Picture this, you, CFO, are sitting at your desk when an anonymous letter arrives alleging that employee X has been committing fraud against your company. Your first thoughts might be disbelief, anger and betrayal. You may question your relationship with this person that you have known and worked with for years. You may question yourself and your own abilities to read people and oversee the company finances.
Through this article, we will help you learn not only how an internal employee financial fraud investigation should start to take shape, but also help you understand that you are not alone. Internal employee fraud happens more frequently than people think  and when it happens, it can be devastating, but companies recover and continue to operate, albeit, usually with more oversight. You CAN get through this!
Create a Fraud Response Team
The first step, once management is aware of the fraud, should be to create a fraud response team that may include senior management (of the departments affected), external legal counsel, controller/chief financial officer, risk management, computer forensic specialist and external forensic accountants. The aim is to keep the team nimble in order to keep the matter private and it’s important to not include those who may have an interest in the outcome of the investigation. This team may start off very small and expand as new information is obtained.
The second step is to obtain and secure information that will form the evidence which may include both electronic and actual physical documentation. It is important to work with the team and heads of the departments to define what information to obtain. This exercise will also assist in identifying additional people that may need to be added to the investigative team, to facilitate the gathering of information and documentation.
Quantify the Magnitude of the Loss
The next step is to quantify the potential magnitude of the loss and determine how much has been taken, which can present an issue when the employee remains at the company or organization. This step is best suited to the forensic accounting team and can vary depending on the scheme and complexity of the fraud that occurred at the company or organization. It can also impact the financial statements so be sure to include your external accounting firm.
Act Quickly on Fidelity Claim
There may be the possibility to recover the funds, but it is imperative for the company or organization to act quickly as claims may have time limitations on certain matters such as fidelity. It is important to highlight that in certain instances, crime and fidelity insurance policies may impose limitations that prevent the insured from recovering losses that arise after they become aware of the theft.
Consult with Legal Counsel
The scope of the investigation will determine the potential involvement of the alleged fraudster including the risk that there are others that may be colluding both internally or externally of the company or organization. Note, in some cases, if the employee is still with the organization, it is important to consult with external legal counsel because the company or organization wants to most certainly avoid a wrongful dismissal suit.
Revisit Your Risk Management Plan
After a company has discovered an internal employee fraud the company or organization normally re-visits their fraud risk management plan, if one already exists. We recommend that companies regularly assess their fraud risk management plan including internal controls that can prevent fraud from occurring in the first place. As businesses grow, evolve and introduce new technology, new fraud risks are presented. The organization should review internal controls continuously for weaknesses.
Throughout this series of articles on employee fraud, we hope to help you understand various methods of employee fraud, red flags for employee fraud and how to detect and investigate the fraud.
The next article in this series will focus on Methods of Fraud and their various red flags.
The number of cases includes 133 countries with an average loss per case of $1,783,000. Ranging from $20,000 to $649,000 alone in the United States and Canada. With 86% coming from asset misappropriation and the remaining from corruption and financial statement fraud – Occupational Fraud 2022: A Report to the Nations