Anatomy of a Fraud Investigation Gone Wrong

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Written by Tracy L. Coenen, CPA, CFF

White-Collar Crime Fighter

The following is all true – from a case that I worked on. Everything this company did is very common. However, this case is especially instructive by virtue of the incredible degree to which the company messed up the investigation – from day one…

Company: Small manufacturer.
Financials: Thin profit margins. Trying to rebuild after some hard times. Things look promising.
Suspect: Accounting manager.
Fraud: Garden variety theft of funds from the company.
Why the fraud happened: The accounting manager had complete autonomy over the accounting process,and was the sole keeper of the corporate bank account. No surprise there.

MANAGEMENT’S INVESTIGATIVE BLUNDERS…

  • Compromised computer evidence. They rifled through the suspect’s computer files for evidence of fraud. By doing so, they changed things on the hard drive with every click. They should have called in a computer forensics expert to image the hard drive in order to have an exact, legally admissible copy of it.
  • Interviewed the perpetrator themselves and then fired him immediately. Interviewing with the goal of eliciting critical information and/or a confession is best left to professionals. Key reason: While firing seems like the right thing to do, there is often reason to keep a suspected fraudster on for a while—in the hope that he or she will create additional incriminating evidence with E-mails,other computer documents, statements to co-workers, etc.
  • Waited for the police to do something. Local police resources are largely focused on violent crimes and departments often don’t want to – or simply cannot – get involved in financial crimes.
  • Created a mess of vital financial documentation. Because they didn’t know where to begin an investigation,
    management had no idea how the guilty employee had concealed his theft in the accounting records. Management simply started tearing through the books, mixing them up and making the investigation harder in the long run.
  • Initiated the “investigation” with no strategy or planning. Key employees were not interviewed in a timely fashion. Had they been involved, no one would have known, since they had plenty of time to get rid of evidence or create phony alibis.
  • Company president headed up the investigation.Problems:
    • Senior managers aren’t objective in most fraud cases, since, if they’re not involved directly in the crime, they at least have a vested interest in minimizing damage to the company’s reputation and therefore are prone to gloss over key evidence.
    • Heads of companies are often too emotional because they feel “violated.”
    • This company’s president had never been involved in a fraud investigation.
    • He put the company in an even worse financial position by wasting time on the investigation.

…AND A FEW THINGS THEY DID (SORT OF) RIGHT

  • Utilized the “Top Drawer” method of investigation. They opened the top drawer of the suspect’s desk and found lots of evidence regarding the crimes, including spreadsheets tracking the theft and other valuable evidence. However, the heart of a fraud investigation is document examination, including both paper and digital evidence… and it takes a seasoned expert to manage this process.
  • Eventually hired a fraud examiner to do a proper investigation. A little late, but better than never.

White-Collar Crime Fighter sources:
Tracy Coenen, CPA, CFE, Sequence Inc., Chicago-based fraud investigation and forensic accounting consultants, www.sequence-inc.com. Tracy is author of the new book, Essentials of Corporate Fraud (Wiley). She can be reached at [email protected].

White-Collar Crime Fighter
May 2008, Volume 10, No. 5 (Full issue found here.)

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