What To Do If You Suspect Fraud
By Rehana Moosa
When business owners first suspect an employee of fraud, it is important to take the right steps at the outset to determine if a fraud has occurred, and if so, the extent of the losses. An employer’s initial actions can have a significant impact on the investigation down the road, as well as any litigation that may ensue.
Here are 5 steps you can take if you suspect fraud in your organization.
Step 1: Contact legal counsel
Although many business owners may be tempted to terminate the suspect employee immediately, it is best to retain legal counsel first and get advice on how their employment should be handled while the investigation is being conducted.
A lawyer can provide options as to the best course of action such as placing the employee on a leave of absence (either paid or unpaid), transferring the employee to a different department, or changing their responsibilities to remove access to accounting data or valuable assets such as cash.
Step 2: Secure documents and data
Once the employee is notified that an investigation is underway, any company-owned electronic devices that the employee used or had access should be returned to the company. These devices include laptops, cell phones, tablets, and storage devices such as hard drives and USB keys.
All relevant documents should be secured as quickly as possible. Original documents should be collected and stored in a locked and secure area, with access limited only to those who are involved in the investigation.
With respect to searching electronic devices, many employers will be tempted to simply turn on the devices and search for documents and emails themselves. However, where possible, this analysis should be performed by a computer forensics expert.
A computer forensics expert can ensure that the data is properly preserved, and the chain of custody is maintained. This will be important if the case proceeds to criminal or civil litigation, as any breaches in the preservation of the data or chain of custody can impact the outcome of the case.
Step 3: Conduct the investigation as quickly as possible
The investigation itself can be carried out by the employer, with the assistance of legal counsel. Depending on the circumstances (e.g. the complexity of the fraud), the employer can consider hiring an outside investigator such as a forensic accountant.
It is important that the investigation be conducted impartially. Someone outside the organization who is performing the investigation can provide the level of independence and objectivity needed, should the matter proceed to the court system.
Utilizing the services of a third party can also help complete the investigation in a timely manner. When the investigation is done internally, employees who are assisting with the investigation may need to have their normal job duties re-assigned to others, which can lead to inefficiencies and time delays.
Step 4: Interview third parties
In many fraud cases I have been involved in, the suspect employee’s colleagues were a valuable source of information. Often, other employees are aware of suspicious behaviour long before management, as they are able to observe things first hand.
Colleagues can often provide insight regarding the changes in the employee’s behaviour, changes in their spending habits, or other employees who may be involved in the scheme or have knowledge about the misappropriation. Alternatively, they can also provide information that may clear the employee of wrongdoing.
Customers and suppliers may also have important information that can prove useful in the investigation. Since individuals outside the organization may be reluctant to come forward with information, due to fears of reprisals, many organizations find it useful to implement a whistleblower hotline or other mechanism that allows individuals inside and outside the business to report suspected improprieties anonymously.
Step 5: If a fraud has occurred, identify other parties who must be notified
If the investigation establishes that a fraud has taken place, other parties may need to be notified.
For example, a business that has fidelity / crime insurance should notify their insurance company right away and start the process to file an insurance claim. Fidelity / crime insurance policies often require that the insurer be notified of a loss within a certain number of days after the misappropriation has been discovered. Business owners should read their policies carefully to ensure that notification is provided within the required time frame.
If criminal charges are going to be filed, the police should also be contacted as soon as possible. In the case of civil litigation, steps can be taken through legal counsel to freeze the employee’s assets, to prevent them from being dispersed before the organization has an opportunity to seize the assets and recover their losses.
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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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