For corporate fraud investigations, the game plan should be methodical, careful, and quiet.
According to a 2016 study of more than 2,400 cases of occupational fraud by the Association of Certified Fraud Examiners (ACFE), an average business loses five percent of its revenue every year to fraud. The study found that losses were highest in cases involving fraudulent financial statements, and were especially costly when perpetrators were company owners or CEOs.
Common internal fraud schemes include embezzlement and financial statement falsification. Employees and executives may also become involved in frauds with vendors, competitors, and other third parties, such as bribery, price-fixing, and industrial espionage.
Retaining an independent investigative agency to handle the review is particularly important if there are suspicions of fraud or financial improprieties by management or directors, or if questions arise about potential collusion within corporate security, compliance, or accounting departments.
Beginning a Fraud Examination
Investigators should begin by reviewing everything that’s already known about the scheme. If the fraud came to light thanks to whistleblower complaints, interviewing the employees, customers, or suppliers who have come forward is a great place to start. Next, gather and analyze financial records and any other internal documents that might back up their claims.
Due Diligence and Background Investigation
According to the ACFE, the three factors that lead people to commit workplace fraud are opportunity, pressure, and rationalization—what investigators call the “fraud triangle.”
When looking for suspects in a potential corporate fraud case, take a close look at employees who may be under some kind of financial, personal, or professional pressure. A background check might identify spiraling debt or even personal grievances that could point to motives. If no suspects are known, look into employees whose positions offer the greatest opportunity to have committed the alleged fraud.
Reviewing public records can turn up signs of financial problems, such as bankruptcies, liens, judgments, or collection suits. Conversely, check into sudden lifestyle changes: If employees or executives are suddenly buying big new houses or luxury cars — or anything that seems well beyond their means — red flags.
Don’t neglect criminal records: Check recent arrests, including non-financial crimes such as assault, drug, and alcohol offenses. If people cross a line into criminal behavior in the past, they might do so again.
Begin your fact-finding interviews with employees, executives and external stakeholders very quietly: It’s generally a good idea to limit the number of people with knowledge of the investigation; you don’t want to give the perpetrators a chance to coordinate their cover story or cover their tracks.
If you hear contradictory or evasive statements, don’t assume this means the interviewee is complicit: Witnesses inside the organization may be afraid to come forward, particularly if the fraud involved their supervisors or senior executives. You’ll find out soon enough whether the culture of the company rewards candor, ethical behavior, and transparency. But even if employees are initially hesitant to blow the whistle, a well-run external investigation can create a safe and secure channel for witnesses to share what they know without fear of reprisal.
Cultivating an Insider
For complex schemes, the goal is to expose the entire network of people involved. In certain cases, the best way to achieve this is by cultivating a reliable inside source. Lower-level participants may be willing to cut a deal in exchange for being allowed to keep their jobs and benefits. This is especially true of employees who were coerced or pressured by corrupt supervisors.
Certain types of corporate fraud – including kickbacks, collusion and bribery of foreign officials – can be very challenging to fully expose without the cooperation of an inside source.
Even employees who know they are going to be terminated may cooperate with investigators, if given a strong incentive. Important witnesses can potentially be persuaded by the offer of a hold-harmless agreement protecting them from civil litigation, criminal charges, or financial clawbacks.
Confronting Complicit Employees
It’s tempting to immediately terminate employees once they are implicated, but acting prematurely can have adverse consequences. Former employees – even the guilty ones – can win a wrongful termination suit if the evidence against them is weak, circumstantial, or poorly documented in their personnel file. Rather than risk a costly settlement, companies should consider letting the investigation run its course before firing anyone.
Often, an investigator will defer interviewing suspected participants in a fraud investigation until the final stage of an inquiry. An experienced investigator can structure these encounters to create an environment conducive to a voluntary, truthful admission — especially if the investigator is armed with iron-clad proof of wrongdoing. If fraudsters see there is no point in protesting their innocence, they may instead rationalize their actions, thus providing a full confession to a patient and methodical interviewer.
Litigation and Law Enforcement
Ideally, companies should wait until a fraud examination is finished and the findings summarized in a formal report before making large, costly decisions about employee termination, civil litigation, and reporting a crime to law enforcement. Once you fire someone or initiate legal proceedings, there’s no going back — so it’s best to have all the facts first.