With the government’s increased focus on ferreting out corporate fraud, companies face a higher risk of gigantic defense costs, negative media reports, and substantial civil or criminal penalties. Cases involving bribery and corruption under the Foreign Corrupt Practices Act, for example, are costing companies their reputations and their profits.
It takes only one credible whistle-blower with access to enough documentation to make a compelling case to a government agency to get the ball rolling. The saving grace, however, can be an aggressive compliance program, complete with thorough internal investigations of tips and red flags, plus swift and certain remediation.
We have previously discussed creating a process to identify a compliance problem that needs investigating and the assembly of an effective investigative team. We now move into the mechanics of conducting the investigation, ensuring quality control, and using the results.
The most effective internal investigation teams use outside, independent investigators with broad experience in fraud, corruption, and compliance. They are assisted by internal employees who have deep knowledge of the company, its systems, its people, and its practices.
While CFOs generally do not play an active, on-the-ground role in the investigation, they should be familiar with the process and keep tabs on its progression. The key is to not influence the outcome of the investigation so it is still deemed independent, yet know enough about what is going on to help the investigators get the information they need, keep the board of directors apprised of the investigation’s status, and make sure employees are fully cooperating.
Internal investigations generate lots of paper and digital files. All of these pieces of evidence need to be examined by the investigation team, who will determine if the items should become an active part of the analysis.
CFOs can facilitate the document-management process by having one or two internal employees as point people through which all document requests go. This will ensure that no one gives duplicates to the investigators, which could add confusion to the investigation; the company can always identify the original source of the documents; and no requests fall through the cracks. These employees should not limit the requests or exert control over the investigation. The investigators are ultimately in control of determining which documents are critical to their work.
Of course, it is important to keep the documents organized, for internal use, for the use of investigators, and, possibly, the government and courts. Even documents that are deemed unrelated to the investigation should be kept in an orderly fashion so that they can be found later if new information makes them relevant. Documents must be tracked, using a database or other tracking tool to log the documents, their source, their description, and their whereabouts in the investigation files. Items slated for a detailed analysis may be organized by issue, company division, geographic location, or some other logical categorization.
A “key documents file” can be especially helpful in an investigation. These documents are deemed critical to the investigation, either because they are identified as a “smoking gun” or because they tend to disprove wrongdoing. The documents will likely need to be readily available to investigators, who will access them over and over during their analysis. Keeping an extra copy of such items in a key documents file can make it easier to access the information and use it during the investigation.
Digging for Clues
The starting point of an internal investigation depends on the allegations or concerns that have come to light and depends on their level of specificity. Obviously, if suspicions are about a particular person, division of the company, or transaction, the work will begin there and may include examining pertinent documents and talking to key witnesses. If, on the other hand, there are only more general allegations or suspicions, the investigators will begin a broader search for wrongdoing. This work could include data analysis to search for irregularities or red flags of fraud; a reconstruction of the books and records using reliable documentation for a particular division, time period, or set of transactions; or scouring a group of transactions or accounts for questionable items.
The CFO can help ensure that this process flows smoothly by monitoring the investigation, providing access to employees and documents, and strongly encouraging management to cooperate with the investigators. The investigation team should be invited to bring any concerns to the CFO, who may have to deal with any resistance from employees to keep the investigation on track.
The CFO’s expertise in maintaining proper internal controls also comes into play during these examinations. Maintaining the integrity of evidence is paramount in internal investigations. Evidence will not only include documents and digital data but will also encompass information received from interviews, physical evidence such as fingerprints and stolen objects, personal observations of the fraud investigators, and information collected via surveillance and covert operations. Many details will be examined, with a heavy emphasis on bank statements, canceled checks, vendor invoices, accounting system reports, purchasing and inventory records, payroll records, internal and external e-mails, and a variety of other documents.
As the internal investigation proceeds, new items and people of interest will likely come to the investigators’ attention, creating additional paths for them to travel to uncover the truth. This can quickly become a confusing web of details, so they must carefully document findings and prepare for additional analysis. Fraud investigators don’t have work programs to guide their work like auditors do. Instead, investigators in a supervisory role may develop internal checklists and procedures, which will be of particular use to inexperienced investigators. This type of work helps ensure that critical tasks are completed to achieve a comprehensive and thorough investigation.
Keep in mind, while hired, experienced investigators need to keep their examination free of management intervention, they will need the expertise and knowledge of managers for an effective outcome. Companies rarely have opportunities for a “do-over” when they’re tasked with investigating allegations of fraud and corruption while the possibility of government enforcement looms.
Tracy L. Coenen, CPA, CFF, is a CFO contributing editor and a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving corporate embezzlement, financial-statement fraud, securities fraud, investment fraud, tax fraud, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts.