Internal auditors no match for fraud experts
By Rob Lamberti, AdvocateDaily.com Contributor
"You need a checklist of what you're going to do if you discover fraud or receive a tip-off that it’s being committed within your organization," says Oswald, founder and owner of the Oakville-based white-collar crime investigation boutique Forensic Restitution.
"Identify who will be on the team — your lawyer, forensic accountant, and forensic computer specialist — and ensure everyone is in place before anything happens.”
Once fraud is suspected, it’s critical to lock down computers and interview everyone related to the allegation, he says.
“It's very important when you receive a tip off that a fraud has occurred that you collect all available data before you interview the person who is alleged to be involved."
Oswald says "the people that are relied on to find frauds, the external auditors," only unearth four to five per cent of them, while about half of the theft cases are discovered by accident or by a tip.
Whistleblowers are often looked at in a negative light, but that’s the wrong approach, he says.
"The worst thing for any company to do is to try and identify the whistleblower,” Oswald says. “It’s like the 101 of what you shouldn't be doing because it deters people from reporting when they see something wrong.
"If a financial fraud is suspected, one of the first things to do is talk to your insurance company and inform them there is a potential problem in terms of your fidelity bond or theft insurance," Oswald says. "The reason that is important is that you don't want to be charged with late notification penalties."
The insurance company should be notified "once you see there is some fire behind the smoke," even if the internal investigators aren't sure of the size of the fraud, he says. "When you put them on notice, you're not giving them a final report, you can tell them at this point it involves one dollar," Oswald says.
A company should have a team in place to investigate reports of fraud, he says. The firm needs to determine if those investigators are internal or external forensic accountants, or a combination, and how the company's legal representatives fit into the probe, he says.
"It's a very detailed investigation, especially if there's collusion," Oswald says. "You have to be careful that everything is kept confidential during the course of the probe. You don't want someone talking about it because another unknown person might be involved who may destroy or cover up evidence."
Oswald says it’s often preferable to hire external investigators with specific expertise in fraud investigations.
"First of all, internal teams are not normally forensic accountants," he says. "They don't chase fraud on a daily basis and may not know what they should be looking for."
Oswald says a poorly trained internal investigator can make serious mistakes that torpedo the case against a fraudster, such an improperly imaging a computer after it’s been seized.
"You have to be really careful that the person conducting computer forensics or looking through the evidence doesn't taint it," he says. "Because we look for fraud day in and day out, we have developed a deep expertise, and we know exactly how to maintain the evidence in a manner that can be presented in court, and what to look for.
"What might seem to be innocuous to a layperson often sends us down a rabbit hole that results in us getting a really good outcome," he says.
In a recent investigation, Oswald says his firm uncovered three cases of fraud — one involving a $200,000 kickback — after an internal audit determined no fraud had been committed.
"We bring the full gamut of knowledge to the table, including computer forensics, data analytics, and mobile phone analytics, and, if it's imaged correctly, it can be put forth in court at a later time," Oswald says.
Police fraud investigators are usually called in after a company's forensic investigators and lawyers have examined the incident, and developed a case, he says.
"You want to ensure the evidence is easy to introduce in court, rather than having legal showdowns during trial where every piece of evidence has to be proven to be accurately depicted and linked to the suspect," Oswald says.