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Common Pitfalls during a Fraud Investigation

Experience has demonstrated that many investigations make four common mistakes in handling fraud allegations. These pitfalls include: not investigating, not shrouding the investigation under attorney-client privilege, not using independent investigators, as well as not disclosing the investigation to clients, shareholders, and government officials as necessary.

Investigative inaction is one of the grossest errors when regarding fraud allegations. This inaction can be the result of sheer negligence or due to a more sardonic, deliberate judgment. In many instances, organisations- particularly charitable and public-service agencies-are staffed by individuals who can’t fathom that someone on staff might exploit personal benefit from their shared, general cause. On other occasions, personalities and corporate internal rivalries stand in the way of initiating proper investigations. No aspiring executive wants to answer for fraud that went on under their leadership.

The law does not readily secure investigative findings from unnecessary disclosure. The best way to protect findings from such disclosures to media outlets, opportunistic plaintiffs, and even government agencies is through the utilisation of attorney-client privilege. This is done by having a lawyer lead the investigation. Forensic accountants and other crucial members of the investigative effort should report to the lawyer.

In a privileged environment, management can be confident it will have proper time to deliberate the sometimes dramatic findings discovered by forensic accountants. Similarly, forensic accountants may identify issues beyond the scope of the original investigation. By operating in a privileged environment, firms can address unexpected and unrelated findings without public oversight. Significant executive decisions that flow from investigations, such as how to discipline personnel, installing new internal controls, and addressing fiscal consequences, can be best handled when conducted under privileged settings. Further, a privileged investigation can best enable the release of findings at the discretion of the party/company involved. This is far more advantageous than leaks of information which can be misconstrued by the public media and publicly created perceptions. Attorney-client privilege offers maximum protection in the investigative process.

Investigators can face critical issues if they are not provided protection from corporate politics. Federal prosecutors, similarly, routinely assign more credibility to internal investigations that are led by outside counsel rather than those conducted by in-house counsel. Given that the mean fine and restitution order imposed on organisations sentenced for fraud in 2012 was estimated to be $343,579, legal fees on outside counsel are dollars well spent.

A major pitfall is how to interview a suspect. People voice record interviews, which is not permissible by the state laws in the United States. There are several high level mistakes investigators make while conducting interviews and taking statements, including making sure the correct procedures are adhered to, or making sure statements are accurate and reliable. Furthermore, investigators interview a suspect before finishing interviews with the witness to see if there are any holes in the witness’ statement, or if that suspect has an alibi, making the witness’ statement flawed and requiring a further questioning.

Another common pitfall is not working on copies of evidence rather than writing on the original evidence itself. This brings the issue of tampering with evidence in the fact that you have altered that evidence and it won’t be in it’s original form if it were to need to be looked at again within the investigation. Moreover, another factor to consider is the question of what is enough when we speak about evidence? This is a question that affects many investigations. When conducting an investigation, and when coming to a conclusion you really want strong evidence that is both circumstantial and direct to ensure that you come to the correct outcome. Wrong referencing an evidence file and a report also causes problems as this can really alter the outcome of an investigation. If evidence has been incorrectly referenced, all of the next stages in the process will be questionable as they will be from incorrect evidence, increasing the probability of incorrect results and a flawed investigation.

Keeping the legal counsel involved is important in avoiding pitfalls in a fraud investigation. Being able to consult with the legal counsel throughout the investigation ensures that all the correct legal steps and procedures are being taken, to lead to a smoothly-run investigation. Additionally, when a whistleblower is involved in an investigation, problems can arise in trying to contain said whistleblower from going to the media and exposing the case. If the media were to find out about the investigation, everything would become public matter before the investigator has a chance to obtain statements and evidence.

Discovering the truth to a fraud investigation frequently means declaring less-desired truth as well. This occurred during the Bogousslavsky Affair in 2009. When it was discovered that Julien Bogousslavsky was found guilty of fraud- including embezzling almost US$8 million- the shortcomings of his employer, Centre Hospitalier Universitaire Vaudois, became open to the public as well. It was discovered that the medical center lacked the internal controls required to prevent Bogousslavsky from committing his acts; no protocols of worth were in place to prevent Bogousslavsky from creating false purchase orders and subsequent false delivery receipts from fictitious companies for equipment that was never delivered to the hospital. Recurrently, the law mandates disclosure of these findings to law enforcement agencies, clients, corporate shareholders, and even the media. Prominent and public-conscience companies face the risk of negative media coverage through untimely disclosures and leaks. It is in the best interests of many companies to promise a full investigation and to make full and definitive disclosures that make clear to the public and law enforcement that the company is an ally in the efforts to detect and prosecute fraud.

Fraud investigations are certainly undesired. They can be embarrassing and expensive to a company in the short term. However, avoiding the mistakes mentioned above will assist in making sure that a company or client never makes a far more costly and embarrassing appearance in legal courts and public perception.

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