rotenberg affiliate company). Read more about Jim . Article republished with the permission of CPAmerica.