Disclaimer: I am not a lawyer and this is not legal advice.
It’s the end of the month, and your Staff Accountant is out on vacation so you’re reconciling the company’s credit card statements yourself. Then you see it. A charge at Tiffany’s on your salesperson’s corporate card. You know the company doesn’t approve expenses like that. Giving the person the benefit of the doubt, you decide to look at a previous statement. Sure enough, there are more suspicious transactions - BoatTrader.com this time. You start to sweat, wondering how your Staff Accountant missed this, or if they knew, and how many more transactions there might be.
The first thing you need to do is stop, take a deep breath and clear your head. The first time I found suspected fraud, my heart was beating so fast I thought it might explode, and my mind was racing with all of the possibilities. I wanted to immediately keep pouring over the documents trying to uncover more evidence. It is not helpful to panic, and run around the office announcing what you found. Even if the suspected fraud is massive, you need a plan of action that protects the company from continued fraud and the liability of handling one incorrectly.
This is a step by step guide, in order, of what I recommend people do when they suspect they have found a fraudster.
You cannot build a case without evidence. The best thing you can do upfront is gather and organize as much evidence as possible before notifying anyone of the suspected fraud. It might not be intuitive, but you do not want to interrupt the fraud right away. It’s usually better to closely monitor the person in question so you can catch them red-handed and see if anyone else can be tied to the scheme. In a company with robust controls, fraud is rarely committed by a lone actor. That means they need someone else to help them commit or cover up their ongoing fraud, and you’ll want to find the co-conspirators as well. You also don’t want them destroying evidence of their fraud before you have a chance to find it. Secrecy is paramount at this stage.
Here are examples of information that would helpful to document in a suspected embezzlement scheme:
The first and largest fraud I have ever uncovered had about 800 pages of supporting documentation created to substantiate the accusations. Your particular scenario might be different, but the more documentation the better in these types of situations.
Once you have your evidence, approach your corporate counsel and the HR department to set up a meeting to discuss what you have found. The reality is the U.S. legal system can be tricky, and there are employment and defamation laws that can make a false accusation very costly for the company. Even if the accusation is true, the situation has to be handled in a way that doesn’t potentially damage the company financially or reputationally. The legal and HR departments should be integral in helping craft the strategy for confronting the person, and removing them from the company. They can also be a sounding board for the evidence you have gathered, and can indicate whether it is time to move forward immediately, or continue finding more evidence.
This is possibly the most difficult step. Personally, I hate fraudsters and have a hard time concealing my emotions. The meeting should include your legal counsel and the HR department. It is important to stick to the plan laid out in the previous step. Do not let the suspected fraudster drive the meeting. If they are guilty, they will either deny the accusation or immediately start coming up with rationalizations for their actions. If you have moved to this stage, it is because you should have enough evidence without their testimony to know they are guilty. The point of this stage is:
It is important to handle this as succinctly as possible. The more time the meeting lasts, the longer the person has to accuse the company of unfair treatment. Be thorough, but this shouldn’t take all day. If the fraud is large and complex enough, you will likely prosecute and the additional information will come out in depositions.
Most businesses carry some type of crime insurance. The time you have to file a claim usually starts when the company becomes aware of the fraud. Make sure not to miss this window, and that you have all of the documentation ready to submit the insurance company’s investigatory team. If you don’t have a fraud insurance policy, I highly suggest looking into it. They are usually relatively inexpensive compared to the potential that your company will be the victim of fraud at some point in the future.
If you want to prosecute the fraud, this is the time to report it to the proper authorities. I will tell you from personal experience that this was the most frustrating part of every fraud I have seen prosecuted. Story time. Early in my career, the accounting team I was working with at a holding company uncovered theft by an employee in one of our portfolio companies. By the time we contacted the authorities, we had only substantiated about $25,000. The detective came in and interviewed us for hours. The first question she asked was, “Did anyone tell her she couldn’t do it?” Couldn’t steal money from the company? Why is that even a thing we have to tell people? Apparently, though, it is a common and sometimes successful defense. That highlights the need for a well-written employee handbook that explicitly states employees are not allowed to purchase personal items with company money.
Anyway, back to the story. When she went to leave she said, “I’m going to be honest. We’re probably not going to be able to do anything meaningful about this. Anything less than $100,000 just doesn’t get prosecuted. She might just plead out and get probation.”
I was furious. How can this be possible? What kind of world do we live in where people can steal $25,000 and basically walk free? Undeterred, my boss had me continue gathering evidence. By the end of the process, we had substantiated nearly $200,000. We found our way to a contact inside the U.S. Attorney’s office, and they decided to take the case. The Secret Service got involved because of the interstate nature of her crimes, and she eventually spent time in a federal prison in Fort Worth. All of this to say, I highly recommend prosecuting, but make sure you are ready for the emotional roller coaster.
Keep in mind that your situation could be different and warrant a different approach. Use this guide as a framework, and make sure you have a plan in place beforehand. Finding fraud is never fun. It is worth the struggle to remove those bad actors from the company, though.
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