Organizations with fewer than 100 employees are the most common victims of business fraud, with a significant estimated median loss of $147,000 in a 2012 report. One of the primary reasons an organization will hire a forensic accountant or Certified Fraud Examiner (CFE) is to uncover details and proof of business fraud, in order to prosecute the fraudster(s) and then recover as much of the missing funds as possible. It is not, however, as simple as discovering that there seems to be a fraud case and then expecting the natural working of the law to help recover the money. First you need to establish whether you have a case and, if so, what type of case, and decide if it is worth prosecuting based on several factors. And alas, recovering all the missing money is not so straightforward either. Following are some considerations for fraud investigation and prosecution to achieve the best possible outcome.
There must be a reason why only two percent of small business embezzlement victims report the crime, although 40 percent of small businesses indicate that they have been victimized. Indeed, many organizations do not want an instance of fraud made public, as it may make clients, prospects, vendors, investors and even potential employees nervous about working with or at that entity. It may imply weakness or poor management, and most organizations only want to appear in the news for something positive. You will need a forensic accountant to perform a fraud investigation as soon after detection as possible to determine what was taken, and what evidence is available that would allow a move to the prosecution stage. Some organizations decide at this point to ask the employee to return whatever has been stolen, along with being fired, because management simply wants to put the issue behind them and move on. But reviewing all options may assist in recovery, and in strengthening against future fraud attempts.
Legally, fraud is an intentional deception carried out for personal gain and/or to damage another. The quality and availability of proof discovered in the fraud investigation may help make the determination of whether to bring a criminal suit or a civil suit. In a criminal fraud case, this burden of proof must be “beyond a reasonable doubt” to show the law was violated; it’s the state or federal government official who makes the call to prosecute or not. Due to the time, expense and limited availability for cases, white collar crime often doesn’t make the list of priorities for criminal prosecution. Because of this, an instance of business fraud is instead prosecuted as a civil case, where an attorney is hired (instead of the government taking the case). The burden of proof is less stringent – a “preponderance of evidence,” or “is it more likely than not.” And it may require a jury ruling that does not have to be unanimous – therefore, making the case more likely to be successful. A final key difference is that a criminal conviction could mean prison time; a civil judgment can only mean partial or full reimbursement of actual losses, attorney’s fees and possibly punitive damages – no incarceration of the fraudster. Despite the trust lost by finding an employee guilty of fraud, many managers don’t find a prison sentence to be necessary – or as useful in recovering stolen funds.
The fraud investigator working with the attorney or prosecutor will likely be seeking evidence from the most common fraud schemes: billing, corruption, check tampering, skimming and expense reimbursement fraud. Prosecuting as a criminal case, there will be the need for more in-depth investigative techniques, including possibly using computer forensics to locate deleted, encrypted or hidden computer files. The cost of these specialized techniques can be significant, and a comparison of the cost to meet the burden of proof to the possible amount of funds to be recovered may determine whether it is worth going to this length. Even for civil cases, however, it’s been shown that businesses utilizing only their in-house IT staff could hurt their case by making mistakes, not following proper forensic procedures, and possibly producing results that are inadmissible in court – a less in-depth investigation by a Certified Computer Forensics Examiner (CCFE) may yield more admissible findings.
Recovering everything that was taken fraudulently poses several challenges, not the least of which is determining how much was actually taken. As the fraudster may have applied several fraud schemes during a long period before detection, some funds may have successfully been diverted and are therefore unrecoverable. Whether it be a criminal or civil case, or even a private agreement including no prosecution or judgment, the fraudster likely doesn’t have the funds to pay everything back immediately or even far into the future – the money taken is typically already spent. By selecting the better avenue to follow (criminal or civil suit), getting the most significant evidence (by a fraud investigator) and determining the actual losses, an organization’s management can ensure they make the optimal decision when balancing the costs of prosecution and recovery of money.
Whether you have decided to prosecute or not, and whether you recovered all or part of your losses, optimally you’ll want to prevent fraudulent activity from happening again. Forensic accounting specialists can assist in more than just fraud prosecution. Learn how to proactively set up your internal controls to include strong checks and balances and other ways to fraud-proof the future – so that you can focus on managing and growing your operations.