It is difficult to completely prevent fraud in an organisation. Institutions with strong internal control measures can be exposed to risk of fraud or misconduct by employees, third parties, vendors, business partners, customers or a combination of these.
In recent months, there have been public reports of allegations of unethical conduct in organisations ranging from the New York State Governor's office to the Nigerian Police Force (NPF).
A problem in many organisations is that oftentimes, suspicions of misconduct are rarely formally reported for the appropriate investigations to take place. Unfortunately, stakeholders harbour concerns without making any formal complaints.
Organisations with strong measures to detect fraud or misconduct benefit from having a variety of channels from which to observe and respond to suspicions of fraud or misconduct.
Top companies conduct thorough internal audits, have the senior leadership of the company regularly reiterate the company's zero-tolerance stance, hold frequent workshops and focus groups to get employees comfortable with reporting concerns, and have effective internal or external whistleblowing hotlines.
Since the Financial Reporting Council (FRC) released the Nigerian Code of Corporate Governance (NCCG) in 2018, there has been an increase in the number of companies that have established a hotline for witnesses to report concerns.
However, beyond having fraud detection mechanisms in place, the company's response to allegations is also important. When allegations are made, the best practice is to conduct thorough and effective investigations to ascertain the veracity or otherwise.
Investigations into allegations may be conducted internally, outsourced or through a combination of both methods.
Internal or in-house investigations are usually conducted by an investigation team typically, but not necessarily, in the internal audit department. The team handles the allegations from the receipt of the complaint to the completion of the fact-finding mission. The team may also engage with employees in other departments of the company to gather evidence, as necessary.
For this, companies need to have personnel who are skilled and experienced in conducting investigations.
The staff in the investigation team should have technical competence, which may be evidenced by a relevant certificate such as the Certified Fraud Examiner (CFE) or Professional Certified Investigator (PCI) and suitable continuous education.
Investigation personnel should have sufficient knowledge of common fraud schemes, investigation techniques, specialized investigations such as cyber investigations, and relevant laws and regulations.
In-house investigations are usually the preferred choice for fraud or misconduct involving minor infringements or relatively small amounts of money. The appeal of this type of investigation is that it could be cheaper for the company, especially on a one-off basis. The company can use employees that are already on its payroll and rather than recruit an independent investigator.
Another benefit of in-house investigations is that the investigator, being a member of the company, is likely to be able to use cues from their experiences in the company and from previous investigations to ask more probing questions and complete the investigation quicker.
On the other hand, a major limitation of the in-house method is that objectivity might be impaired, especially where the investigator has close personal or professional relationships with the persons identified in the allegations. For example, it could be difficult for a member of the internal audit team to investigate a fellow team member, their lunch buddy from human resources, or an influential director in the company.
Furthermore, the management of the company could interfere with and compromise the investigations to suit their specific agenda. This could result in the investigation losing credibility in the eyes of employees, third parties, and other stakeholders.
Internal investigations could be ineffective if the organisation does not have employees who are equipped to carry out these investigations. Investigations conducted in such scenarios can overlook certain risks and thus, cause the company to miss out on opportunities to close those gaps.
Interestingly, in-house investigations could be slower than outsourced ones. In-house investigators encumbered by their day-to-day tasks and responsibilities at the company. In some companies, there is no separate investigation team within the internal audit unit. This means that members of the unit have to combine their work of executing their audit plan with investigating allegations that occur.
In many organisations, conducting investigations is not a major Key Performance Index (KPI) in the employees' performance evaluations. As such, the internal auditors are incentivised to prioritise executing the audit plan over conducting investigations. This can quickly cause a backlog of investigations or worse, some allegations may end up being completely neglected.
This is not ideal as when a complaint is made, there is often limited time to respond. Investigators try to get the necessary information while it is still fresh in the memories of witnesses and electronic systems still contain any relevant log files that could be useful as evidence.
The alternative to in-house investigations is to outsource some part or all of the investigation to qualified independent investigators. Companies, both large and small, use independent investigators. The nature of the allegation is likely to be the biggest factor in deciding whether to insource or outsource an investigation.
Ideally, the company's fraud response plan should outline the categories of fraud that would require an external investigator. The threshold could be monetary, based on the seniority of the person(s) named in the allegation, or based on how likely it is that a criminal offence has occurred. Some companies also outsource the investigation of all allegations that involve collusions among various stakeholders (for example, vendors, employees, and customers). Other examples of concerns that could be outsourced include hacking and ransomware attacks.
Because investigations often need to be conducted swiftly, organisations are recommended to have a list of prequalified independent investigators that could be called upon when an allegation arises.
Outsourced investigations still rely heavily on internal members of the company. Employees within the company often act as key witnesses or as subject matter experts of the policies, practices, and procedures within the company.
Sometimes, an investigation is conducted on behalf of a key stakeholder such as a regulator, key business partner, or the court. In these instances, the investigation is likely to be conducted by an independent investigator to ensure objectivity.
External investigations, especially when conducted by globally-trusted organisations, can be especially useful in giving credibility to an investigation. The credibility attached to the brand of the independent investigator could go a long way in ensuring that the client and the third party(ies) are comfortable with the findings of the investigation. If the findings were from an in-house investigator, it might be easier for people adversely affected by the investigation to reject some or all of the findings of the examination.
“Beyond having fraud detection mechanisms in place, the company's response to allegations is also important. When allegations are made, the best practice is to conduct thorough and effective investigations to ascertain the veracity or otherwise. Investigations into allegations may be conducted internally, outsourced or through a combination of both methods.”
A qualified external investigator is also likely to have access to talent that is technically skilled at uncovering attempts to conceal fraud. The Association of Certified Fraud Examiners ACFE's 2020 Report to the Nations states that 88% of fraud cases involve some attempt at concealment.
This means that investigations can often benefit from having members of the team who are skilled in areas such as cyber reviews, forensic data retrieval, or forensic accounting principles. Indeed, world-class investigation teams usually comprise of talent that support investigations by reviewing electronic logs, analysing accounting entries, or analysing Electronically Stored Information (ESI) in search of evidence.
Outsourcing an investigation also allows the management of a company investigate allegations against an employee or involving an employee, without alienating or creating conflict between the investigator (whether a member of the management team or a trained investigator) and the employee. This is especially important if the investigation eventually exonerates the employee in question.
There was a scene in the popular action-thriller, The Accountant, where the client angrily ended an external investigation because it pointed fingers at his employee and trusted friend. In reality, close personal or professional friendships can jeopardize investigations. This risk is however lower when investigations are outsourced.
Despite the benefits of independent investigations, some companies opt for in-house investigations typically due to the latter's lower cost burden. In-house investigations are also a good way to respond to fraud if the investigations can be conducted in an effective, reliable, and objective manner.
When allegations are reported, they must be sufficiently investigated. If employees do not have the confidence that the company will take investigations seriously, they are more likely to report directly to regulators or to the media, which could damage the company's reputation.
Research shows that one of the top reasons why people hesitate to report observed illegal or unacceptable activity is management inaction. In these scenarios, people question the benefits of reporting concerns for fear that such reports will not address the unacceptable behaviour.
Properly conducted investigations, on their own, are not going to produce a fraud-free organisation. Nonetheless, promptly and thoroughly addressing allegations of fraud and misconduct, whether through in-house or external investigators, could go a long way to establishing a strong anti-fraud culture within an organisation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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