Apr 17

Investigating internal fraud? Six Costly Mistakes to Avoid.

Mistake #1: Making a Rush to Judgment.

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.

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 Forensic Accounting Professionals.

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.

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.

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.

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.

The mistakes made in each of the investigations above were avoidable. Consult with  your attorneys and certified public accountants to assist you in investigating 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.