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So you caught an employee in a major fraud

What do you do: Handle it in-house OR call law enforcement. Why did you choose your route?

Answers

John P. Hart
Title: Vice Pres - CFO
Company: Nova Pressroom Products, LLC
(Vice Pres - CFO, Nova Pressroom Products, LLC) |

Major fraud and NOT call law enforcement?

Lynn Fountain
Title: MBA CGMA CRMA, Past Chief Audit Executiv..
Company: Business Consultant
LinkedIn Profile
(MBA CGMA CRMA, Past Chief Audit Executive, Business Consultant) |

Wayne's question is one that MUST be carefully considered. Do you jump in and call the FBI or some regulatory agency or just the local police? When you say MAJOR fraud what does that mean? Is it in jnternational territories, cross state borders, impact some EPA law. Also, who found it? Was it identified internally, reported through a whistleblower hotline, identified in a regulatory audit? All these factors will impact who is alerted and when big it is major, one of your first steps is to alert in-house counsel and obtain proper protocols on any subsequent notifications.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

"Major" is a term tied to materiality. So depending on your business, it can mean many things.

The crux is that most times, law enforcement is not brought into the situation, allowing the perpetrator to continue their behavior(s) at someone else's company.

Is that good governance (another term tied to materiality)?

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

During my career I have seen instances of Sales Fraud. In these cases, there was an immediate termination, but nothing more. I have seen Accounting Fraud. In this case, there was an immediate termination. Segregation of Duties was re-evaluated and some changes implemented.

Not one organization reported the incident to the authorities.

For the most part, fraud is committed by petty criminals.

If my CEO came to me and said we just caught “Bob” cashing a client check; and we believe the problem occurred previously. I would need to weigh three pieces of information prior to recommending involvement by the authorities –

1) Do all facts lead you to the same conclusion that Bob committed fraud? Making a claim of Fraud requires irrefutable evidence.

2) Do we have any ability to recoup the monies from Bob?

3) Must I engage my clients to help me understand if there was fraud committed in my company?

It does not make sense to replace one fraud, with two risks, i.e. risk of a lawsuit from Bob, and risk of losing the client.

My solution can be seen in a blog I posted on this site (May 9, 2013) - “The Best Way to Avoid Fraud Is to Remove the Opportunity.”

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Regis,

Involving law enforcement does not require you to have irrefutable evidence. You need to have reasonable suspicions; it is the job of the Police and the Prosecutor's office to obtain irrefutable evidence (and they have the tools you and I don't have to obtain this evidence).

Going to Bob and saying "Pay us back or we go to the police" can place you in a precarious position of possibly being charged with extortion.

Engaging your customers is a must. They for the most part won't pay you twice, but they'd want to know, because they too were defrauded and are part of the legal proceedings.

And yes, you are absolutely correct to say "The Best Way to Avoid Fraud is to Remove the Opportunity". By doing so, I don't have to entertain and fret about the other "risks" you described.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

It's a catch 22.

Not involving law enforcement can make you liable because you failed in your fiduciary duty to protect shareholder interests. In my own case, public agencies, failure to protect public assets and taxpayer interests is cited as an absolute reason to provide all information to law enforcement. I've been in this situation and legal counsel insisted.

On the other hand, keeping it in-house and taking it up with the employee confidentially is an accusation of wrong doing for which you can be sued under various constructs if you are unable to bring the accusation to conviction. I've seen this happen as well. Which is why there is frequently a "buy out" contract that legal lays out.

I know of a case where a controller was hired by a major health care operator and his references checked out. Within a few months, it was discovered that he was stealing from the organization. They terminated him without incident and kept it quiet.

He moved on to another health care organization.

During the course of the employers fraud investigation, it was discovered that the perp had been terminated by his prior employer for suspicsion of.....you guessed it, fraud. Only they didn't tell the next employer checking his references about the reasons for his termination - actually mutually agreed to separation - because they had never "proven" it by going through criminal process. They didn't want to liable themselves.

But, the next employer went after the previous employer for NOT revealing the whole story.

Like I said, you're d**ned if you do and d**ned if you don't.

Anonymous
(Board Advisor and Investor) |

This is aligned with that I saw at a previous company. Except we DID evaluate it with our in house Legal and Security groups and then we went to the police and district attorney. They investigated, as we don't have all the information access and authority. And guess what? They asked the prior employers of this accused employee and one of the prior employers then discovered that same issue at their company--- only at a much larger magnitude. Had the police and DA not gone to that prior employer, that illegal act would not have been discovered. They also uncovered a network of associates of this accused employee who assisted him in the fraud and all of them were prosecuted. The leader was sentenced to 5 years state prison and repatriated to the companies

Anonymous
(Accountant) |

It made it hard for me because it was my boss, the VP/Treasurer of the company that was doing the deed. It's a tough decision as an underling to call your boss out for inappropriate behavior.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Anon - you are bringing up a completely different issue. The overall question, which is how I responded above, relates to including outside parties, when fraud is discovered internally. Make no mistake - if you discover fraud, you are required to report it internally, regardless of the level of the fraudster. I understand the difficulty. However, if you know about it and turn a blind eye, you may as well be party to it.

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

In my opinion it depends on the legality and, I guess, it depends on your definition of fraud. Was the fraud a violation of company policy, accounting principles or something illegal in the subject jurisdiction? If they latter, I believe authorities should be advised.

Rich Housman
Title: Chief Financial Officer
Company: Venus Wafers Inc.
(Chief Financial Officer, Venus Wafers Inc.) |

May want to transfer this "burden" of responsibility to your fiduciary insurance company, assuming you have this coverage. Let them carry on their independent investigation. They will involve law enforcement if appropriate.

Daniel Ansong
Title: principal partner
Company: fenson & associates
(principal partner, fenson & associates) |

The decision will be whether the employee is superior or subordinate to you. If the employee is your superior other than the CEO himself then you make a report to the CEO but if it is the CEO then the appropiate person to be informed is the Board Chair.

Anonymous
(Controller) |

Some fraud that I've witnessed:
- Controller used the company credit for personal expenses, $20k+. Authorities were called and she was fired and had to pay the money back.
- Division President tried to get a $50k bonus paid out twice. Management looked the other way, treated it as a loan, and he was not fired.
- SVP purposely miscalculated commissions/money owed to a reseller/partner (by providing incorrect information to accounting). Company looked the other way and it was not corrected.
- President/Founder took more distributions that he had basis, and instructed the accountants to book it to an asset account. Controller was fired for objecting. His company went bankrupt 6 months after receiving a clean opinion from one of the Big 4.

Stephen Glenn
Title: Controller
Company: Pierre Frey, Inc.
(Controller, Pierre Frey, Inc.) |

If there is a loss of assets to the company, then yes the crime must be reported to law enforcement.

I discovered an employee, responsible for charging credit cards (small company and way before e-commerce), was issuing credits to their own personal cc. Total loss was over $50K. Employee was terminated and I filed reports with local police and insurance company. Fortunately the company had coverage.

Joe Cantatore
Title: CFO
Company: Fehr Brothers Industries, Inc.
(CFO, Fehr Brothers Industries, Inc.) |

I have had this occur a number of time over my career. In all cases, the employee was immediately terminated. In one case the Manhattan DA was brought in along with the company auditors to prosecute the case. The biggest concern was that the individual would do it again if not prosecuted.

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

One business I participate in uses investigators when something like this comes to light. If they are in finance, it is usually a forensic auditor brought in under the theme of determining if we are set up right in order to pursue "XXX." The employer under investigation participates without knowing in determing where potential issues or opportunities exist. If it is fraud by employee, the investigator has always been able to get a written confession which is used to terminate the employee and report to the authorities. This business is more retail so most of the suspected fraud has to do with 'free giveaways' by staff, but we did have an accountant investigated for fraud. Turned out our internal controls protected us from her shenanigans, but she had a part time gig with one of our sub-tenants and she took them for over $50K. She ended up in jail. The other potential outcome is that there might be a little fraud, but more incompetence that is allowed due to poor internal controls.The investigation brings that to light and then you have your one and only chance to clean things up.

In the event a company determines they don't have the funds for an investigation and don't want to risk reporting to the authorities, the company can not provide any references. That can send a clear message for any future employer when the prior office is silent and states they will not provide a reference. There is a difference between saying "our company policy is to not provide references," and "we will not be able to answer any of your questions with regards to reference information outside of hire dates and salary."

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

The sales type fraud I have witnessed the employees were brought in and given the opportunity to admit to it or deny it. If they admitted to and showed remorse we gave them a second chance. If they denied it we would terminate.

Recently, we are facing customer fraud with what we believe is employee involvement. Without going into a ton of detail, to involve the authorities is difficult. There are a lot of pieces to the puzzle. I spent almost an entire day sifting through mounds of data to find commonalities and proof. We called the one person just to inquire about it and within hours she had her phone number changed and didn't show up for her next shift.

When I was a controller for a hotel I had someone stealing cash from the night server's cash drops. I set her up so I had the proof I needed but there wasn't enough hard proof to involve the authorities in that case either.

Anonymous
(Accounting Manager) |

I was a consultant at a business which I knew where it was going to lead, when I had the proper information of proof I showed the owner of the business that his accounting person was embezzling. I cautioned him to go the authorities first but he went directly to her, who turned around and filed a sexual harassment complaint against him - thereby both suits were dropped and I'm sure she's moved onto another business to do the same. I would contact the authorities first and agree with Wayne that it's law enforcement job to verify or get more evidence.

John P. Hart
Title: Vice Pres - CFO
Company: Nova Pressroom Products, LLC
(Vice Pres - CFO, Nova Pressroom Products, LLC) |

An industry trade publication brought news yesterday of a Houston hospital employee who stole 10M over 14-years! He plead guilty only a month after an anonymous tip - not an auditor - uncovered the scheme.
http://www.piworld.com/article/print-services-manager-admits-defrauding-employer-10-million-bogus-invoices/

I know of another case of 16M that also lasted for years in a Family Office.

I've seen many cases of fraud over the years as a consultant and business owner. Almost always due to too much trust and not enough controls. Doesn't matter if it the treasurer of the local little league or a 100 million operation.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Let's not forget partner's stealing from partner's with or without tacit approval.

I once went into a business where it was obvious from the tactics one partner was using in delaying what was obviously a necessary implementation of business controls because he didn't feel them necessary.

They weren't necessary, because it would unravel his scheme's that was defrauding his partner.

Betty Kayton
Title: CFO
Company: Innovative CFO LLC
(CFO, Innovative CFO LLC) |

i was CFO of a start-up where the office manager charged approx $100K of personal charges to the corporate credit card in a few week period before being caught. she also doctored a $10K check to make it payable to herself.

the local police and the FBI both declined to prosecute because they were "too busy to handle a case where the loss was so small". apparently $1M is their threshold. very disappointing, especially when we learned that she had ripped off prior employers in a similar fashion (and the authorities hadn't prosecuted due to small size).

when i pinged my CFO network, i heard similar stories. one of the companies filed a civil suit to reclaim the money, but it took 3 years and cost more (in legal fees) than the recovery itself. in retrospect, that CFO said that they wished that they hadn't wasted the time/money on recovery

sad world we live in where the criminals have the upper hand.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I understand the Feds declining, but the local police? They live for that sort of crime...

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

You still need to file a complaint so they have the person on file. You would be surprised how many thefts occur by a person that was dismissed from one company and go to another company and commit the same crime.

There might also be some civil charges that can be pursued. You might also call the Local prosecutor and ask them if there is a particular reason they didn't go to trial. Maybe there wasn't enough evidence in their view. There might be some things you can do differently the next time. And there will be a next time.

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

I would always recommend firing somebody who defrauds the company whether it is embezzlement or a salesperson misrepresenting facts to alter commissions. It is not just a moral issue but also bad judgment or stupidity on the part of the employee. In some cases you should involve counsel if you are unclear on whether to refer the matter to authorities.

Anonymous
(C2C Specialist) |

Okay so this is the story.

I volunteered for a very small non-profit. One of our volunteers was stealing money and falsifying records to try to cover their theft. We caught him after he had been doing this for some time. This person was a long time volunteer and had only started stealing recently.

There was a long discussion about what to do. We spoke to a lawyer and his advice was that we did not have an obligation to report and the choice was ours on how to proceed.

He did give us some background. If we went to the police then we were taking a chance. The amount in question was not large. The police are not well trained with trying to fight fraud. Much can depend on what the police officer feels. If they feel there is a case and they want to pursue this, then this would be moved on. Otherwise the entire process could end after an interview or two. If this was sent to the next stage then much depended on what Prosecutor felt. Chances were that the Prosecutor was more likely to proceed but there have been instances were they've felt that the case was weak and typically tried to settle. In other cases they've chosen not to proceed. If we went this route there was no chance that we would recover the funds and there was a chance that the person might not be charged criminally.

Our second option was to set up a meeting and work out a plan for restitution which is what we did. We recovered most if not all of the money that was stolen. This agreement contained a clause that if the person missed a payment we could take the agreement and everything to the police.

Our challenge was that we would have had a hard time proving what happened. We did have reasonable records but they weren't perfect. The person did get away with stealing for 18 months or so.

This happened 3 years ago and we still debate the matter. We opted for #2 and we've received all of the payments. If we had chosen to call the cops then we would have been taking a chance and if nothing had happened then we might not have recovered our money. From the perpetrators point of view, the police might have come, had a chat and left. If nothing happened then its unlikely that we could have done much to recover payment.

A bit of background.
Most police agencies have unofficial fraud thresholds. Typically cases below this threshold are put into a low priority queue. If the victim is a "vulnerable" party like a charity, Senior Citizen etc. then the threshold can be lower than if the victim is not viewed as being vulnerable, ie " a large sophisticated corporation." However a large corporation is more likely to have better controls and agreements.

Personally, I wanted to go to the police but ultimately the board voted for option #2. I felt that this person needed to be removed from the community and to have thier transgression made public. Since then other things have happened and I can now say that justice isn't as swift as people think. It can take years from the initial report to police to having the matter go to trial.

Ultimately the best thing you can do is to review your controls regularly and not take things for granted. Its much better if the person is caught after stealing once than if they get away with stealing for a long time.

I've come across this a few times and every time I hope that its the last time. This is very emotionally draining, you have to accept that people you knew/trusted violated your trust.

Anonymous
(CFO) |

It is my understanding that police departments will not get involved in civil matters like this, even though they are technically criminal. Police are focused on other criminal activity where there is physical danger as compared to fiscal issues. Fraud isn't isn't robbery, rape or murder and doesn't involve physical assault or threat.

But the DA's office will get involved. DA's often have trained fraud investigators.

I'd call the local DA office first.

Anonymous
(Director) |

I worked at an organization where fraud and embezzlement was an issue. the previous controller was complacent in the fraud and even helped cover the fraud from Big 4 auditors.
When the owner was made aware, he contacted the same auditors and a lawyer immediately. But, did not take the action to FBI/Police. After a several month investigation, and 10 mil loss over 10+ years before they just stopped looking. The perpetrator provided some restitution (about 40%) and NEVER went to jail. the perps family never knew either.

I still fail to see why authorities were never notified. As CXO's, it should be required by our profession to report these people. Corporate integrity starts at the TOP!

Barry Wallace
Title: Superintendent
Company: Searles Valley Minerals
LinkedIn Profile
(Superintendent, Searles Valley Minerals) |

I agree with Mark. I think we first must define fraud. I've worked for numerous small companies over the years and, in all situations, the owners pulled money in one form or another and claimed it was a business expense. I also just left a situation where one partner was paying his personal credit cards through the company. This would range anywhere from $5K to $15K a month. Unfortunately, I see this type of behavior to be very common in small companies. It's very frustrating and extremely disheartening when you work for such a person. So, tell me how you'd deal with that type of situation?

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

Barry:

I'm interested too. I've encountered this with small companies my whole life. If I changed jobs every time, it would be a nightmare.

And, I had my own tax practice at one time. So, I was on the preparation side and lost quite a few customers this way.

Over the years, I've queried various auditors I've had to deal with about how they deal with this - usually owner/operator tax fraud - and they tell me all they do is put in writing what the risks are and present it to their clients. So much for CPA ethics! They aren't turning away the business or refusing to sign returns or audit opinions despite being aware of these activities.

Worse, I've been called a "wolf boy" before because the perps had gone through IRS audits in the past where none of the issues related to tax cheating were caught by the IRS auditor.

I worked as a controller at one company where the CPA firm preparing the corporate income tax returns for three related entities would move income from one to the other to minimize taxes and allowed the owner to write off 100% of all three automobiles he owned.

Through several IRS tax audits, the issue was never raised. And yet, it was completely apparent to anyone with a lick of sense. The owner thought this made it all "legal" and that I was an idiot.

I did leave that job after six months, but it was because I was tired of juggling cash flow on a daily basis for an irresponsible owner rather than running the finance department.

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

I hope you found another company to work for. What they committed was tax fraud.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

@Scott MacDonald:

Yes. I knew it was tax fraud. Actually, most business fraud is in fact, income tax fraud as well. Stealing is bad enough. Stealing and not reporting the income is tax fraud.

But, as I said, it seems that this is a commonality in sole proprietorships and small businesses. Often the owners don't even realize that what they are doing is committing income tax evasion when they pay personal expenses out of company funds without recognizing it as taxable income.

I thought one of the weaknesses of Stanley and Danko's work on "The Millionaire Next Door" was not exploring the income tax "cheating" endemic to small firms and how that compares to W-2 slaves who aren't writing off personal expenses against their taxable income. They showed how most of the wealthy are self-employed business owners and how they pay a lower effective tax rate than wage earners. But they failed to explore why that is; that business owners might be illegally benefiting from manipulation, misunderstanding or even outright fraud, when it comes to income taxes.

I have family that farms. They would tear my head off if I said they were cheating on their income taxes. But, not one of them has ever paid for auto, health care, utilities or similar personal expenses in their entire life. "The ranch" paid for those and writes it off as a business expense for the ranch.

Even their houses were provided "by the ranch" in that, they bought additional property that included personal residences and took up residence there They see everything they do as being business related and thus a legitimate business expense.

I did quit that job. I walked away with two weeks notice and a clear conscience. But, I ended up going through one of the worst employment periods of my life. For three years, I worked temp assignments through the major agencies and did consulting work on the side. Low pay. No benefits. False promises of future FT employment if I "just took this one assignment for now".

Sadly, it made me very security conscious so that, I am much more willing to look the other way now. And, I generally advise others to do the same. No one is going to care if you expose fraud or waste or other malfeasance. You'll have your dignity. But you may starve.

We live in different times than I grew up in.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Fraud is fraud. You as an individual must decided where the white line meets the gray area and then where the black line is drawn.

Only you can decide whether something has crossed into that black area and whether or not you wish to be party of that action.

Just as law enforcement and the prosecutor's office have thresholds on what they will investigate and/or prosecute, you too need to establish your own thresholds.

Life is not black and white, but a milieu of grey.

David Smith, CPA, CMA
Title: Senior Financial Professional/Accountant
Company: seeking a new challenge...
(Senior Financial Professional/Accountant, seeking a new challenge...) |

Had a Payroll fraud, Manager gave herself a raise and got 50k before it was discovered. 50% of which she allocate to other employees and the government automatically took taxes on the money which was easy to recover.

The balance was ultimately recovered (over 3 years without police) by her repaying after chasing her around the globe.

Before closure to the issue, she had the Gaul to request a employment reference. Needless to say it was denied.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

We have always called law enforcement for material items. In any event, we pursue repayment. If we cannot get repayment, we may pursue legal action with the involvement of the police.

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