You May Have Found Fraud...Now What?

OAK BROOK, Ill., March 11 /PRNewswire/ -- The unthinkable has happened. You believe there may be fraudulent activity in your organization. What do you do next? Crowe Horwath LLP, one of the largest public accounting and consulting firms in the U.S., offers some guidance on what companies should do if they suspect fraud within their organization.

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"Fraud is uncovered every day, often through a tip or a complaint from an employee, customer, vendor or other source," said Jonathan Marks, partner-in-charge of Crowe's Fraud and Ethics group. "Some of the best resources an organization has for detecting fraud are a safe and anonymous tip line, a skilled internal audit function and internal controls that are appropriately designed and monitored for effectiveness."

According to the Association of Certified Fraud Examiners (ACFE), about 50 percent of fraud is discovered as a result of tips or complaints. "When a whistleblower hotline is called, it's important to act quickly and strategically," said Brenda Buetow, a senior manager in Crowe's Fraud and Ethics group. "Delaying an investigation could allow additional losses to occur or an organization's reputation to be damaged. A fraud response plan that designates responsibilities and outlines the steps to take enables you to act quickly, prevents those additional losses and minimize reputational damage."

Marks and Buetow suggest that companies develop a fraud response plan and follow these steps if they suspect that fraud may have occurred:

• Gather preliminary information. Evaluate preliminary data to determine if there is a basis for a continued investigation. Analyze information gathered carefully, as suspicious circumstances may turn out to have a reasonable explanation.  
• Consult legal counsel. Legal counsel can provide valuable guidance in conducting the investigation, dealing with authorities and working with the investigation team to make sure that evidence is properly gathered and preserved for possible prosecution. Legal counsel can also consult with management to determine if internal action is sufficient or if legal action is necessary.
• Secure data and files. Establish chain of custody protocols for all documents and information obtained. Computers that may contain evidence should be secured in a locked room until a computer forensic expert can examine the files.
• Define the investigation's scope and objectives. Is it your intent to work with law enforcement to prosecute the individual(s)? Do you believe funds are recoverable? What type of insurance coverage do you have? Who else could have been involved? These answers will help determine the breadth of the investigation.  
• Identify the investigation team. Ensure that the investigation team has the expertise to conduct a thorough investigation, as well as the independence to obtain and assess the facts surrounding the activity. While some companies use their internal auditors or other internal resources, it is often advantageous to use an outside consultant who has Certified Public Accountants (CPAs) and Certified Fraud Examiners (CFEs) with the experience and training necessary to conduct fraud investigations. Internal resources often do not have the objectivity required to conduct these investigations effectively.
• Determine who needs to be notified. Consult with legal counsel to determine if and when you are required to alert outside parties. For example, government agencies and banking regulators have reporting guidelines when fraud cases involve federal funds or federally insured funds. You may also need to notify your insurer if you're planning to file a claim.  
• Perform the investigation. Make certain that the investigation team has full access to all necessary data and individuals that could provide documentary support. Use electronic and data analysis tools to enhance the effectiveness and efficiency of the investigation. Communicate with the investigation team frequently.
• Control data and communication. According to Buetow, developing data and communications protocols is one of the keys to conducting a fraud investigation. "Understanding the nature, timing and extent of communication is imperative," she said. If fraud has occurred, you may need to notify the organization's stakeholders and determine if the organization's reputation is at risk. Legal and  communications counsel can help decide when and how to share information with the public, if necessary.
• Strengthen your controls. Revisit your controls and determine if a control was weak, broken or didn't exist. Strong controls reduce both the likelihood of a fraud and the magnitude of a fraud if one does occur. Segregation of duties is a powerful control that prevents many types of fraud. The ACFE recently examined 15 specific anti-fraud controls and measured the median loss in fraud cases depending on whether organizations had a given control at the time of the fraud. In every comparison, there were significantly lower losses (ranging from a 28 percent to a 66 percent reduction) when the controls had been implemented. Work with your investigation team and consult with your internal auditors or outside consultants to strengthen internal controls and reduce the risk of fraud.

About Crowe Horwath

Crowe Horwath LLP (www.crowehorwath.com) is one of the largest public accounting and consulting firms in the United States. Under its core purpose of "Building Value with Values®," Crowe assists public and private company clients in reaching their goals through audit, tax, advisory, risk and performance services. With 25 offices and 2,400 personnel, Crowe is recognized by many organizations as one of the country's best places to work. Crowe serves clients worldwide as an independent member of Crowe Horwath International, one of the largest networks in the world, consisting of more than 140 independent accounting and management consulting firms with offices in more than 400 cities around the world.

SOURCE Crowe Horwath LLP