What do these situations have in common?

• Cash flow improves when a company’s long-time controller is away on a 4-week dream vacation.
• A busy restaurant’s cash receipts don’t match up with cash on hand.
• Soon after a defense contractor is sold, it loses valuable contracts after former employees misuse proprietary corporate information and trade secrets for the benefit of their new employer.

All three situations describe what could be financial fraud in action.

While it is common for business owners and managers to want to respond aggressively in such situations by firing the perpetrator and calling the police, that is not necessarily the best approach.

Stay Calm and Investigate

Maintaining calm and taking the time to thoroughly investigate the matter in accordance with the law is the best path. It’s imperative to continue business as usual while professional investigators uncover and sift through evidence. Here’s why:

• If someone did break the law, your company will have the evidence to prosecute.
• The investigation may uncover an unexpected source of the irregularities.

9 Steps to Effective Financial Fraud Investigations

1. Engage experienced counsel. It’s imperative to uncover the necessary evidence for the employer to take defensible action pursuant to California employment law.
2. Engage an investigator who has earned their Certified Fraud Examiner. certification (CFE). The Association of Certified Fraud Examiners’ (ACFE) rigorous fraud risk assessment and mitigation processes enable CFEs to understand the underlying factors motivating people to commit financial fraud, and to identify red flags indicating evidence of fraud.
3. Consider the company’s tolerance for bad publicity if suspected fraud becomes public. Are there any skeletons in the company’s closet? Is there a strong spokesperson on the management team?
4. Safeguard the integrity of source documents and materials to ensure completeness of business data and to protect against the threat of future chain of custody issues.
5. Identify existing anti-fraud measures and vulnerable areas susceptible to fraud.
6. Conduct financial analyses of the data to determine the full scope of potential fraud schemes, including but not limited to: financial reporting, sales records, payroll records, inventory levels, and cash flow.
7. Identify the extent of the fraud by assessing the potential for collusion between the company’s current employees, as well as collusion between current employees and outside vendors, relatives, and former employees.
8. Think outside the box when evaluating employee behaviors, identifying those who may be susceptible to engaging in fraud based on, among other things, lifestyle changes, financial pressures, living beyond their means, and job dissatisfaction.
9. Look close to home at long-time key employees who have the trust of the company, enabling them to manipulate financial records, inventory levels, accounts payable, accounts receivable, and cash flow for their benefit.

For more information, please contact Keith Rohman at rohman@piila.com or Anetta Stark at astark@piila.com, or call (213) 482-1780.