Guest Article: The Dishonest “Trusted Bookkeeper” Part 2: How to Respond and Investigate Internal Fraud

Michael S. Brown, Director in Marcum LLP’s Advisory Services Group’s New York office, explains how to respond and investigate internal fraud, in a follow up to The Dishonest Trusted Bookkeeper Part 1, which details how to spot internal fraud.

Once it is clear that internal fraud is occurring at an organization, there are guidelines to follow regarding how a company should respond to internal fraud and the appropriate steps needed in any fraud investigation.

What You Need to Consider in Responding to a Potential Fraud Scheme A business owner needs to determine if an incident or incidents require an internal inquiry or should be handed off directly to law enforcement or a local prosecutor. A lawyer and a forensic accountant should be contacted to assist in this determination since the decision to proceed must be supported by the available evidence.

The Forensic Accountant's Role Forensic accountants are hired to investigate, analyze, interpret, summarize, and present complex financial information. A forensic accountant and/or damages expert could help – i.e. quantify the extent of the company's loss due to the fraud, gather evidence as to how the fraud was perpetrated and make suggestions as to how it can be prevented in the future.

It is important to note that once law enforcement or a prosecutor becomes involved, the business owner will most likely lose control of the investigation and that these third parties may not have the same priority to investigate the theft as the owner/operator because they have many other cases to address. Thus, business owners must take stock of the salient facts and what their ultimate objectives are regarding potential restitution and punishment for the perpetrator. Keep in mind that this is not a decision to be taken lightly as investigations (whether internal or external) can be time consuming and costly, and the likelihood of recovering the misappropriated funds or property may be remote.

Conducting an Investigation If an internal investigation is decided upon, it must be conducted in a way that builds credibility with the company's own employees as well as with outside regulators, customers and the media. Counsel and experienced fraud investigators should be retained as soon as possible in order to ensure that any investigative steps exact to the specifications of the law and any documentary evidence is properly preserved.

A decision needs to be made early on identifying those responsible for the investigation – i.e. the business owner or manager, audit committee, internal audit department, board of directors, outside counsel, forensic accountant, or a combination of the above. This decision should be based on several factors such as the size of the potential fraud, the targets of the investigation, the ability to recapture stolen funds and the overall risks to the company. Once the decision is made, the responsible party should outline the scope of the investigation. Depending on the type of fraud, investigative efforts may include interviews with employees, vendors, and/or customers. A review of relevant records must also be undertaken.

The responsible person should also outline how evidence is to be preserved. Given that documentary evidence is the keystone to most civil litigations, it is important to address this issue early on in the investigation. To this end employees should be alerted to preserve relevant documents, including electronic evidence.  The investigator may also want to consider hiring a firm qualified in computer forensics and electronic discovery if a significant amount of electronic evidence exists. Computer forensics can help to find hidden, or hard to find data and recreate critical computer related events. A firm experienced in using computer forensics will also ensure the integrity of the evidentiary chain of custody. 

Conducting an Interview The interview process is in many respects an art form. It is a complex moving vehicle that can take many forms depending on the scope of a particular investigation. The process requires highly qualified and experienced investigators to control the questioning and record the witness's answers, as well as visual and sensory cues regarding the witness's body language and vocal inflections. 

An overall interview strategy must be established, a list of questions developed, and an effective and efficient plan of action commenced. However, the interviewer also needs to be flexible keeping in mind that no two interviews will be the same. It is difficult to know if someone is involved in the fraud until you begin your investigation. One interviewee may want to tell you what they have done, while another will not tell you anything and is only looking to find out what you know. The interviewer has to have the ability to gain quality information and cause the interviewee to respond, in order to detect deception.   The interviewer also needs to keep in mind that once the investigation and interview process has begun, you may have only one chance to interview a person.

For these reasons, it is essential for management to engage an experienced professional who has conducted many fraud-related interviews. Marcum has professionals with years of experience interviewing witnesses regarding employee theft in large and small businesses involving company funds, inventory, and other types of assets and interests.   

Conclusion If an internal control environment does not exist, management is gambling that employees will behave ethically which, unfortunately, is not always the case. Best practices dictate that management should maintain established internal control policies and procedures, such as segregation of duties and regular evaluation of the effectiveness of all preventative measures that are in place. Business owners and operators should also monitor for the early warning signs to aid in the detection of employee fraud detailed in this article. 

Experienced professionals, such as those in Marcum LLP's Advisory Services Group, are available for assistance with the vast array of controls and techniques available for preventing and detecting employee fraud.  If you can only remember one thing from this article, I suggest that you keep your friends close and your bookkeeper even closer!

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Marcum LLP is one of the largest independent public accounting and advisory services firms in the nation. Ranked within the top 15 firms by Inside Public Accounting and Accounting Today, Marcum offers the resources of more than 1,100 professionals, including more than 150 partners, in 23 offices throughout New York, New Jersey, Massachusetts, Connecticut, Pennsylvania, California, Florida, Grand Cayman, China and Hong Kong. The Firm's presence runs deep with full service offices strategically located in major business markets.

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