Internal Fraud Investigation – Assessing the Control Factors

When a company faces an internal fraud investigation, it has several options to figure out the direction of the investigation. When reporting requirements and regulatory agencies are intervening, then the choices are limited. However, if there are no outside reporting pressures, the company can call for reinforcements who will make the necessary decisions that need to be made.

During an internal fraud investigation, situations will dictate the amount of effort that will be required to define the extent of the fraud. Although every situation is different, there are still two very important considerations that need to be taken into account during this process:

1. When do you consider hiring an outside consultancy firm?
2. When or if the company should report the fraud to law enforcements?

Running an internal fraud investigation from within the company does have its own benefits. These very benefits can actually diminish the minute outside forces are called in and can actually disappear when law enforcements are involved.

As the company moves closer towards making a decision, it needs to weigh its advantages and disadvantages that are currently present. Soon it will see other benefits emerge from such a process.

While making the right decision, the most important factor to consider is how the decision affects the company’s control over aspects such as:

1. The disclosure of facts being uncovered.
2. The cost of investigations.
3. The manner and timing in which the investigation will be conducted.

These can be summarized further into segments like:

  • Cost Control – human resource and financial
  • Disclosure Control – public and regulatory disclosure
  • Investigative Control – objectivity and timing

These control factors actually have an inverse relationship, where benefiting in one area of control might cause a disadvantage in another area. Depending on the company’s objectives, having the right balance in the control structure is an important aspect for a successful fraud investigation.

The Internal Investigation

According to the Association of Certified Fraud Examiners ACFE, the typical length of fraud incidents reported actually lasted two years from the inception of fraud to the detection of it. So any fraud that may be uncovered might simply be the tip of the iceberg and by simply dismissing the employee will leave many unanswered questions.

Internal Cost Control

An increasing number of companies have internal resources that are capable of conducting their own internal investigations. Conducting the investigation from the internal audit department or the general counsel’s office might be a more practical option instead of involving a law enforcement agency or consulting firm.

Internal Disclosure Control

According to ‘Managing the Business Risk of Fraud: A Practical Guide’, which is sponsored by the ACFE, the American Institute of Certified Public Accountants and the Institute of Internal Auditors, “Fraudulent acts can damage an organization’s reputation with customers, suppliers, and the capital markets.”

Internal Investigative Control

By not including a third party law enforcement entity or specialty firm, the company can actually have a much stronger grip when it comes to investigative controls, since it has no outside forces influencing the direction of the investigation.

Assessing the control factors, concerning hiring an outside consultancy firm or bringing in law enforcement entities is crucial to the success of an internal fraud investigation. Each direction the company takes can put different areas of the control structure under pressure. The human resource and financial elements of cost control, the objectivity and timing of investigative control, and the public and regulatory disclosure control requirements, all have an inverse relationship that are essential for the investigation.

The importance of making the right decision is based on knowing the rewards and risks associated with each of the control elements and trying to balance them in ways that allows the company to achieve its objectives.

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