Don’t Undermine Internal Fraud Investigations

Posted on Monday, July 23, 2018

For even the largest and most sophisticated organizations, internal fraud inquiries can pose numerous challenges that can send a case off track, cause legal expenses to skyrocket, and put your enterprise on the losing side.

Ranging from lax investigations to not knowing enough about local law, here are examples of six mistakes that turned victory into defeat:

1. Avoid rushing to judgment. The facts of a case may clearly seem to indicate guilt, but  regardless of how compelling the evidence, your organization must conduct a rigorous investigation.

In one case, a commercial builder's internal audit department had evidence that the business's controller had used corporate funds for personal expenses. The enterprise fired the employee without conducting any additional inquiry, believing it had sufficient documentation showing a clear pattern of fraud.

The controller had other ideas, however, and sued the company for wrongful termination. In the end, the builder's legal advisers suggested an out-of-court-settlement because not only hadn't the organization conducted a strong investigation, it never even interviewed the controller.

2. Work on a need-to-know-basis. Knowledge of an internal investigation should be shared only with those who absolutely must know. By extending the range of individuals who know what is going on, your investigators risk hindering, if not dooming, the outcome of the investigation. This is particularly true if those being investigated get wind of the inquiry.

A large hotel chain determined that employees in one of the company's hotels were stealing their guests' credit card numbers. Managers shared their suspicions with one of the hotel's supervisors who, it turned out, was a part of the fraud. She, of course, told her fellow fraudsters, who promptly destroyed numerous notebooks that allegedly contained detailed records of the credit numbers stolen. Without this evidence, the hotel chain had to spend considerable time, effort and money rebuilding the case.

3. Don't proceed without input from Human Resources and legal advisers. Employees have certain rights that, if violated, can affect not only the outcome of an inquiry but also create considerable legal risk for your company. Before launching a formal investigation, brief your enterprise's human resources staff, attorneys and lawyers.

At one retailer, an internal fraud investigator suspected that an employee was part of a shoplifting ring. The investigator contacted local police to share her suspicions. At the time, the police did not have a detective available to interview the suspect, so they faxed a list of questions and asked the investigator to do it for them.

Unfortunately, the retailer's investigator did not read the suspect his Miranda rights, a critical mistake since she was conducting the interview at the request of law enforcement officials. Had the employee or any of the others in the shoplifting ring been charged based on information obtained in that interview, a judge would likely have suppressed the evidence because of the failure to give the Miranda warning. As is turned out, the employee cooperated with officials as a confidential informant and was never charged. 

4. Failing to prepare a document trail. Even the simplest fraud generally involves documentary evidence. No matter how straightforward the crime may appear, the case files must contain all the relevant information compiled during the investigation.

For instance, a landscaping enterprise fired an employee for allegedly stealing supplies to use in his own side business. The individual filed a counterclaim with the Equal Employment Opportunity Commission (EEOC) alleging racial discrimination. The company provided the EEOC a copy of its original investigation files, but unfortunately, several crucial pieces of evidence were missing. In light of the missing evidence that allegedly demonstrated the employee's guilt, the employer settled the racial bias allegations without admitting any wrongdoing and was fined by the EEOC. 

5. Not knowing the local laws. If your company employs staff abroad, it must understand and comply with the employment laws in each location where it operates. Failure to do so could be costly.

A U.S. corporation had uncovered suspected fraudulent activity by an employee based in Paris. The organization dismissed the employee and ran an investigation to determine the extent of the fraud. The business was able to determine that the employee had misappropriated approximately $50,000. However, the company never consulted an attorney familiar with French labor law and as a result violated several parts of the law. A French court ordered the company to reinstate the individual, pay back wages and cover the employee's legal costs. 

6. Holding too many interviews. A successful fraud investigation depends upon secrecy. If suspects determine that they are being investigated, chances are good they will destroy evidence, try to influence witnesses, or simply disappear with their criminally obtained gains.

A regional airline was notified through its confidential hotline that a vice president had stolen frequent flier miles for his personal use. The executive's boss was skeptical and would allow the investigation to proceed only if multiple employees corroborated the allegations. The company interviewed more than 20 employees before confronting the suspect. Not surprisingly, during those interviews the suspect became aware of what was happening and created a seemingly plausible explanation for the use of the miles. Without compelling evidence to support termination, the vice president kept his job and was subsequently promoted.

Engage your law and accounting firms to assist in all internal fraud investigations to help your company avoid these pitfalls and significantly improve the chances of a successful outcome.

Posted in Fraud & Forensics Group, Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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