When business owners suspect that an employee is stealing assets or manipulating financial results, it’s time to call a fraud expert to investigate. Although the complexity of the incident will determine the investigation’s scope, there are three basic steps forensic accountants generally follow to build a fraud case that can stand up in court.
1. Conducting interviews
Fraud interviewers know how to spot warning signs, detect deception and pin down suspicions when talking with suspects and their coworkers. But they usually start with management interviews, by asking owners, executives and audit committee members what they know about:
- Possible fraud ploys,
- The company’s fraud risks, and
- Internal controls that have been implemented to mitigate specific fraud risks or to generally help prevent, deter and detect fraud.
An expert may interview not only your company’s management and audit committee, but also anyone who can provide information about financial fraud risks. These interviews might include employees involved in initiating, recording or processing complex or unusual transactions, as well as operating personnel not directly involved in the financial reporting process.
When interviewing suspects and potential witnesses, experts encourage interviewees to do most of the talking and use silence as a tool to elicit information. Before concluding the interview, they confirm the information they’ve gathered.
2. Gathering evidence
Fraud experts also collect physical and digital evidence of possible fraud from the company’s internal sources. Examples include personnel files, phone and email records, security camera recordings, and physical and IT system access records.
Locating this evidence may require computer forensic examinations. Expect your expert to ask to access your accounting system to search for suspicious journal entries, credits, reversals and overridden controls. Experts may also collect external sources of evidence, such as public records, customer and vendor information, media reports and private detective reports.
3. Analyzing facts
Fraud specialists have been trained to review and categorize internal and external evidence, conduct computer-assisted data analysis and test various hypotheses. Rather than rely on gut instinct, your expert will formally document every step in the investigation and follow formal procedures to ensure a comprehensive investigation.
When experts finish conducting interviews and gathering evidence, they report their findings. You and your attorney may determine the appropriate format for a report and how distribution will be affected by the need to protect legal privileges and avoid defamation.
Avoid a botched investigation
A proper investigation is essential to building a strong fraud case. Indeed, botched investigations could prevent your company from recouping losses and prosecuting the perpetrator. Contact us if you suspect fraud in your organization.
© 2020 Covenant CPA
Businesses and fraud experts often face a long, arduous process when investigating any occupational fraud incident. When the suspect is a member of upper management, it’s exponentially harder.
In theory, investigating executives shouldn’t differ from the process of investigating rank-and-file employees. In reality, the authority and influence of an executive can slow — even shut down — a fraud investigation. You need a plan to prevent interference and facilitate the collection of evidence that can be used in court, if necessary.
The first step is to brief the executive’s chain of command. As soon as allegations surface, work with your company’s human resources and legal departments to make the suspect’s superiors aware of the situation. If you believe the fraud may involve the executive’s immediate boss, brief someone higher up the chain of command.
To minimize the potential for rumors and information leaks, limit the number of employees with knowledge of the investigation. Instruct them to refrain from discussing the case with anyone within or outside the company. Better yet, hire a fraud investigator to handle most of the investigation. An outside expert knows how to protect confidential information and is able to remain professional and impartial when interviewing suspects and potential witnesses.
If employees participate in the investigation, involve only experienced and trustworthy people. An investigation of an executive inevitably attracts greater scrutiny from the senior executive team and stakeholders such as investors. So make sure the team conducts the investigation in strict compliance with your company’s personnel policies and employment law. Investigation-related electronic files should be password-protected and physical documents stored on-site should be secured in a locked filing cabinet.
Many companies are hesitant to discipline (particularly, to terminate), an executive involved in wrongdoing due to potentially negative publicity. In fact, many senior executives expect to see overwhelming evidence of wrongdoing before they agree to take action against a colleague. Keep this in mind as your team conducts its investigation.
You should try to assemble convincing evidence of fraud before formally interviewing the suspect. To avoid being overwhelmed or overpowered by the executive, a professional fraud examiner or a superior executive should conduct the meeting. Should the need arise to suspend the executive pending further review, make sure someone with the appropriate authority is present.
Cost is too high
Investigating allegations of wrongdoing by an executive can be stressful, but it’s critical. According to the Association of Certified Fraud Examiners, the median loss associated with fraud perpetrated by an owner or executive is $850,000, compared with $100,000 for non-management employees. If you suspect executive fraud, don’t hesitate to contact us.
© 2020 Covenant CPA