What Every Attorney Needs to Know About Fraud

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Most attorneys don’t think about the issue of fraud in companies until a client (or their law firm) is hit by employee theft. It’s simply not one of those issues that is taken too seriously unless huge risks are identified or a crime has already been committed. Until then, fraud is just another “issue” that probably isn’t as pressing as other legal and operation matters.

Once a sizable fraud is committed and detected, everyone is in fire drill mode to get to the bottom of the issue. Everyone wants to find out who stole the money, how it was done, and how in the world someone could get away with this at “our” company! While this reactive attitude is very common, it’s not the best for the long-term health of a company.

Maybe the issue of fraud in companies is ignored because it’s not something that attorneys see everyday. Maybe it’s because issues like profitability and closing new deals are so much more important to the viability of a business. Yet fraud cannot be overlooked, as companies put their livelihood at risk when they do not take steps to deter and detect fraud.

Fraud Does Not Happen In a Vacuum

A single fraud incident within a company is almost never completely isolated. It doesn’t just happen with the involvement of a couple of people and then go away once it is discovered. It’s not just a solitary incident that occurs alone.

When a fraud is discovered, it will surely have wider-reaching effects than anyone may have anticipated. It can affect the morale of the employees around the perpetrator, especially if the thief was a highly respected colleague or superior. It may also cause changes in the way business is done, which affects how people will carry out their job duties in the future.

An internal fraud committed by upper management can be the most devastating to a company. Not only is this fraud the most costly, it sends such a horrible message to employees. If there is not integrity in the highest levels of a company, why should employees be concerned about honesty in the lower ranks? Fraud by an executive sets the worst kinds of precedent.

A fraud within a company may also cast suspicion on more than just the immediate perpetrator or perpetrators. Others may have had information about the scheme or may have suspected something was going on, which immediately links them to the fraud. Feelings of guilt and suspicion may run rampant in the company as employees try to come to terms with the betrayal.

One fraud within a company is never necessarily just one fraud. It is likely that other frauds are occurring in other areas of a company, so for management and legal counsel to focus solely on the one fraud that was discovered is ill-advised. A small fraud is often symptomatic of bigger frauds, so it is wise to do a thorough examination of the company.

Involve a Fraud Examiner
The best investigation of a fraud within a company often involves an experienced fraud examiner. It is important to gather and preserve the right information as soon as a fraud is discovered. It is foolish to risk the integrity of the evidence by not gathering the right information in the right manner.

In addition to identifying the best evidence to be gathered, an experienced fraud examiner can often begin analyzing the information quickly, and identify additional data that may be necessary to the investigation.

It’s best to have someone with a strong investigation background assist in gathering evidence and beginning the investigation.

While a company’s internal audit staff or accounting staff might seem the logical choice for investigating a financial fraud, it’s not usually recommended. There are independence issues to consider. What if a member of the accounting department was involved in the fraud or had knowledge of parts of it? There are experience issues as well. Has the internal auditor ever investigated a fraud or testified in court?

An external fraud examiner can be completely objective in looking at the evidence surrounding a fraud, in addition to bringing the best experience to the table. An independent investigator can ask hard questions and explore uncomfortable issues without fear of suspicion or reprisal.

Taking swift action when a fraud is discovered sends an important message to employees. It lets them know that management takes fraud seriously. It warns them that action will be taken to investigate frauds, and that thieves will be punished. Swift action further indicates to employees that management is interested in fostering an honest and ethical corporate culture.

You’re Not Alone
Attorneys who ignore fraud can take heart in the fact that they’re not alone, because many of their colleagues ignore fraud too. As there are many important regulatory, operational, and legal matters to attend to daily, the issue of undetected fraud can easily fall by the wayside.

Company executives can and should be focusing on preventing and detecting fraud, but many of them aren’t doing enough either. It’s a common problem in companies, and I think it’s not because the executives don’t care or are too busy. Rather, I think management often believes the company’s controls over fraud are better than they really are. Until an actual problem surfaces, the urgency to examine policies, procedures and controls may not be there.

Yet everyday, companies around the world find that their fraud prevention controls are insufficient, ineffective, or non-existent. Wouldn’t you hate to discover this fact about your company because a key employee stole millions of dollars? Do you really want to consider fraud prevention controls after someone has put the future of the company in jeopardy?

As the topic of fraud continues to receive more publicity, executives and counsel are realizing that this issue is not going away. The key is enlisting the help of a qualified professional to shore up fraud prevention controls and raise awareness about the issue of fraud. Proactive anti-fraud measures are the right answer for executives and attorneys who want to protect the future of companies.

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