Internal fraud investigations can pose numerous challenges. Here are six costly mistakes an organization canmake when faced with the possibility that one of its employees or executives is engaging in fraudulent behavior.
Mistake #1: Making a Rush to Judgment. The facts may appear to clearly show that the targeted individual has perpetrated internal fraud. However, regardless of how compelling the facts may be, your company must conduct an appropriately rigorous investigation.
Example: A commercial builder’s internal audit department had evidence that the company’s controller had used company funds to pay personal expenses. The company terminated the controller without any additional investigation because his supervisors felt the documentation showed a clear pattern of fraud. The controller sued the company for wrongful termination. Since the company failed to complete a rigorous investigation, including an interview of the controller, its legal counsel advised that the company settle the matter out of court.
Mistake #2: Letting Word of an Investigation Get Out. The existence of an internal fraud investigation should only be shared with those with a “need to know.” Divulging information beyond these individuals can doom an investigation to failure, especially if the targets are made aware of the fact that actions are being scrutinized.
Example: A large hotel chain determined that employees in one of the company’s hotels were stealing their guest’s credit card numbers to presumably engage in identity theft crimes. Managers shared their suspicions with one of the hotel’s supervisors. Unfortunately, the supervisor was actually involved in the fraud. She notified fellow perpetrators that management was hot on the trail. The employees destroyed numerous notebooks that allegedly contained detailed records about the theft ring and the credit numbers stolen. Without this evidence, the hotel had to spend considerable time and effort building a case against the employees.
Mistake #3: Proceeding without Notifying Legal Counsel and HR Professionals. Employees have certain rights and if they are violated, it can directly affect the results of the investigation and it can also create considerable legal risk for the company. Before a formal internal fraud investigation is launched, both legal and human resource professionals should be briefed on the situation.
Example: An internal fraud investigator for a retailer suspected that one of the company’s employees was part of a shoplifting ring. The internal fraud investigator contacted local police to share her suspicions. The police did not have a detective available right away to interview the suspect. However, the police faxed the company’s investigator a list of questions to ask. The investigator conducted an interview where she asked the employee all of the questions from the police. Since the company’s investigator conducted the interview at the request of law enforcement, the employee should have been read his Miranda rights. (It is generally not required in a company investigation.) If the company’s investigator had consulted with legal counsel prior to conducting the interview, she would have been informed that any statements gathered during the interview violated the employee’s Miranda rights and most likely would be be suppressed by a judge.
Mistake #4: Failing to Maintain a Document Trail. Even a simple fraud will likely involve documentary evidence. No matter how straightforward the fraud may appear at the time, it is critical that the investigation case files contain all relevant information compiled by the company during the investigation.
Example: An employee was terminated by a landscaping company for stealing supplies for his own side business. The employee filed a claim with Equal Employment Opportunity Commission alleging racial discrimination. The company provided the EEOC a copy of its documents from the investigation. Unfortunately, several crucial pieces of evidence were missing from the files. In the absence of direct evidence demonstrating the employee’s guilt, the employer was subsequently fined by the EEOC.
Mistake #5: Not Realizing that U.S. Practices Don’t Apply Overseas. If your company employs employees abroad, it is crucial to comply with the country’s employment laws. Failure to do so can be expensive and can even hurt your ability to do business internationally.
Example: An American corporation uncovered suspected fraudulent activity by an employee based in Paris, France. As soon as the company was made aware of the allegations, managers immediately dismissed the employee and then conducted an investigation to determine the true extent of the fraud. They were able to determine that the individual had misappropriated approximately $50,000. However, at no point during the investigation did they consult an attorney with experience in French labor law. The company violated numerous aspects of that country’s law. The French courts ordered that the employee be reinstated, receive back pay and the company was forced to pay all of the employee’s legal costs.
Mistake #6: Not Holding Executives to the Same Standards. A successful fraud investigation depends upon secrecy, as described in Mistake #2. If alleged fraudsters determine that your company is investigating them, they will probably attempt to destroy evidence, influence witnesses, or disappear with their ill-gotten gains.
In some cases when executives are suspected of fraud, companies handle them with kid gloves.
Example: A regional airline was notified via their confidential hotline that a Vice President had stolen frequent flier mile rewards for his personal use. The VP’s boss expressed a great deal of skepticism and would only allow the investigation to proceed if multiple employees corroborated the allegations. Prior to confronting the VP, the company interviewed more than twenty employees. Not surprisingly, the executive became aware of the investigation and created a plausible explanation for the use of the rewards. Without compelling evidence to support termination, the Vice President remained employed and was even subsequently promoted.
Not only can special treatment of an executive result in significant financial losses from that individual, it can lead to subsequent losses from others in the company. If staff members become aware that leaders are permitted to get away with fraud while lower level employees are held accountable, they are more likely to steal too.
The mistakes made in each of the investigations above were avoidable. Consult with your attorney and accountant to assist with internal fraud cases. By doing so, you dramatically improve the chances that your company will conduct a successful investigation while helping to avoid the pitfalls.