Conducting Dishonest Employee Investigations

When companies believe they have been taken advantage of by a potentially dishonest employee, many have no idea what to do next. Many times business owners or managers jump directly to what is perceived as being the easy solution; the employee in question is terminated. However, is that really the best action to take? Many forensic accountants and corporate investigators will say it is not.

The first thing the company needs do is verify that the employee in question is in fact dishonest. There are very few matters that can cause more unhappiness in a workplace, or amongst a workforce, than an employer targeting an employee that has done nothing wrong.

Companies often forget to determine if “predication” is present before any type of investigation begins or accusations of wrong doings are made. Predication is defined as being a set of circumstances that would lead a reasonable and professionally-trained person to believe that fraud has occurred, is occurring, or will occur in the future

Predication can be found to be present with the help of things such as tips, accounting anomalies, surveillance, etc. A fraud investigation should never be conducted without predication being present. In reality, the accused employee may have upset someone enough that false accusations are made to “get even” or to cause the employee suffering. The following are some of the questions the company’s management or company investigator can ask themselves and others before any accusations are made or an investigation begins:

  • Did someone tell you the employee was dishonest?
  • Is there evidence the employee is being dishonest?
  • If evidence is present, is the evidence being safe-guarded?
  • When and how should you talk with the employee?
  • If the employee is coming back from a Workers Compensation Claim, how should the interview be conducted?
  • Is the employee a female and does she happen to be pregnant?
  • If the employee is a female, should a male investigator interview her alone?
  • If a witness is to be involved in the interview, should the witness be male or female?
  • Is the employee under 18 years of age? If so, does one of their parents need to be present during the interview?
  • Are there any cultural issues that need to be taken into account before interviewing the individual?
  • Will the “opportunity” the employee took advantage of still exist after the employee in question is terminated, suspended, reassigned or resigns?
  • How do I keep this from happening again?
  • Will the matter be handled internally, through a civil proceeding, or in a criminal court?
  • If the matter is to be handled in a criminal court, when do the police need to be involved in the investigation?
  • Is the matter in question covered under the company’s insurance coverage and if so, what documentation or procedures need to be followed in order to file a timely claim?

Once predication is determined, it is best if the owners or managers bring in outside experts to assist with the investigation. Many fraud investigations handled “in-house” are not done correctly for many different reasons. Some of which are accusing or alerting the individual suspected of the fraud at the wrong time, mishandling evidence, assumptions of involvement, failure to obtain a verbal or written statement of involvement from the suspect(s) and/or personal emotions getting involved.

In fact, emotions may be the hardest aspect for the management to get over or deal with. The owners and/or managers may feel embarrassed that someone was allowed to steal from the company. They may feel they “should have known better” and if they had only done something differently, this matter would never have taken place.

Business owners and managers must work to move past the feeling of being embarrassed. Trusting their employees is not the reason they were taken advantage of or stolen from. People take advantage of situations for many different reasons. Some reasons make sense and actually seem like they may be justified but most make no sense at all.

People who steal from those who have entrusted them with the well-being of their company must be held accountable for their actions. If not, you are allowing this person to go somewhere else and potentially victimize another organization or individual. I would believe the majority of business owners and/or managers don’t wish to feel as if they could have done something to prevent another business and/or individual from suffering the same fate as they have. Hold dishonest employees accountable for their actions.

If something does not seem right in your business, contact your attorney, your banker, your local law enforcement agency, or a forensic accountant for expert assistance in determining if something dishonest took place. Make sure your internal controls work properly in order to avoid potential fraud and catastrophe. Remember: prevention is always cheaper than detection.

Segregation of Duties. What is that?

When one person controls multiple phases of accounting transactions (i.e. accounts payable, payroll, accounts receivable, etc.), the opportunity for fraud in the workplace significantly increases.

By involving at least one other person in the transaction, the risk of fraud can be greatly reduced. According to the Association of Certified Fraud Examiner’s Report to the Nation, the presence of anti-fraud controls such as segregation of duties are associated with reduced fraud losses.

Accounting processes are divided into three separate phases:

  1. Authorization (requires an employee to direct another employee to initiate a transaction)
  2. Custody (the actual possession of the asset)
  3. Recording (adjusting accounts to reflect the transaction within the accounting records)

The “ARC” duties should be se segregated so an employee doesn’t have responsibility for more than one phase (authorization, custody and/or recording) within an accounting process.

The Financial Motivation to Commit a Crime

I previously presented at the International Association of Arson Investigators (IAAI) conference to fire investigators, insurance claims adjusters and county attorneys. My presentation was focused on determining/identifying financial motives for arson, or for that matter, any crime where the motive appears to involve financial gain. The process used by accounting professionals to identify motive is referred to as financial forensics.

Financial forensics is defined as a financial analysis and examination used to assist in the determination of a possible motive to commit a crime/fraud. A key element in the investigation of a financially-motivated crime is gaining an understanding of the perspective of the possible culprit. For example, the culprit may ask: “Does the relief from personal financial pressure outweigh the cost (risk) of prison, continued financial hardship and even the cost of damaging my own moral compass?”

Capture

The Fraud Triangle describes three elements present when a financial crime is committed: pressure, opportunity and rationalization. The analyses performed by fraud investigators focuses on the pressure(s) present in an individual’s life causing them to commit an act they may not normally commit. What were the financial pressures leading up to the event, on the event date and/or following the event? The following circumstances may lead to deteriorating financial condition and may create a financial motive to commit a crime:

  • Marital dissolution
  • Substance abuse
  • Addictive behaviors (gambling, shopping, collecting)
  • Bankruptcy/Insolvency
  • Loss of income (job)
  • Unpaid taxes
  • Insured arrested/attorney fees needed
  • Recent business partner split or dissolution

 

 

Case in point

In 2003, fraud investigators from Eide Bailly were asked to review the personal financial position of a woman who was accused of shooting and killing her boyfriend. The prosecutor and the investigating law enforcement agency suspected the crime was financially motivated. Eide Bailly’s fraud investigators reviewed the woman’s finances. Our findings indicated that leading up the event, the woman had amassed $37,000 in credit card debt with expenses exceeding her income by $52,000. The State was also able to demonstrate that the credit cards and associated debt were in her boyfriend’s name without his knowledge. In addition, the credit card statements were sent to a Post Office Box of which she had had the only access. The belief was that the victim/boyfriend was close to, or had discovered, these financial forgeries and debts, which ultimately led to his eventual murder. The culprit was found guilty and sentenced to thirty-five years in prison.

In 2010, Eide Bailly was retained by an insurance company to review and examine financial accounts for a business owner who lost his home and two at-home businesses due to suspected arson. Our fraud investigators’ analyses and financial trending charts showed an increasing number of delinquent payments, increasing amounts of debt and personal insolvency as of the date of the fire. In addition, our fraud investigators included in their analysis a projection of the financial position the business owner would have been in six months following the fire, if the fire had not occurred. The case never proceeded to trial, and our financial motive theory was never tested. However, the insured ultimately settled for an amount far less than their coverage.

It is also important to note that personal enrichment, also known as greed, is sometimes the sole motivation for financial crimes; not all financial crimes include the presence of financial pressure. Often times, these financially motivated crimes are easier to prove.

Fraud Facts

Fraud Facts

Eide Bailly’s Forensic Accounting team provides services in preventing, detecting and investigating fraudulent behavior and financial crimes. Our services include fraud detection and investigation, internal controls examinations, fraud awareness training, employee background checks and hotline reporting.