Financial advisory: Responding to fraud

Article

Responding to fraud: doing nothing is not an option

If you think you have discovered fraud, what should you do?

It is not an everyday occurrence to discover suspected fraud within an organisation. Initially you may feel overwhelmed, shocked, surprised angry, or inclined to deny it. However, the action you take in response to the discovery will significantly affect the outcome. It is good practice for an organisation to draw up a Fraud Response Plan, setting out the measures to take in response to suspected fraud, so as to be prepared should it happen.

Fraud can have wide implications – be prepared

While most organisations have controls in place to prevent and detect fraud and employ sophisticated procedures and technology to prevent and detect occurrences of it, fraud by someone within the organisation can be a very sensitive matter. In addition to the financial cost involved, there may also be collateral damage, such as loss of reputation and damage to employee morale. The more senior the perpetrator within the organisation, the more serious the damage can be because Senior Managers tend to have access to more data and more assets and are more easily able to circumvent controls.

Not taking fraud seriously is dangerous

A weak response to internal fraud can harm employee morale and attitudes. The lack of visible and appropriate action by an organisation to deal with fraud can give the impression to other employees that the offence is not thought serious. The result may be a decline in productivity caused by lower employee morale and motivation.

Therefore as a manager you should be aware of the need to maintain the highest ethical standards. The response to suspected incidents of fraud should be both prompt and robust (“zero tolerance attitude”) and compliance programmes should be tailored to the particular risks presented by different groups of employees rather than one-size-fits-all tick-box exercises.

But how can you ensure that there is a robust response to suspected fraud or misconduct?

Fraud? Keep calm and carry on

As a leader, you are well advised to take the view that fraud is likely to happen sooner or later. Sad as it may seem, no company is safe. Regarding what to expect, we go along with the old saying: plan for the worst, hope for the best, but expect to be surprised.

We recommend a “Fraud Response Plan” in the event of discovery of suspected fraud or serious misconduct. Such a plan provides valuable guidance for the fraud response team, enabling it to organise its work in an efficient and effective way. While statements on the organisation’s zero tolerance policy towards fraud and its policy on whistleblowing, including anonymity and protection from retaliation and false allegations, is part of the Code of Conduct, your individual Fraud Response Plan should list standard operating procedures in response to allegations:

  • The responsibilities, procedures and processes for reporting and responding to allegations of suspected fraud or misconduct.
  • The consequences of unsubstantiated allegations and the exploitation of related data and statistics.
  • The documentation, collection and preservation of evidence as well as the issuing of legal holds1.
  • The assignment of roles and responsibilities for internal investigation and oversight of external partners who assist your organisation in the investigation.
  • The list of trusted external advisors for key areas such as investigation, preservation of physical and digital evidence, crisis communication and litigation.
  • The policy on confidentiality and avoidance of bias in the investigation team.
  • The policy and principles of communication and media relations.

Checklist: do’s and don’ts in a case of suspected fraud

From experience, we created the following checklist for an immediate response to an allegation of fraud. If you adhere to the principles set out in the checklist you can avoid some common mistakes:

Who should read this article?

Corporate executives, Board members and General Counsels are responsible for responding to suspected fraud in their organisation. Since such events do not occur every day it is essential to have a playbook and checklists to hand so as to be ready to respond effectively and prevent an uncontrolled escalation of the matter into a veritable corporate crisis.

About the authors

Nic Carrington

Nic is a Partner in Deloitte’s Financial Advisory practice in Switzerland. He specialises in forensic advisory, financial crime fraud and corruption investigations, advising on cases involving white collar crime and corruption, including FCPA-related matters, anti-money laundering compliance and investigations, procurement fraud, conflicts of interest issues and accounting irregularities. Nic is a Qualified Accountant and a Certified Fraud Examiner.

Marc Buehler

Marc Buehler has proven experience in managing task forces in a variety of fields such as remediation, regulatory compliance, governance, fraud, misconduct and litigation. As a former banker he knows processes, regulation and practices in a wide field of financial services. With an academic background in information technology, economics and commercial law he can quickly adapt to a wide variety of investigative challenges.

Madeleine Rebsamen

Madeleine Rebsamen is a former banker and former SAP consultant with experience in the areas of Anti-money laundering, Compliance and Investigations of Fraud and Misconduct. She holds a Bachelor in Economics and Business Administration and a Master in Economic Crime Investigation of the Lucerne University of Applied Sciences and Arts and has many years of experience in international advisory and investigation in Western Europe.

Footnotes

1. To preserve physical and electronic information and documents, which can be relevant evidence in an investigation or litigation, from disposal. Employees are instructed by the legal counsel to stop disposing of information and processes are installed to handle information while the investigation is ongoing.

2. This may be particularly challenging in smaller organisations or when the suspects are members of senior management.

3. Regulated businesses like banks are well advised to align their communication also with the supervisory authorities.

4. Suspects may be put on administrative leave instead which keeps them out of the firm while they must still obey to their fiduciary duties under their work contract and collaborate with the organisation, such as respond to questions in an interview.

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