4 Key Pieces of an Effective Corporate Fraud Investigation


Here’s a simple way to break down the idea of a corporate fraud investigation. If you’ve got a compliance department, this is way too basic for you. But if you’re at a smaller company that is new to the concept of fraud (either because you recently had a fraud or because you have decided that fraud prevention and detection are important)…. then this might help you see the basic things that you’ll need to put in place.

A corporate investigative policy is necessary because it is important to have guidelines in place for the start of an investigation. What should management do when fraud is suspected? How are fraud allegations to be evaluated? When and why does the company initiate a full-blown investigation?

Most managers and executive haven’t had to deal with allegations of serious fraud. They need some guidance so that evidence isn’t corrupted and so that the allegations are handled fairly. A well-designed policy will help avoid claims of selective treatment. It also brings uniformity to the process so that similar offenses are treated similarly.

The investigative team will carry out the full fraud investigation. Depending on the seriousness of the allegations and the level of examination required, the team could be as few as one or two people, or as many as dozens of people. The team might include: attorney, fraud examiner or forensic accountant, auditor, private investigator, computer consultant, and a management representative. For smaller companies, your fraud investigation team will likely be made up of outside consultants, rather than dedicated employees. Continue reading

Preventing Corporate Fraud


Executives have the means to commit and cover up the largest frauds. They have access to the information and computer systems, they have power over all employees and they have access to the money. The finance function is riddled with fraud risks and the company’s executives are in the best position to take advantage of those risks.

Because of the risk of losing large sums of money to fraud by executives, companies must ensure owners and boards of directors are actively involved in creating and maintaining an environment that is not conducive to fraud. This involves active oversight of daily operations, continuous monitoring of potential red flags of fraud and swift action when fraud is discovered. Continue reading

Infidelity and Fraud


What on earth do fraud and infidelity have in common? Quite a lot. While there may be no scientific studies available that analyze the correlation between financial fraud and infidelity, anecdotal evidence suggests there is a connection.

A discovery of a corporate fraud has often led to the discovery of a secret addiction like gambling, alcohol, or drugs. Digging into the financial records of a suspected thief finds a spending problem, a secret source of income, or theft from another party. Discovery of fraud has also led to a spouse finding out about infidelity and the existence of a love child.

The theory that fraud and infidelity are often related is simple: Fraud does not happen in a vacuum. It takes a certain mindset to be able to commit adultery and to be able to commit fraud. I have rarely seen extremely deceitful acts being confined to only one part of a person’s life. Continue reading

Fooling the Auditors in 7 Easy Steps


Even with all of the publicity surrounding the issue of financial fraud in the last decade or two, most auditors, investors and other professionals still do not “get it” when it comes to detecting fraud. Traditional financial statement audits were never designed to detect fraud. The audit is simply a process by which auditors check the company’s math and application of accounting rules.

Fraud is rarely detected by financial statement audits because they are not designed to do so. Occasionally, fraud is detected by auditors, but they could increase their chances of finding fraud if they changed their audit procedures. Continue reading

Staying Independent in Fraud Investigations


I would like to think that most companies are committed to doing business honestly. They try to do the right thing, and when a problem is found, they try to correct it quickly.

Even when a scandal is looming, I hope most companies would want to find the truth as fast as possible and take appropriate action.

Even when a company is committed to fixing problems, however, management does not always do it the right way. This is particularly true when it comes to investigating suspicions of wrongdoing. There are many times when such an investigation must be done by an independent party in order for the company to be in the best possible position following the conclusion of the investigation. Continue reading

Myths About Fraud


I wrote an article on these five myths about fraud nearly fourteen years ago. And really, nothing has changed. I’ve updated some of the facts and figures, but the concepts remain the same. These are some of the most common myths I see, and these traps are the reasons companies continue to become victims of expensive internal frauds.

1. Our company does not have an internal fraud problem.

While companies would like to believe they have good employees and adequate controls to prevent fraud, the fact of the matter is that half of all companies will be significantly affected by fraud. One survey estimates the average internal fraud will cost a company $150,000.

Companies cannot afford to ignore the risk of fraud and the likelihood that fraud is occurring internally. It is too expensive, particularly when one considers the fact that there are many indirect costs of fraud, including investigation and legal costs, employee attrition, and decreased employee morale.

Actively fighting fraud means implementing policies and procedures that prevent and detect fraud. Anti-fraud professionals who are experienced with the common methods of fraud can be invaluable to this process. Whether a company gets there with employees or outside consultants, it is important to secure company information and assets to prevent internal fraud.

2. Most people are honest and won’t commit fraud.

This is a dangerous approach to take to the business of fraud. It is true that most people are generally honest. But to rely on this instead of putting controls in place to prevent fraud is a big mistake. Continue reading

Identifying Fraud Red Flags


Would you recognize the clues that your client has been ripped off by one of its employees? Or would management conduct business as usual, blindly trusting their employees?

Companies make the mistake of not actively searching for fraud. They tend to trust their employees and trust the procedures in place to safeguard company assets.

It may be good business to trust employees and empower them to make real contributions to the growth of the company. However, it is not wise to turn a blind eye to signs that a trusted employee may be stealing. Continue reading

Conducting Corporate Fraud Investigations


The unthinkable has happened. We have good employees. Our people are honest. They don’t steal from us. They’re like family. We trust them. So it goes when a company discovers a fraud from within.

Then what happens?

After the initial shock wears off, it’s time to start investigating the situation. The company must know who did it, how the fraud was committed, and what controls can be put in place to stop fraud from happening again. This is all accomplished with an effective fraud investigation. Continue reading

Fraud is Just Part of a Controller’s Job


Can you believe people actually admit to this stuff? A survey of accounting controllers done by FloQast found that lots of controllers think fraud is a routine part of their jobs.

There are some awfully interesting results. 69% of the participants said their job is that of a risk manager who oversees internal controls. (For those who don’t know, internal controls are the policies and procedures that ensure the numbers are recorded accurately and that prevent fraud.)

64% say they’ve experienced pressure to cook the books. That’s not necessarily surprising. Results are everything in many companies, and I can easily envision executives asking how the numbers can be prettied up. Continue reading