03 Oct

Can Fraud Investigations Reduce Fraud?

When consumers think about investigating fraud, they do not usually think of the investigation as part of an overall plan to reduce fraud in a company. An investigation is typically seen as a reactive process that is only engaged in when a major problem is identified. Fraud investigations are representative of something completely negative, and they should be avoided at all costs, because if we do not have fraud investigations, then we do not have fraud.

The reality is not quite so fatalistic. Fraud investigations can and should be a routine part of a proactive fraud prevention program. Anti-fraud education and proactive fraud prevention procedures are essential to reducing corporate fraud, but fraud investigations are a third and equally important part of the equation.

Even in companies with the most comprehensive fraud prevention policies, procedures, and controls, there will still be some level of fraud. Investigations are needed to thoroughly examine allegations and suspicions of fraud. They also play a deterrent role, as employees are less likely to engage in fraud if they know that periodic checks occur throughout the company.

It would be nice if fraud investigations became completely unnecessary, but that is not realistic. In companies with increasingly better anti-fraud controls, the need for reactive investigations should decrease. But fraud investigations should never be completely eliminated, because even the companies with the most effective fraud prevention programs will still have some instances of fraud to investigate. The hope is that incidents requiring a full-blown investigation will be decreased and that management can focus their best efforts on turning a profit instead of examining cases of fraud.

24 Sep

Prevention After Finding Fraud

After a company has experienced internal fraud and has investigated the situation, how do they address the issue of fraud prevention?

Moving forward after an internal fraud requires that management actually make good on promises to prevent future frauds. It is sometimes difficult to get management to make changes, because they view changes as another cost on top of the cost of the fraud and the investigation. But shoring up internal controls is necessary if the company really wants to improve after a fraud.

The wise members of company management are interested in remediation after an internal fraud is discovered, and often they look to the fraud investigator for guidance in this area. It makes sense to have someone well versed in fraud schemes help management make improvements for the future. Read More

06 Sep

What Happens After a Fraud Investigation?

After an internal fraud is discovered and fully investigated, a company and its employees must move forward. That might seem like a simple thing to do, but it is not always quite that easy. The financial blow of an internal fraud can be devastating. Employees have long-term memories that may not allow them to forget about the violation of their trust by someone who worked side-by-side with them or by someone who was responsible for their future.

The most obvious potential long-term effect from an employee theft is financial devastation. Companies lose something on the order of 4% to 5% of revenue to internal fraud each year. Imagine how many companies could be put out of business with a fraud of that size.

The first step to moving beyond an internal fraud, especially a significant fraud, is repairing the financial damage. Often, cash reserves have been depleted and debts have mounted while the dishonest employee was filling her or his pockets. A plan to repair the company’s finances should be established quickly. Read More

28 Aug

Why Is It So Easy to Commit Fraud?

It sometimes seems like it’s easy to commit fraud at work. Why is that so?

One of the main reasons is that employers must put trust in their employees and give them access to data and assets. It’s also important to remember that employers give responsibility to people who are trusted. If someone wasn’t deemed trustworthy enough to take money to the bank, she or he wouldn’t be handed the bank deposit. That trust inherently means that opportunities to commit fraud are handed to employees each day. Read More

17 Aug

What to Do After a Fraud Investigation

After a fraud investigator is done with her work and has issued the expert report, company management and retained attorneys must decide what to do with the information presented. If the case is already in litigation, the use of the report is obvious. If the company has not yet taken action, a few options should be considered.

Internal Discipline

It is natural to want to dismiss an employee as soon as it is apparent that the person has committed a fraud. It is often safer for the company to have the suspect off-site, so that no more fraud can occur, but it is important to realize that this may also hamper the gathering of information. For this reason, some companies decide not to immediately terminate the employee. If the employee is still actively employed by the company when the fraud investigator’s report is issued, a decision must be made about her or his future. The company could decide to do nothing if sufficient evidence is not available or if the evidence exonerates the employee. Read More

02 Aug

Interviewing in Fraud Investigations

Interviewing witnesses and suspects is a critical part of any fraud investigation. There are tons of resources out there to help fraud investigators learn how to be effective interviews. There are books, videos, courses, and certifications.  I’m going to quickly cover some of the high points of interviewing here.

Fraud investigators are continually in question-and-answer mode when trying to understand a company, its operations, the players, and the suspected fraud. Much of this is done informally, with an information exchange between employees and investigators.

A big part of interviewing involves having the right demeanor and body language. People who are uninvolved in the fraud and are giving you information want to feel comfortable doing so, and they want to know that the investigator is listening. That has to be accomplished while directing the discussions so that time is not wasted on much unnecessary commentary. There must be a focus on the items that will help solve the case.

The best interviewers are able to connect with those being interviewed in a way that makes them want to help and provide information. They have a way of guiding the discussion while listening to the person giving information. They do not interrupt a lot, and even when they need to focus the interviewee, they do it in a way that does not seem like an interruption. Excellent interviewers have the ability to put the interviewee at ease. They are professional in their demeanor, yet relaxed enough that the interviewee feels comfortable sharing information. Read More

26 Jun

Should You Investigate Suspected Fraud?

When an internal fraud (one committed by employees) occurs at a company, the natural reaction is to assume that an investigation must be started immediately. After all, it is important to determine who was involved, exactly how the fraud was committed and covered up, and what evidence exists to prove the fraud.

Intuitively, that makes sense. In reality, it’s not always the way things go. Whether a fraud is fully investigated often depends on the estimated size of the fraud and the size of the company in question. It does not always make sense for a company to investigate a fraud because of the cost involved.

For a public company, an internal fraud is probably always going to be investigated to some degree, and the larger the fraud, the larger the investigation. Many regulations must be followed, and it’s imperative that financial statements be restated if necessary. To determine the amount of the fraud, the effect on the financial statements, and whether the financial statements need to be restated, an in-depth investigation is usually required.

But for private companies, it is not so certain that an investigation must be done. There are a variety of reasons why. It is important to first understand that the recovery of the proceeds of fraud is typically very small. The Association of Certified Fraud Examiners (ACFE) reports that in more than  50% of cases, victim companies recover nothing. So to undertake an investigation with the intention of recovering significant money from the thief is probably misguided. If a victim company is fortunate enough to have insurance coverage for the fraud, an investigation must be initiated to help compile a proper insurance claim with supporting documentation.

Yet there are times when an investigation should be done, even if money is unlikely to be recovered. Management may conduct an investigation because they are not sure who was involved in the fraud and need to identify all responsible parties. They may also be unsure of the exact methods used in the commission of the fraud, and an investigation will help nail down this aspect. Fraud investigations play an important part in fraud prevention efforts; finding out exactly how a fraud was perpetrated and who was involved can go a long way toward preventing future frauds.


18 Jun

Finding Skimming Schemes

Schemes that involve the skimming of money are very difficult to detect, investigate, and ultimately prove. These types of schemes are carried out before money is recorded in a company’s accounting system. Because of this “off-books” nature of the crime, little to no trail is created for investigators to follow.

Skimming happens at the point of entry of money into a business. The gatekeeper who receives those funds is the most likely person to steal the money. Typical jobs that might involve access to funds in this way include bank teller, waitress, store cashier, salesperson, or medical billing clerk. Hundreds of jobs could afford someone an opportunity to skim funds from a company, but these common examples illustrate the ease of theft but the difficulty of investigation.

Imagine a case involving a waiter or waitress who takes an order from a customer, which includes an appetizer, a meal selection, and a beverage. The customer receives all the food and pays for all the food, but the server has not entered the appetizer into the cash register, and instead pockets that part of the customer’s payment. This is a simple example of how easily a skimming scheme can be carried out. Read More

14 Jun

Why Does Bankruptcy Matter During the Hiring Process?

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It’s difficult to know who is going to commit fraud at a company. In 89% of internal fraud cases (fraud committed by employees of a company), the perpetrator was never previously charged or convicted of a fraud-related offense. So there is very little direct evidence that someone is more likely to commit fraud when they come to work for you.

That is why we look for red flags… signs that someone may be more likely to engage in fraud. We call these personal red flags of fraud, and there are literally hundreds of them that could indicate a greater propensity toward fraud. While companies have to be careful in the hiring process to not discriminate against protected classes, they most certainly can consider legal troubles (particularly of a financial nature) when hiring someone who is going to have access and/or control over budgets and money.

This topic came to my attention as the City of Milwaukee encounters an interesting turn in their quest to hire a new Health Commissioner. One of two finalists for the position, Jeanette Kowalik, has had some significant financial troubles that were reported yesterday in the local newspaper. Ms. Koawalik filed for Chapter 7 bankruptcy in both 2003 and 2014. Chapter 7 bankruptcy allows the filer to clear unsecured debts, but not debts secured with collateral (like a home) or student loans. She also lost a home to foreclosure in 2014. Read More

12 Jun

The Fraud Investigation Report

Reporting the findings of a fraud investigation will require varying levels of detail and precision, depending on the specifics of the engagement. Yet it is fairly easy to develop a standard reporting process that can be followed by staff.

One option in some cases is providing an oral report to the client and counsel. This is not the most common way to report on the findings of a fraud investigation. However, it is appropriate in certain cases, such as ones in which legal counsel does not yet want a discoverable report in the file.

The results of a fraud investigation are usually detailed in a written report. When writing a report, the fraud investigator must remember who will be reading the report. It is important to consider that even though today the report may only be for a company’s internal purposes, somewhere down the road the report may be used by law enforcement or in court proceedings. So it is important to know the current audience for an investigation report, but it is also imperative to consider who might need the report in the future. Read More