Conducting an Internal Fraud Investigation
By Rehana Moosa
In a previous blog post, we discussed what to do when you first suspect that a fraud has occurred within your organization. If your suspicions are correct, the next step is to start an investigation.
The objectives of a fraud investigation can include:
- Determining how the fraud was carried out and over what time period
- Identifying whether accounting records / documents were altered to conceal the fraud, and if so, the extent of the concealment
- Identifying what information may be available to assist in the investigation (this can be in the form of documents or interviews, in the case of witnesses)
- Calculating the amount that has been misappropriated
- Identifying who may be involved in the misappropriation and the extent of their involvement
- Preserving evidence such as laptops, emails, and smartphones
The investigation should be conducted objectively, with a focus on gathering facts and as much evidence as possible.
Fraud Response Plans
Businesses are often advised to develop an incident response / disaster recovery plan in the event of a cyber attack or other unplanned event that disrupts their operations. Similarly, a fraud response plan can also be prepared, which sets out the steps to be taken if a fraud has occurred.
The purpose of a fraud response plan is to provide a framework for internal fraud investigations, to ensure that they are conducted fairly and consistently. It also defines the roles of those tasked with conducting the investigation to clearly assign responsibilities to specific individuals.
A fraud response plan should include, at a minimum:
- The protocol to be followed in terms of how the fraud investigation will be conducted.
- A list of the individuals within the organization who will be responsible for conducting the investigation (e.g. human resources, in-house counsel, internal audit staff, members of the finance department).
- A list of parties who will need to be notified that a fraud investigation is underway. For example, the organization’s insurance company may need to be informed if there is a fidelity / crime insurance policy in place. Also, depending on the size and structure of the company, the board of directors may also need to be notified.
- How communication regarding the fraud will be handled internally and externally. What will employees be told? If news of the investigation becomes public, how will the organization deal with any negative publicity?
Conducting a Fraud Investigation
- The steps in a fraud investigation will vary depending on the specific circumstances. However, there are some basics that apply to all fraud investigations:
- If allegations have been made via a tip or other means, understand the basis for the allegation before starting the investigation. Are specific transactions or parties referenced in the allegations? How did the allegations arise?
- Gather and secure as much information as possible. For electronic devices, a computer forensics expert should be retained to search the contents, to preserve the chain of custody should the matter proceed to criminal or civil litigation
- If the fraud was committed by an employee, consult with legal counsel to understand how searches of, for example, office space, can / should be conducted.
- Identify other parties, both within and outside the organization, who may have information and should be interviewed. Interviews should be conducted on a voluntary basis, with two interviewers present.
- Allegations of fraud may include specifics about the nature of the fraud scheme. For example, an employee may be accused of stealing cash sales. However, it is important that the investigation include all areas of the organization over which the employee had control or access.
- In some cases, the suspected employee will agree to participate in an interview to discuss the allegations. Accusations should not be made during the interview, and any decisions regarding their employment or possible disciplinary action should be made only after consulting with legal counsel.
- Keep legal counsel regularly informed as the investigation progresses. A lawyer can advise as to possible legal remedies if the allegations of fraud are substantiated and can ensure the evidence gathered is properly preserved. Legal counsel can also identify any additional information that may be required to support the allegations in court, should it proceed to that point.
- Document the investigative process, key dates and details of all steps taken. The notes should document facts only and summarize when and how investigative procedures were performed.
- Maintain confidentiality throughout the investigation. Findings should be communicated only to those involved in performing the investigation (unless circumstances require otherwise).
Completing a fraud investigation can be a time consuming process. However, it is important that the investigation be conducted carefully to properly preserve and document evidence.
It is also important to ensure not only that businesses create a fraud response plan, but that it is updated regularly.
Contact us to learn more. 647-426-0146 | firstname.lastname@example.org
Communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. For permission to republish this content, please contact Rehana Moosa Forensic Accounting Professional Corporation.
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