INTRODUCTION TO CONDUCTING AN INTERNAL FRAUD INVESTIGATION – Part II

This is the second installment in a two-part expose in which I walk you through the basic outline of conducting an internal fraud investigation. By “internal” I mean inside an organization.

_________________________________________________________________

7. HOW WILL THE INVESTIGATOR  DOCUMENT THE INVESTIGATION?

On the one hand, documentation is vitally important to show that the company took the complaint seriously and investigated the matter. On the other hand, if documentation is not done properly it could lead to numerous complications. The decision of how to document the interviews should be made with regard to the specific facts of the case. In particular, before an interview, the investigator must decide to either take notes and then have the interviewee initial them, or have the interviewee sign a written (even sworn) statement in order to support allegations and prevent possible problems in the future with inconsistent stories. Whatever type of recording the investigator decides to use, he or she runs the risk of either too little recorded factual information and “faulty” memories in the future or too much information that could be damaging to the company in the event of a lawsuit (any records generated throughout the investigation may be subpoenaed). Any legal questions about what documents will be discoverable should be directed to lawyers.

 

8. HOW TO CONDUCT AN INTERVIEW?

The investigator should initially inform the employee why the investigator is there and what is going to be discussed with the interviewee. For example, “there are issues concerning the way the goods are accounted for” or “how the cash management system is being administered” are two ways in which the investigator can avoid saying “fraud” while at the same time informing the interviewee of the purpose of the interview. All employees interviewed should be informed that it is expected that they will keep the information discussed, and the fact that the interview took place, confidential. The investigator should inform the interviewees that the company cannot promise absolute confidentiality, in order, among other reasons, to minimize the possibility of allegations of defamation. During the actual interview, focusing on the who, what, where, when, why and how (5wh) questions about the alleged fraud will present the company with a complete picture about the scope of the alleged fraud.

Inquisitive language encourages open communication, whereas accusatory language will tend to agitate and make the interviewee less forthcoming.

 

9. WHAT HAPPENS WHEN AN EMPLOYEE DOES NOT WANT TO COOPERATE?

In general, every employee owes a duty to cooperate and a duty of loyalty to the employer. This duty obligates an employee to comply with the directions from the employer during an internal investigation as long as those directions are reasonable. Unwilling or untruthful employees should be dealt with immediately. Regard must be given to the employee’s possible contractual rights, the Zimbabwe law (specifically, the Labour Relations Act [Chapter 28:01], and the specific facts of the situations. Before terminating an employee for failure to cooperate with an internal investigation, the company should consider a common issue of the employee requesting to have a lawyer present. In the initial investigatory stage, most companies do not allow individuals to have an attorney present, but the investigator should be aware of possible interview requirements.

10. HOW TO EVALUATE THE FINDINGS OF THE INVESTIGATION?

The conclusion of the investigation will result in finding fraud, no fraud, or no conclusion. No matter what the investigator finds, the investigator should be careful to support any findings with facts. Thus the following “global” checklist will be helpful to a company faced with a decision about how to proceed after the completion of any investigation:

  • Assess offenses or possible offences.
  • Review company policies and procedures to ensure that they cover the alleged violations
  • Decide whether the offence is historical or on-going.
  • Address parallel issues of governmental intervention, stakeholder derivative suits, and third party actions.
  • Decide whether a final report should be written.
  • Consider what steps should be taken as to disciplining the employee or terminating the employee.
  • Address public relations issues and possibilities of disclosing the fraud to the appropriate regulatory agency and/or the police.

11. TO WHOM DOES THE INVESTIGATOR REPORT?

Reporting to the correct decision-maker in a respective area — i.e. division head, CFO, CEO, etc. — is essential to conducting a fraud investigation. Embarrassment often accompanies fraud investigations, especially by the one who might have overseen the area where the fraud was committed. The investigator should make sure that the person to whom she or he reports is someone who will take action pursuant to the investigation’s findings and consistent with the company’s policies and procedures.

Just as promptness was important during the fraud investigation, promptness and accuracy is critical when reporting to the decision-maker.

12. HOW TO HANDLE THE ACTUAL TERMINATION?

After the completion of the investigation, if it is determined that an employee has committed fraud, the employee can be terminated immediately. The employee should be told clearly and concisely the reason for the termination.

In informing the employee of the reason for dismissal, the employer, if possible, should link whatever fraud the employee committed with one of the specific company’s policies and procedures. This will allow the employer to inform the employee that the termination is a response to a violation of a company’s policy and procedure instead of an undefined fraudulent act. (This point is a testimony to the importance of company policies which are “alive”, not just being documents at the HR office.) Taking this approach reduces the possibility of falling into a trap of the legal definition of fraud and minimizing the risk of countersuits. There should be documentation of the meeting with particular emphasis on what the accused admitted or denied.

 

WHAT INVESTIGATORS SHOULD KNOW ABOUT WHISTLEBLOWER PROTECTION

HR managers are aware of the various protected categories of employment, ranging from age, sex, disability, to union activity. The issue of whistleblower protection in Zimbabwe is mute. Investigators and HR managers should nonetheless be aware of the necessity of whistleblower protection in order to treat employees with due regard to their appropriate rights and protection and also for the promotion of a culture of openness.

Whistleblower status could possibly affect different stages of the internal fraud investigation process — including a decision to discharge an employee. When an employer discharges an employee for fraudulent acts, the employee might claim that the real reason for the termination is not the alleged fraud, but due to the fact that the employee is a whistleblower. In other words the suspect would be taking the “spilling the beans route”, even when there were no beans to spill. If the employer has solid facts to support the allegation of fraud and has been consistent in applying discharge as a penalty, the employer should be on safe grounds to terminate the employee. Although this may not prevent an employee from bringing an action, it should put the employer in a defensible position. Even with the facts to support the allegation of fraud and a consistent application of discipline to fraudulent acts in the company, the employer should proceed with caution if the employee:

  • makes an allegation of workplace or external fraud either to a superior, a governmental or regulatory authority, or the police right before termination;
  • claims that there was coercion to commit the fraud; or
  • was prevented from disclosing the fraud through threats of dismissal by his or her superiors.

 

CONCLUSION

Companies must face the realities of workplace fraud. A company’s legal responsibilities are increasingly dictated by law and regulations from many different governmental agencies’ requirements. At first glance, conducting a workplace fraud investigation might seem daunting, but in reality, it is only slightly different from any other workplace investigation. As with all investigations, preparation, documentation, findings of credibility and conducting the investigation in a fair and impartial manner are the essential characteristics of a thorough and successful investigation.

 

Souirce: Arthur P. Murphy, Esq. and Quinn H. Vandenberg

Advertisements

3 thoughts on “INTRODUCTION TO CONDUCTING AN INTERNAL FRAUD INVESTIGATION – Part II

  1. Very informative Caleb. Thanks for being generous- a feat lacking amongst many professional in Zimbabwe.
    I noted on item 12 that the due process of a disciplinary hearing was not mentioned. After determination by the fraud investigator that employee XYZ perpetrated fraud, it would be prudent for the respective divisional head, basing on the investigations report, to call for a hearing whereupon the alleged offender will be given an opportunity to formally answer to the fraud charge/s. This is over and above any preference of criminal charges in the courts of law.
    This aspect is important since employers should not be tempted to rely on the somewhat overwhelming evidence against an employee to summarily dismiss/terminate him/her without following the due process.
    On a different note I find a major challenge in fighting fraud being absence of commitment from top management to accept fraud as a pandemic that could affect business. They turn a blind eye and efforts to get them on board are viewed as tantamount to false accusations. May you tackle this one Caleb.

    Liked by 1 person

  2. Thanks Laxman for pointing out the intricacies of terminating an employee and the lack of “tone at the top” in many organisations in Zimbabwe.

    Termination is indeed a minefield. I did touch on this aspect in my earlier post of 21 August [https://5whaudit.wordpress.com/2011/08/21/a-contingency-plan-for-responding-to-workplace/]. There I reproduced, as is, an article of mine which appeared in the July/August 2003 issue of Business Digest, a Harare business publication. The article was adjudicated by George Makings, a labour guru in Zimbabwe. You are right, this aspect of labour law and procedure is a career in its own right. I will, with the aid of specialists, tackle the developments in this particular field again in the near future.

    As for tone at the top; indeed the very purpose of this – my blog – is to broadcast awareness among the populace and, as you rightly put it, “top management to accept fraud as a pandemic that could affect business”. In fact, fraud is a major cause of death among businesses of all ages and sizes.

    Like

    1. This post was copied word for word from HOW TO CONDUCT A
      FRAUD INVESTIGATION
      Arthur P. Murphy, Esq. and Quinn H. Vandenberg.

      I don’t see where you gave credit to this publication at all.

      Liked by 1 person

What do you think? What strategies do you, or your company, use to manage the risk of fraud and error in your organisation? Are you primarily proactive or reactive in your approach to risk management? Share your experience in the Comment box below.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s