Partnership Chair
Do you suspect you’ve become the victim of fraud perpetrated by your employees? If so, here are some steps you can take to identify and respond to internal fraud.
Recognizing the Signs of Fraud
Some of the most common signs of fraudulent activity occurring in a business include:
- Unusual financial discrepancies, such as suspicious expenses or balance sheets that won’t balance
- Changes in specific employees’ behavior, including secretive actions, disappearing at random times of the workday, sudden willingness to stay late/after-hours, or reluctance to take vacations
- Missing inventory or altered company records
- Unexplained vendor payments or duplicate invoices
Initial Steps to Take
When you discover signs that fellow partners or employees may have engaged in defrauding your business, immediate steps you can take to protect your company’s interests include:
- Secure and review financial records: Company managers should secure the business’s financial records, preventing employees suspected of fraud from accessing those records. Managers should work with the finance/accounting department or external accountants/auditors to understand the financial records and ensure that all financial activity is accounted.
- Begin limiting access to sensitive information: Your company should also start restricting access to other sensitive information, such as customer lists, pricing information, marketing plans, and trade secrets.
- Start an internal review: Your business can retain auditors or attorneys to help conduct an internal review; however, the investigation should also avoid alerting the suspected perpetrators that they have come under investigation.
Investigating Fraud
Companies can investigate suspected internal fraud in several ways, such as:
- Conducting internal audits: Companies should begin gathering all relevant documents to audit their financials and operations and identify possible discrepancies that may indicate fraudulent activity by employees or managers.
- Hiring an accountant or external auditing firm: Accountants can review the company’s financial records to track suspected fraudulent activity. Auditors can also help identify fraud involving missing inventory or company property.
- Reviewing compliance with ethical and legal guidelines and regulations: Companies who believe they may have experienced internal fraud should also work with legal counsel to review how the suspected fraud may implicate the business’s compliance with legal requirements or ethical regulations.
Taking Action Against Fraud
After a business has uncovered substantial evidence of fraudulent activity by employees or managers, company leaders can take actions to respond to such fraud and protect the business’s interests by:
- Implementing disciplinary action: Businesses should take disciplinary action against employees or managers identified as having engaged in fraudulent activity; in most cases, such misconduct will support termination.
- Revising company policies and internal monitoring processes: A company should also review its employee handbooks and internal monitoring processes to reduce the risks of future fraudulent activity by other employees.
- Reporting perpetrators to regulatory authorities or law enforcement: In certain circumstances, a business may choose to report employees or managers who defrauded the company to applicable regulatory authorities (such as FINRA or state licensing boards) or law enforcement when their fraud may have involved criminal activity.
- Pursuing legal action to recover losses: Companies can also file lawsuits against former employees who caused the business to incur losses due to fraudulent activity to recover compensation.
Preventing Future Fraud
Businesses that have become the victims of internal fraud can reduce the risks of future fraudulent activity by employees or managers by taking various steps, such as:
- Strengthening internal controls and financial oversight mechanisms to eliminate loopholes that allowed prior fraud
- Establishing strong fraud reporting procedures and encouraging employees to come forward with evidence of discrepancies or suspected fraud by co-workers
- Conducting additional employee training on fraud awareness
- Setting up regular audits and independent reviews of the company’s finances and operational records to more quickly identify potential fraud
Contact a Business Litigation Attorney Today
If you believe that fraudulent activity has occurred in your business, swift action can help protect your rights and interests. Contact Patrick, Harper, & Dixon today for a confidential consultation with a knowledgeable business lawyer to discuss your options for resolving potential fraud in your company.
