When fraud occurs the typical reaction of senior management includes shock, anger, denial and confusion. Although these are understandable responses, they tend to incite managers to act either prematurely or too slowly. Often fueled by their emotions, they lash out at the suspected fraudster or withdraw into a defensive, wait-and-see shell. Neither strategy works. By angrily confronting the person before they have solid information, they could tip their hand too soon. And in doing so, open themselves up to a wrongful or constructive dismissal suit. By waiting too long -- or not acting at all -- they could endure further losses.
Reacting to fraud
The first decision is who to involve. The answer depends on numerous factors, from the circumstances of the fraud itself to who is involved and to what outcome the company wants to achieve. Professional input and advice are critical to finding the best possible solution.
As soon as the company becomes aware that fraud may be happening it should have two primary goals: 1) take appropriate steps to stop the fraud from continuing; and 2) secure all documentation and other relevant information. At the same time management should endeavour to keep an open mind concerning guilt or innocence. Allegations, poison pen letters, circumstantial evidence or suspicious behavior do not necessarily mean a person has committed a fraudulent act. For the sake of the individual under suspicion, the morale of the company and to avoid litigation, the company must not jump to conclusions that have not been proven.
Recovering a loss is an obvious priority. There are four main avenues of pursuit: 1) negotiated settlement; 2) civil action; 3) insurance claim; and 4) criminal proceedings. The primary benefit of a civil action is that the victimized company or individual can react immediately. The victim controls the investigation and the key objective of recovery and damages -- which is not the primary concern of the police -- remains paramount. The civil action directed by legal counsel is often the most effective when combined with the expertise of forensic accountants.
Evidence can be obtained through traditional investigative techniques, which can be supplemented by authorizations through the courts. For example, through the discovery and subpoena process, financial records and other documents (of the fraudster) can be obtained; and through a Temporary Restraining Order the fraudster can be prevented by the courts from disposing of any assets which may have been acquired from the proceeds of illegal activity.
A fidelity insurance claim, depending on the company's coverage, can also be pursued. The success of the claim may be affected by what actions the company took -- and how quickly they were taken -- after the fraud was discovered. Also vital to the claim is the ability to identify and quantify the losses, as well as determining that an actual fraud transpired.
The role of forensic accountants
Forensic accountants are trained and experienced in fraud investigation. They approach a case with an investigative mindset. They emphasize the interviewing of people as well as the examination of documents or accounting records. They evaluate the ongoing flow of financial information from both people and documents and evolve investigative strategies accordingly. All of their work is performed with one standard clearly in mind -- it must meet the test of cross-examination in a courtroom.
When fraud occurs, a company must not only do the right thing it must be seen to be acting properly. Employees, clients and customers -- if they are in the know -- will judge how the matter is dealt with. That requires the company to respond in a fair, objective and discreet fashion. Failure to do so could compound the losses and have long-term negative consequences, while a professional, evenhanded strategy could regain any loss of trust and confidence, and possibly even enhance it.
Paul Dopp, CPA, CGA, CFE is a Principal with the Forensic Accounting Services group at Tauber & Balser, P.C., with over 22 years of international engagement experience. Paul can be reached at (404) 814-4988.