If you discovered a major fraud at your company, would you handle it in-house or call law enforcement?

That was the topic of a discussion on proformative.com, a networking site for finance executives. Participants in the discussion offered an eclectic mix of observations.

Fraud AlertIf, say, “Bob” was caught cashing a client’s check, the bar for calling the cops would be high indeed for said Regis Quirin, director of finance at Gibney Anthony & Flaherty. He said he’d need to weigh three pieces of information prior to recommending involvement by the authorities: (1) Do all facts lead to the same conclusion that Bob committed fraud? “Making a claim of fraud requires irrefutable evidence,” Quirin said. (2) Do we have any ability to recoup the monies from Bob? (3) Must we engage our client to help us understand if fraud was actually committed?

“It does not make sense to replace one fraud with two risks — i.e., the risk of a lawsuit from Bob and the risk of losing the client,” Quirin said.

Wayne Spivak, CFO at SBA consulting, took issue with all of Quirin’s points. While a company may have an internal policy not to turn in employees unless there is irrefutable evidence, Spivak noted that from a legal standpoint all that’s needed is reasonable suspicion. Second, Spivak said, “Going to Bob and saying ‘pay us back or we go to the police’ can place you in a precarious position of possibly being charged with extortion.” Third, “Engaging your customers is a must. They for the most part won’t pay you twice, but they’d want to know, because they too were defrauded and are part of the legal proceedings.”

An anonymous CFO of a government agency weighed in that not involving law enforcement can make the company liable because it failed in its fiduciary duty to protect shareholder interests.

But doing the opposite can be dicey as well, the finance chief said. He told of a case where a new employee was discovered to be stealing from Company 1 a few months after being hired. He was terminated, but Company 1 kept it quiet and the fraudster moved on to another job at Company 2.

During the course of the fraud investigation, it had been discovered that the perp had also been terminated by his prior employer for fraud. But when Company 2 called Company 1 when checking references, the latter didn’t say he’d been fired for fraud, but rather said there was a mutually agreed-upon separation. Company 1 was playing it safe, because the person’s guild had not been proven in the criminal-justice system.

Guess what happened then? Company 2 sued Company 1 for not revealing the truth. “You’re damned if you do and damned if you don’t,” the government CFO said.

Sara Voight, controller at Critical Signal Technologies, offered that if a company doesn’t have the funds for an investigation and doesn’t want to risk reporting the fraud to authorities, it should not provide any references. That doesn’t mean it can’t send a message. There is a difference, she pointed out, between “our company policy is to not provide references” and “we will not be able to answer any of your questions with regards to reference information outside of hire dates and salary.”

Another anonymous participant told of once discovering that his or her boss, the company treasurer, was committing fraud and that it was a hard decision to call the boss out. Quirin responded that if you discover fraud you should report it internally, regardless. “I understand the difficulty,” he said. “However, if you know about it and turn a blind eye, you may as well be party to it.”

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7 responses to “If You Spot Fraud: Handle It In-House or Call the Cops?”

  1. Any organization’s primary objective should be to determine if illegal or unethical activity has occurred/is occurring within its workforce. If litigation, liability or further illegality are a concern for management, there are plenty of ways to keep the response discreet and quiet. Do your own internal investigation, conduct data analytic detection audit procedures, conduct confidential interviews with key employees and/or managers. If these activities reveal solid evidence of fraudulent activity, THEN it is management’s considered option to notify law enforcement or simply confront the suspect quietly.
    In any case, each incident is unique and requires careful analysis assessment before ANY action is taken

  2. Factors to be taken into consideration include the players involved. Corporate politics will likely be the deciding factor.

  3. Mr. McCann, where do you come down on the issue? I was interested to read the opinions of the others in the discussion, but disappointed that you didn’t provide the final verdict.

    • I’ve never worked in any kind of financial role, but I will say this: I think companies do themselves wrong when they try to give fraud the hush-hush treatment. Almost any company can be victimized. They should put out a press release and tell the world what they’re doing in response. They would gain respect, as opposed to what happens when word of a cover-up leaks out. Naturally, that action would open the door to criminal prosecution.

  4. Gotta love Proformative! The only place online that you find CFOs talking about real life.

    As for this, call counsel for advice on next steps. They have likely handled this many times before and know the law. You don’t want to go off half-baked and get yourself fired or make moves that leave a criminal unpunished. So, get some very quick insight into the right next steps and be transparent with the risk leaders at the company.

  5. Counsel s/b informed immediately. Once guilt is established the employee should be let go (or, at least) suspended pending an investigation. Under no circumstances should a reference be made and certainly no press release is required.

  6. With the given, “Bob was caught cashing a client’s check” there is reasonable suspicion to support reporting the matter to authorities. However, many state and local jurisdictions lack the resources to properly investigate a financial fraud and will ask the victim to perform its due diligence and then share the findings for their investigation. So, as mentioned by others, it is advisable to consult your counsel concerning the next steps and timing. An internal investigation is certainly warranted. Are you sure this is the only check Bob has cashed? Better to verify and quantify the losses. Data analysis, audits and interviews will all be part of the process. The players involved should NOT be a factor. Set the tone for honesty and integrity for your organization from the top. Whether you report to authorities or not, do not let the perpetrator just move on to victimize someone else.

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