Navigating the Aftermath of an Allegation of Fraud: Strategies to Guide Your Investigation
Contributors
We all hear about fraud occurring at large and small companies, but what do these companies do to recover their losses? Unfortunately, most victim companies are not able to recover their losses. Many don’t even try! In a recent Association of Certified Fraud Examiners (ACFE) study, 42% of victim companies did not refer the case to law enforcement, and 52% of victim organizations did not recover any fraud losses. In the same report, the ACFE estimated that organizations lose 5% of revenue to fraud each year and total fraud losses were more than $3.6 billion in 2022. With that kind of risk, it could pay to have fraud prevention strategies in place.
Even if you don’t think you are at risk for fraud, your company should maintain fraud response protocols, including categorizing potential impact based on severity, escalating or referring the fraud response, investigating the fraud, documenting the fraud and maintaining confidentiality.
Fraud Allegation Response Procedures
Hopefully, you never receive notice of potential fraud in your company. But if you do, you’ll need to know the objectives of your investigation and have a playbook to respond. Most victim companies’ primary goals should be stopping the ongoing fraud, gathering evidence, and identifying and correcting the internal control weaknesses exploited by the fraud perpetrator.
If you become aware of potential fraud, you should consider performing the following as initial steps in the company’s responses:
- Analyze the allegation’s nature and severity; and
- Based on the nature and severity of the allegation, consult with the appropriate parties, including department leads, external auditors, the board and legal counsel, as appropriate.
In addition, generally you don’t want to alert a fraudster to an investigation before it even begins, so it’s essential to take care when consulting internal stakeholders.
How a Forensic Accountant Can Help After an Allegation of Fraud
If you decide an investigation is warranted, first you need to assemble your investigative team, which based on the nature and severity of the allegations, will likely include some or all of the following internal and external parties:
- Board of Directors;
- Audit Committee Members;
- General Counsel’s Office;
- Internal Auditors;
- External Auditors;
- External Counsel; and
- External Forensic Accountants.
Next the investigative team should develop an investigative workplan. The investigative workplan should be based on input from the entire investigative team.
Once an investigation begins, collecting and preserving as much relevant evidence as possible is crucial. Evidence collection starts with reviews of internal records (think emails and computer files), which you should supplement with external documents like news reports, customer records and other publicly available data, as appropriate. You’ll want to be thorough with your documentation as you may need to use the evidence to document a tax loss, support an insurance claim or pursue legal remedies in a court of law.
Hopefully, the document-based evidence gives you a good idea of how the fraud was perpetrated and who had the ability and access to execute it. Next, you should interview individuals relevant to the investigation. Start with those least connected to the suspected fraud and end with the prime suspect. This strategy allows for sufficient information gathering before any interviews seeking a confession.
Investigations should always end with a report documenting your findings, which should never contain opinions of guilt, even if you receive a confession. Reports containing opinions of guilt could expose you to defamation lawsuits and are generally unnecessary in the context of the investigation.
If you need assistance implementing these strategies or think you have been a victim of fraud, the Moore Colson Special Services team can help conduct a fraud risk assessment or perform a forensic accounting investigation. Our Certified Fraud Examiners can assist with developing an investigative workplan, collecting and analyzing evidence, conducting interviews, maintaining records and writing a report. Don’t hesitate to contact us for more information.
