Guarding Against Embezzlement Fraud: Defensive Measures

Now that you’ve gained valuable information from the first and second parts of our educational series, Guarding Against Embezzlement Fraud, we offer insight into defensive measures.

It is extremely important to understand the necessity of an adequately controlled investigation.  The moment embezzlement or fraud is suspected, steps should be taken to mitigate the company’s damages while assuring that the criminal activities cannot be repeated.

However, as with all investigations, there is a right way and a wrong way to approach embezzlement activities. When an employer has been financially victimized by an employee who is suspected of fraud or embezzlement, the defensive measures listed below should be followed. These steps should help a company avoid various legal landmines associated with an internally focused investigation.

  • Time is of the essence
    • Scheme has probably been in place for a while.
    • Financial impact likely much higher than it originally appears.
    • Management must mitigate the company’s losses by moving quickly to curtail further criminal activity.
  • Prompt notification
    • Contact insurance provider.
    • Failure to promptly notify the insurance company may void coverage.
  • Contact legal counsel
    • An attorney with fraud experience can be invaluable in developing and executing a litigation plan.
    • An attorney with employment experience can be helpful in guiding you through the maze of employer and employee rights.
  • Develop an investigative plan
    • Hire Certified Fraud Examiner (CFE).
    • Organize and review pertinent documents.
    • Conduct confidential meetings with management and staff to find those who will be useful to the investigation.
    • Arrange for identified individuals to be made available for interviews.
  • Preserve evidential materials
    • Assemble copies of computer data, files, and reports.
    • Secure all pertinent original data and catalog all documents.
    • Secure any related computer data or media.
    • Review plans with your attorney to search the employee’s desk and office to avoid making any mistakes.
    • Once an employee has been notified he/she is the subject of investigation, the employee should not be allowed to handle or remove anything from the office with the exception of personal items.
    • Don’t overlook offsite and remote computers this employee may have used for work-related purposes.
    • Restrict the employee’s access to company computers while changing all passwords to prevent unauthorized access or destruction of evidence.
  • Decide how to deal with the alleged perpetrator
    • Avoid the urge to terminate to avoid wrongful termination, defamation, slander or libel suits.
    • Retaining employees can be advantageous: (1) employees have a common law responsibility to cooperate with employers in a legitimate investigation and (2) may make obtaining records needed to prove fraud easier.
  • Know your employer rights
    • You have the right to conduct a fraud examination.
    • You have a responsibility to stockholders to investigate and recover any losses suffered via theft.
    • Laws regarding employee rights in the workplace do not have to hamper your investigation but do have to be followed.
  • Where there is smoke, there is fire
    • What may initially seem like a simple scheme may ultimately prove to be a much bigger operation with fraudsters inside and outside the company.
    • Common embezzlement schemes may involve outside vendors and associated accomplices.
    • Perpetrator’s first admission is likely only a small part of the whole story, so don’t stop digging too soon.

A successful outcome when embezzlement fraud is discovered requires interplay of many diverse elements, not to mention a delicate balance between the rights and responsibilities of both the employer and the employee.

Hiring seasoned professionals on the legal and accounting fronts will help an employer avoid missteps that could result in further loss of revenue and assets. Professional assistance may also prove helpful in identifying failed accounting procedures and remedial actions.

Finally, a professionally managed fraud investigation is often a major catalyst in protecting the employer from further fraud, embezzlement, and related criminal activities.

Guarding Against Embezzlement Fraud: What Can Go Wrong?

Welcome to the second installment of our three-part educational series on Guarding Against Embezzlement Fraud. Catch up on part one, Guarding Against Embezzlement Fraud: Developing An Action Plan.

Simply adopting an action plan doesn’t necessarily eliminate the risk altogether. What can go wrong? Many varied problems. The reason unexpected situations arise is because they are unexpected. Examine the following case study:

 In this example, the management of a regional midsized corporation discovered that a key accounting department employee had embezzled more than $300,000 in company funds.

 As a result of the discovery and the subsequent investigation, the company’s outside auditing firm issued a report indicating that the accounting employee was responsible for the loss. The company ultimately filed a claim with its insurance carrier recouping only $25,000 of the original $300,000 loss. This shortfall was primarily because of policy coverage limitations. While management realized that the embezzled money had been gambled away and, therefore, would not be recouped, the corporation insisted that the employee be punished for the theft.

 Accordingly, management turned the matter over to the local district attorney who presented the case to the grand jury, obtained an indictment and prosecuted the employee for criminal fraud. Having presented limited evidentiary materials at trial, including the employee’s schedule, copies of various daily accounting reports, periodic bank deposit statements and direct management testimony, the jury acquitted the employee.

 Once acquitted, the vindicated employee filed a $1 million defamation law suit against the outside auditing firm and the company. The case was ultimately settled out of court, leaving the company with substantial legal fees and a large monetary settlement in addition to its initial embezzlement losses.

 This may seem unbelievable, but actually it’s far from unique. Be sure to read our upcoming final part in this series next week about how to conduct a successful investigation and be prepared for the unexpected: Guarding Against Embezzlement Fraud: Defensive Measures.