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Five Best Practices to Safeguard Your Business As You Launch a Financial Fraud Investigation

by | Mar 5, 2024

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The threat posed by rogue employees is real—and expensive. Every year, five cents of every dollar a business earns is stolen by internal fraudsters, according to data from the Association of Certified Fraud Examiners, with the average loss from a fraud case now standing at nearly $1.8 million.

And that’s just the financial price. An organization that fails to proactively prepare for, prevent, and detect fraud can count on costly business disruptions and reputational damage that may scare away customers, current and potential employees, and business partners. 

With these issues in mind, we have compiled a list of steps business owners should take immediately when launching financial fraud investigations, as well as some of the best practices they should consider when dealing with employees suspected of fraud.

A careful response to a suspected fraud can limit the damage to your business’s operations, reputation, and culture and help your business as it seeks to recover losses and prosecute wrongdoing. Here are five best practices business leaders should consider as they begin to investigate fraud:

1. Secure Potential Evidence:

If you suspect a fraud, you should promptly safeguard all relevant data and information. This includes preserving electronic media sources like computers and cell phones, which are crucial for financial fraud investigation. 

However, business leaders must resist the temptation to dive in and search for evidence on their own. Wait for the trained professionals to do this work. Secure a suspected employee’s desk, but do not go through it. If a computer or cell phone is on, leave it on, and do not connect an external device to the computer and start extracting files. 

The mere act of turning off a computer can alter its data—and open the path for arguments by opposing lawyers that the evidence contained within has been contaminated. Properly collecting and handling digital information can be the deciding factor as to whether or not you recover your losses or suffer greater damages.

2. Hire Trained Professionals:

Hiring lawyers and financial investigations experts will help you uncover the fraud, minimize legal fallout, and ensure evidence is properly collected and maintains its integrity. Consider bringing aboard:

Employment counsel. An employment  lawyer will help you stay within legal boundaries and avoid a potential lawsuit from an employee suspected of wrongdoing.

A white-collar crimes attorney. Lawyers who specialize in helping address white-collar crime will develop overall plans for the investigation and help you grapple with its aftermath. 

A financial investigator. An experienced financial fraud investigator, such as a Certified Fraud Examiner, will locate quantitative and qualitative evidence to detect and root out financial improprieties and accounting discrepancies. Use someone other than your current accountants, however, as they may be too close to the situation (or a part of the problem) and are unlikely to have the specialist knowledge necessary to properly manage and conduct an investigation.

A computer forensic specialist. During an investigation, a computer forensic specialist uses forensically sound methods to ensure critical evidence is properly collected from computers and other electronic devices. Avoid using your company’s IT personnel to perform these tasks. Almost certainly, a traditional IT team will not have the expertise to recover and preserve important digital evidence.

3. Keep Your Suspects Close:

Your first impulse may be to fire employees suspected of fraud. Resist this urge. Terminating employees could seriously hinder a fraud investigation. While on the payroll, employees have a duty to cooperate with their employers during an investigation. This obligation evaporates once employees are terminated – making gathering information from them far more difficult.

4. Restrict Access:

After informing employees they are the subject of an internal investigation, you should immediately restrict them from touching or removing anything from their desks or offices, except personal items. While on the premises, suspected employees should be accompanied and closely monitored. And electronic access should be restricted and passwords deactivated and changed to prevent potential damage to information systems.

5. Contact Your Insurer:

Once you have discovered the fraud, you should notify your insurer as soon as possible. Failing notify your insurance provider early on could result in your insurance being voided (thus increasing your potential losses). Most insurance policies have a notification provision of 30 to 60 days beginning on the first day after a possible loss has been discovered. After this, a proof of loss will need to be filed within a specific time frame set by the insurer. Usually, however, this timeline will be inadequate for a proper investigation. Be sure to seek an extension from the insurer to give you the appropriate time to document your claim.

Following these best practices at the outset of a financial fraud investigation can minimize the impact of employee wrongdoing and may make the difference between a successful recovery and further damages. To learn more, contact us for a consultation or visit our Forensic Investigations practice page for additional information about our approach to financial fraud investigations.

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