1. Investigating Employee Fraud

2. Introduction
While most employees are honest and do the right thing, employee theft/fraud is widespread.
Suspicious activity needs to be dealt with swiftly, firmly and fairly.

3. What Is Employee Fraud?

4. Asset Misappropriation -
Cheque forgery
Cheque tampering
Inventory theft
Expense reimbursement fraud- this includes creating false receipts or inflated expense claims
Corporate credit card fraud
Commission fraud

5. Vendor Fraud
Billing schemes
Overbilling
Kickback schemes

6. Payroll Fraud
Ghost employee schemes
Timesheet fraud

7. Corruption/Bribery An employee provides a bribe to an official
An employee may use a shelf company to launder money

8. Accounting Fraud
Fake suppliers set up in a Company’s financial accounts
Account receivable fraud
Creating false accounts and sales

9. What Motivates Employee Fraud?
Fraud Triangle
Pressure
Opportunity
Rationalization

10. So What Are The Stages For Investigating Employee Fraud?

11. Stage 1 - Stop The Fraud!
Get advice from both a forensic/investigative accountant and a lawyer. We need to work together.
If an employee has been using a computer, ensure that the computer is isolated and no one else touches it. The reason for this is to ensure that evidence is not tainted and to protect the integrity of the chain of evidence. Preferably, an independent forensic/investigative accountant should be brought in to recover anything that has possibly been deleted from the hard drive.

12. What Role Will The Investigative Accountant Play?
Reviewing the factual situation and assisting to develop strategy
Assistance in the preservation, protection and recovery of assets
Co-ordinating with other experts
Tracing and recovery of assets

13. Stage 2 – Investigate And Collect The Facts And Evidence.
Collect as many facts as possible and understand how the fraud operated before approaching the employee.
Collect and isolate relevant documents
Keep things confidential, on a need to know basis.
Document all investigations thoroughly

14. So What Does This Factual Investigation Involve?
Interview Co-workers
Find out if there are any factors which may have led to the fraud eg: gambling or other addictions.
Once the facts are collected and statements are obtained from relevant employees there should be a legal review of the case and an opinion formed about the strength of the evidence.
If the factual investigation suggests a prima facie fraud- and at least a preliminary estimate of the quantification of the fraud can be established, then searches should be undertaken to ascertain whether the suspected employee has any assets and what they are.
Legal advice should be sought at the same time as to whether it may be possible to bring an application to freeze the employee’s assets, particularly if the fraud is quite large.
What I usually do are property searches in the names of the employee and any spouse, as well as company searches to see if they are shareholders or directors in any companies.
Undertake searches of any related companies

15. Stage 3 – Interviewing The Employee Suspected Of The Fraud.
Never do this alone. Always make sure there is a second person present.
An accurate record of questions and answers given by the employee should be taken.
Employee should be encouraged to bring a support person.
The allegations need to be put to the employee and he/she should be asked to comment in relation to each allegation.
Documentation should be shown to the employee.

16. What Action Should Be Taken With The Employee Suspected Of Fraud At This Initial Meeting?
Suspension is better than termination at the initial stage.
Follow the rules of procedural fairness or employees may claim unfair dismissal.
Employee should be warned not to contact any other employees of the business and he should be asked to return any laptop and any other electronic equipment. His access to the system should be cut off immediately. This reduces any risk of tampering with documents.
Sometimes an employee will admit to the fraud and offer to resign. Advise the employee that the matter may still be referred to Police.

17. Finalise The Investigation While The Employee Is Suspended
The investigation should be finalised and the following decisions made;
Is there strong enough evidence that a fraud has been committed by the suspected employee?
Was anyone else involved? If so who?
Even if not directly involved in the commission of the fraud, did anyone else know about it?
What is the likely quantification of the fraud?
If the employee has admitted the fraud- has he agreed to make restitution and if so how?
If not, then decisions should be made about whether civil action will be commenced. This decision will often be governed by whether the employee he any assets to make civil action worthwhile.
Finally, a decision needs to be made about what is going to happen to the employee and he should formally be notified of any termination.

18. Reporting To The Police
The business should report the fraud to the Police.
Under s 316 of the NSW Crimes Act, anyone who knows or believes that a serious indictable offence has been committed and has material information that could assist with the apprehension or prosecution or conviction of the offender must bring that information to the attention of the police or other appropriate body.
A serious indictable offence is one that comes with a maximum penalty of 5 years or more in jail - this includes fraud.
The failure to report any such offence can carry with it maximum penalty of 2 years jail. This does not include a lawyer- due to privilege issues.

19. Post Review
Review Company Policy and procedure to ensure that fraud is not repeated.
Forensic review of employer systems.

20. Case Study
Fraudster - Practice manager in small professional service firm
Fraud came to light fortuitously
Multi-layered Fraud – Credit card fraud, cheque fraud and manipulation of firm accounts
Total Theft - $450,000

21. Case Study Continued Investigation by investigative accountant
Application for freezing orders prepared prior to confronting employee
When confronted employee makes no admissions to committing fraud but agrees on restitution
Asset recovery approximately $350,000 from joint sale of home
Matter referred to Police
Eventually employee pleads guilty
Sentenced to four years jail suspended after 18 months.

22. THANK YOU