Fraud Investigations and Fire Drills

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Fire drill training in grade school always included the mantra, “Stop, drop and roll.” This was the prescribed course of action if a child was on fire. Professionals sometimes refer to tragedies in companies as fire drills. When a major internal theft occurs, it is akin to a fire, and needs to be met with swift action.

Where there is smoke, there might be fire. Numerous red flags can point to internal theft: missing or altered documentation, unexplained accounting entries, excessive customer complaints about account balances, and disregard for policies and procedures.

While one red flag alone does not necessarily mean a fraud has occurred, numerous questions increase the suspicion of internal fraud. It is important to quickly identify the red flags, determine who might be responsible, and take quick action to extinguish the problem.

Why Investigate?
A “four-alarm fire” doesn’t have to rage before you do something about fraud. Small frauds might merit investigation as much as large frauds.

Investigations are important, because they send a message to employees that fraud management is serious about stopping fraud. The perception that management is actively looking for fraud and punishing offenders can have a significant deterrent effect.

The Fraud Squad

When management becomes aware of a potential fraud, it is advisable to quickly involve legal counsel. Other members of the team may include internal or external auditors, human resources, private investigators, and fraud experts.

The roles of all professionals involved in the investigation should be very clearly defined. Not everyone can be the chief; make sure all team members have a clear understanding of their responsibilities.

Confidentiality should be a concern. Information about an ongoing investigation should be given out on a need-to-know basis only. It is reasonable to tell employees that an investigation is ongoing, but it is not prudent to provide specific information about the suspect, the methods or the losses.

Putting Out the Fire
The first step after mobilizing the team is to create a plan of action. Effectively fighting a fire requires a systematic approach based upon standard operating procedures. It is equally important to have an overall plan for investigating a fraud.

The next step is gathering documentation. Quickly secure all records that might pertain to the suspected theft. Err on the side of caution. Items can always be eliminated from the investigation at a later date.

Do no forget that “documentation” includes both paper and electronic evidence. Secure computers and computer files. Consider involving technology professionals with significant experience in electronic evidence discovery and preservation.

Gathering evidence to support or refute a fraud allegation also includes interviewing personnel. Proceed cautiously, as interviews have the potential to make or break the investigation. First, interview those who are least likely to be involved with the fraud. The provide information about procedures, daily operations, and their knowledge (if any) of the fraud.

Those who are suspected of participating in the fraud should be interviewed last. These are the most critical interviews, and most or all of the facts and evidence should be in order prior to conducting them.

Evidence should be evaluated together. This means considering how the documentation, electronic evidence, interview results and financial analysis relate to one another.

Fraud investigation findings are often summarized in a report. Conclusions and opinions should be as objective as possible, and should be clearly based upon the evidence gathered.

Wrapping up the Drill
The results of an investigation can lead to any number of possible actions. Company officials might pursue the thieves criminally or civilly, or they might decide to do nothing. This decision rests upon the evaluation of several things, including the quality of the evidence and the ease of prosecution.

Fraud schemes can by highly complex. Even with solid evidence, it might be difficult to explain the methods of theft to a jury.

Further considerations include a company’s fear of negative publicity or reluctance to incur additional professional fees. Managers sometimes decide they would rather put their money and energy toward building the business.

The most important part of fraud detection is assembling the right team. This includes experienced, competent professionals. If the most effective people are involved, they will know how to lead an investigation in the right direction.

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