Business owners who suspect fraud is being committed by someone in their organization might be forgiven for believing their story has just become a tragedy. Trust is, after all, the backbone of any successful business, and discovering fraud can shake an owner’s faith to its foundations.
But rooting out fraud can also be a heroic tale, with a business owner embarking upon an expedition to uncover the truth and to learn how they can prevent their enterprise from future danger. Like any protagonist on a difficult quest, a business owner launching a financial fraud investigation may start with doubts and will certainly face threats and obstacles along the way. Yet they can also avail themselves of wise counsel and, if they do, they are likely to end an investigation with a transformative store of experience and knowledge.
Where does a business owner begin? Just like a hero’s journey in classic literature or myth, the business owner’s quest has 12 steps. Here, we tell the story of a determined business owner grappling with the possibility of wrongdoing in his company and trace the path he and the professionals he hires must take in investigating and putting an end to fraudulent activity.
Step One: Trust Your Gut.
Our protagonist is a business owner named Alex. For a while now, Alex has had a lingering feeling that something was amiss, noticing discrepancies in financial statements and that the numbers just aren’t adding up. Alex digs deeper, and the more he does, the more uncertainty he finds.
This is a critical juncture for business owners. Many will brush off warning signs, or rationalize suspicious employee behavior. But business owners who ignore their doubts are betting against the odds. As the Association of Certified Fraud Examiners has noted, “occupational fraud is very likely the most costly and most common form of financial crime in the world,” and the average business sacrifices five cents of every dollar in revenue to fraudsters. In other words, if you suspect something is wrong, trust your gut, and try to unravel the mystery.
Step Two: Bring in the Professionals.
Alex is not a trained investigator, and he is busy running his company. Those two issues alone should be enough to spur him to bring in the professionals. Also, a haphazard, do-it-yourself investigation can endanger the organization. If, for example, Alex asks his IT team to examine computers, he may spoil evidence or tip off a fraudster to hide their tracks. And if he suspects a particular employee and acts rashly, he could run afoul of employment laws. To reduce risk, business owners should hire an outside team as early as possible in a financial fraud investigation. Optimally, the team would include:
- attorneys with employment law credentials and white-collar crime experience.
- a financial investigator, such as a Certified Fraud Examiner, to maximize the efficiency and effectiveness of the investigation. (Pro Tip: Avoid using your current accountants to serve in this role. They may not be independent of the situation under investigation.)
- a computer forensics specialist with experience collecting and preserving digital evidence. An outside specialist will use forensically sound methods to recover and secure evidence, something an in-house IT team is likely unqualified to do.
Step Three: Safeguard the Evidence.
With professionals on board, Alex should take immediate action to safeguard data and other information relevant to the financial fraud investigation. This should happen in concert with counsel, a financial investigator, and a computer forensics specialist to avoid missteps. In the case of computers and electronic media, a computer forensics specialist can mirror computer hard drives, extract data from other digital devices, and examine documents, emails, and other files—including partial and deleted files. If specific employees are the subject of the investigation, their workspaces should be secured as well.
(Pro Tip: Owners should avoid the urge to examine computers and other electronic devices on their own. They should not turn relevant computers on or off or connect external devices. Doing so can render a computer or device useless for evidentiary purposes.)
Step Four: Conduct a Forensic Analysis of Financial Records.
Once records are secure, Alex can initiate a thorough examination of his company’s financial records. Here, he enlists the help of a forensic accountant/fraud examiner to meticulously scrutinize every transaction. A forensic accountant who specializes in financial fraud investigations is an expert at seeking patterns in data and spotting anomalies that may indicate fraudulent activity. This step is critical in an investigation to identify areas where money might have been siphoned off and to provide a roadmap for further inquiries.
Step Five: Deploy Technology.
Modern challenges require modern solutions. The forensic accountants hired by Alex are also deploying technology to monitor and analyze transactions in real time. By implementing advanced software and artificial intelligence tools, investigators add an extra layer of security and can flag any suspicious activities promptly.
Step Six: Uncover the Source of Missing Funds.
As the investigation unfolds, forensic accountants extend their focus beyond identifying irregularities to uncovering the source of money that the business may not have received. This involved tracing financial inflows, scrutinizing accounts receivable, and cross-referencing transactions to pinpoint any discrepancies that could indicate diversion of funds.
Step Seven: Interview Employees.
The review of financial transactions at Alex’s company has yielded a clear trail of corruption involving an employee, but more information is needed to uncover the scope of the fraud and the identities of all of those involved. At this point, the fraud investigator conducts discreet employee interviews to gain further insight.In interviews, an investigator will interpret not only the answers a person gives but non-verbal factors as well. They can spot red flags in facial expressions and body language that can indicate an individual is engaged in deception.
Step Eight: Deal with the Alleged Perpetrator.
After the investigators identify the person they believe has engineered the financial fraud, Alex wisely avoids the impulse to immediately terminate the suspected employee. While keeping a bad actor on the payroll is difficult, employees have a duty to cooperate with employers during a lawful investigation, which can make interviews and obtaining evidence much easier. Once an employee is off the payroll, the company quickly loses its leverage over the employee.
Step Nine: Restrict Access.
Once the employee has been notified they are the subject of an investigation, they are not allowed to touch or remove anything from their office except personal items. At all times, the employee is escorted while on the premises, and passwords for company information systems are deactivated. Restricting access is critical because a disgruntled employee can wreak havoc on information systems in a matter of seconds. The employee can attempt to cover his tracks by deleting incriminating evidence, stealing trade secrets, and encrypting programs to render them useless.
Step Ten: Report the Incident.
As the forensic accountants unearthed crucial evidence, they encouraged Alex to seek legal counsel to navigate the complexities of fraud detection and recovery. Understanding the legal implications of the forensic accountant’s findings, Alex takes decisive action. With the assistance of the forensic accountants, he reports the suspected fraud to the appropriate law enforcement and regulatory authorities, a move that will ensure justice is served and the interests of the company are protected.
Step Eleven: Contact the Insurer.
As soon as Alex discovered a potential loss, he was obligated to inform his insurer. Failure to put an insurer on notice can void coverage, and many policies have a 30- or 60-day notification provision from the first day you discover that a loss may have occurred. Once the insurance carrier is notified, proof of loss must be filed within a specified time frame.
(Pro Tip: The period to file a proof of loss is often too short to properly document a claim. Insurers typically grant an extension—be sure to ask for one.)
Step Twelve: Rebuild Trust and Strengthen Controls.
While the journey to uncover fraud is arduous, Alex remains committed to rebuilding trust within his company. Communicating transparently with employees and stakeholders, he implements robust internal controls to prevent future occurrences. Training programs on fraud awareness are instituted to empower employees to be vigilant and report any suspicious activities promptly.
Final Thoughts
In the face of adversity, our business owner, Alex, emerges victorious in his quest to uncover fraud within his company. His determination, coupled with strategic measures such as forensic analysis, employee interviews, technological solutions, legal consultation, and uncovering the source of missing funds, allowed him to reclaim control and protect the financial health of his business.
Alex’s story serves as a reminder that vigilance, transparency, and swift action are the cornerstones of safeguarding a business against the insidious threat of fraud. 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.