Armanino Blog

Are Your Clients Prepared to Handle a Fraud Disaster?

by Scott Copeland
September 27, 2012

Fraud contingency plans protect companies in much the same way. But few businesses have considered — let alone documented — what they’d do if they found employees embezzling funds, stealing inventory or fudging financial statements. Don’t let your clients fall victim to financial and legal disaster: Encourage them to plan for the worst.

Plan as Roadmap
A fraud contingency plan works as a roadmap to help a business minimize damages, protect evidence, maintain client relationships and even deal with the media during a stressful time. It sets objectives such as recovering losses, identifying and punishing the perpetrator, and deterring future fraud.

This plan also addresses immediate needs such as ensuring that business continues as usual during the fraud investigation and outlining steps to rectify any losses from the incident. To catalog losses, your client would need to take an immediate inventory of assets and evidence — which means retaining a fraud investigator as quickly as possible.

Avoiding Knee-Jerk Reactions
When a company discovers fraud, it should refrain from immediately firing the suspect. Instead, your client might suspend the employee until it’s reasonably certain that the:

  • Suspect was responsible for the fraud,
  • Suspect acted alone,
  • Full extent of the fraud is known, and
  • Stolen funds have been located and can be recovered.

In any event, your client will want to get the suspect off the premises so his or her office or workspace can be searched.

This is where a contingency plan must be specific. While an initial examination of documents and personal papers may reveal certain ambiguities and irregularities, your client must know when to call an expert.

Forensic accountants and computer experts understand what proof is required for legal action. More important, they know how to extract that proof without destroying its evidentiary value. An inexpert review of electronic files, for example, could damage user logs or file access data that might prove the suspect opened the incriminating records.

Likewise, fraud investigators are experienced in interviewing suspected perpetrators. They ask questions and understand technical obfuscations that a business owner or manager might miss, and they conduct the interview in a way that helps establish its validity in court.

Everyone on the Same Page
Any fraud contingency plan must receive a stamp of approval from the company’s upper levels, including its board of directors. It must clearly delineate actions to be taken, establish limits on the internal investigation team, and identify how and when outside investigators, including police, will be called in.

Some fraud incidents may seem too minor to require full mobilization of a company’s contingency plan. Unfortunately, a “small” fraud often can reveal the tip of a much bigger iceberg. Even if a theft seems inconsequential, putting the contingency plan into action helps ensure that a company uses its best practices and avoids costly mistakes.

Proactive Approach
Too many companies wait until they’ve become victims before they put a fraud contingency plan in place. Instead, your clients need to not only plan for the best with strong internal controls and regular audits, but also to prepare for the worst with a fraud contingency plan.

September 27, 2012

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Scott Copeland - Partner-in-Charge, Audit - San Francisco CA | Armanino
Partner-In-Charge of Audit
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