Discovering that a trusted employee has engaged in embezzlement fraud can lead to a series of sometimes contradictory responses by an organization’s leaders—actions that can harm an investigation and expose the enterprise to additional legal and financial risk.
On one hand, finding fraud can lead to a kind of institutional paralysis, with managers failing to move quickly to assemble an investigative team with the critical skills necessary to minimize damage to the business. On the other, executives may be tempted to lash out, making rash decisions—such as immediately firing an accused employee—that can backfire on the company.
When embezzlement fraud is suspected or has been found, time is of the essence. The scheme has likely been going on for a while, its financial impact is probably much larger than it originally appears, and to mitigate losses, management must quickly curtail the alleged fraudulent activity.
Assembling the Right Team
The first, and perhaps most important step, in fighting back is assembling the right team of professionals to respond to the crisis. Relying solely on in-house employees to address the problem is a recipe for trouble, as they are unlikely to have the evidence-gathering skills necessary to root out fraud and to properly handle evidence so that it can be used by law enforcement and prosecutors.
An investigative team will be able to determine the size and scope of an embezzlement scheme and determine whether others were involved. What may seem like a simple scheme at first glance may ultimately prove to be a much bigger operation with fraudsters operating inside and outside the company. Embezzlement frauds may involve outside vendors and associated accomplices, and a perpetrator’s first admission is likely only a small part of the whole story, so don’t stop digging too soon.
Critical investigative team members include a financial investigator, such as a certified fraud examiner (CFE), who has experience collecting, analyzing, and presenting evidence and who can maximize the efficiency and effectiveness of the investigation. Also crucial is a computer forensics specialist, who ensures that digital information is properly handled and who uses forensically sound methods to recover and preserve critical digital evidence.
Legal counsel should include a white-collar attorney who can advise on criminal law issues and develop and execute on a plan from investigation through resolution. An employment counsel is also needed to assist with questions of employee rights and help avoid errors that may lead to defamation and wrongful termination cases.
The moment embezzlement fraud is uncovered, immediate steps should be taken to mitigate the company’s damages while assuring that alleged fraudulent activities cannot be repeated. As with all investigations, however, there is a right way and a wrong way to approach embezzlement fraud activities.
1. Deal with the alleged perpetrator. Firing an employee may be tempting, but suppressing this urge will help the enterprise avoid wrongful termination, defamation, slander or libel suits. Retaining employees also can be advantageous to the investigative process. Employees have a duty to cooperate with employers in a legitimate investigation, and keeping the employee on the payroll may make it easier to obtain records needed to prove fraud.
2. Preserve evidence. Employers should secure all pertinent data and catalog all documents, as well as any related computers (onsite or offsite), electronic devices (cell phones, tablets, flash drives) or digital accounts. However, the process should proceed with caution and in conjunction with advice from your counsel and forensics experts. Investigations have been undone by employers who altered evidence simply by turning off a computer or downloading files from a hard drive.
3. Restrict the employee’s access. Once employees have been notified that they are the subject of an investigation, they should not be allowed to handle or remove anything from the office with the exception of personal items. Restrict employees’ access to company computers and networks and change all passwords to prevent unauthorized access or destruction of evidence.
4. Promptly notify your insurer. Notify your insurance carrier about the fraud. Failing to do so within the time limits specified by your policy may void your coverage.
5. Know your rights. Employers have the right to conduct a fraud examination. And they have a responsibility to shareholders 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.
What Can Go Wrong: A Case Study
Developing and adopting an action plan to respond to embezzlement fraud doesn’t necessarily eliminate risk. A successful outcome when fraud is discovered requires the interplay of many diverse elements, not to mention a delicate balance between the rights and responsibilities of both the employer and the employee.
Consider this case involving a regional, midsized corporation, which faced financial losses at nearly every step of the process—from the fraud itself, to its handling of the investigative process, and to claims filed by the accused employee.
The trouble began when the company discovered a loss of more than $300,000 and accused a key accounting department employee of embezzling the money. Following an investigation, the company’s outside auditing firm issued a report saying the employee was responsible for the loss. The money, management realized, had been gambled away and thus could not be clawed back from the employee. Attempting to recoup funds, the company filed a claim with its insurance company. However, due largely to policy coverage limitations, the insurer paid out only $25,000.
Management also referred the matter to the local district attorney, who presented the case to a grand jury, obtained an indictment and prosecuted the employee for criminal fraud. But the evidence presented at trial was limited, including only the outside accountant’s schedule, copies of various daily accounting reports, periodic bank deposit statements, and direct management testimony. The jury acquitted the employee.
Once acquitted, the employee struck back, filing a $1 million defamation lawsuit against the outside auditing firm and the company. The case ultimately settled out of court, leaving the company on the hook for substantial legal fees and a large monetary settlement.
A team of seasoned investigative professionals with the right forensic, accounting and legal skills can help an employer avoid the kinds of missteps that can result in the further loss of revenue and assets. They can ensure that evidence is properly collected and assist law enforcement in building a strong case against fraudsters, and help the company prevent actions that may result in additional liability.
They can also identify systemic issues, such as failed accounting procedures and lax internal controls, and help an employer take remedial action. A professionally managed fraud investigation, in fact, can be a major catalyst for change—protecting the employer from future embezzlement frauds and related criminal activities.
To learn more about how FSS helps organizations combat and investigate embezzlement fraud, contact us.