Fraud has struck! What now?

A contingency plan can help minimize fallout, expedite investigation

It’s the news no business owner wants to hear: Fraud has struck. So what now? Do you lock down the office and not allow anyone to leave until someone fesses up? Do you call the cops and ask them to send down a black-and-white?

One thing’s for sure — you wouldn’t be the first business owner to panic a bit upon the discovery of fraud. That’s why preparing for a harrowing moment such as this with a fraud contingency plan can help ensure that you know just what to do to minimize the fallout from a fraud incident and get the investigation underway immediately.

Think bad … and worse

A fraud contingency plan is your disaster road map. When you learn that a trusted employee has been stealing from you, you’ll likely be distressed — which is no time to trust your instincts for damage control. With a well-designed contingency plan already in place, you won’t have to rely on knee-jerk reactions.

No contingency plan can cover every fraud possibility, but yours should be as comprehensive as possible. Work with your senior management team and financial advisor to devise as many fraud scenarios as you can dream up. Consider how your internal controls could be breached by an enterprising fraudster, whether a rank-and-file employee, manager, executive or third party. Look at how someone could defraud the company acting alone or how employees and outsiders might work in collusion.

Next, decide which scenarios would be most likely to occur and which would be most damaging from a financial and public relations standpoint. Then decide what you’ll do about them if they happen. For example, you’ll need to define the objectives of a fraud investigation. Some companies want only to fire the person responsible, mitigate the damage and keep news of the incident from leaking. Others may want to prosecute offenders as examples to others.

Pick your team

Your plan should be specific to the risks your company faces and assign distinct responsibilities. For this reason, you need a fraud response team.

Designate one person to lead the overall investigation and coordinate with staff and any third-party investigators. After that, assign specific tasks to knowledgeable managers. Your IT manager, for example, may be tasked with protecting your computer system to prevent loss of electronic records and your head of human resources may be responsible for maintaining employee morale.

Because fraud can wreak havoc with your company’s reputation and weaken its standing in the community, you should also designate someone to manage external communications. This person should be prepared to deflect criticism and defend the company’s stability as well as control the flow of information to the outside world.

Communicate with your employees

Employee communications are particularly important during a fraud investigation. Employees who don’t know what’s going on will speculate, and they may not be particularly circumspect about it. Consult your legal and financial advisors to clarify whether any information should be withheld, but be as honest with your employees as you can.

It’s equally important to make your response visible because it strengthens your fraud-prevention efforts. If employees know you take fraud seriously, they’ll be less likely to attempt it themselves and more likely to report suspicious activities on the part of others.

Integrate your efforts

A fraud contingency plan is, in and of itself, an important measure against what could be a devastating crime affecting your company. But it shouldn’t stand alone: Integrate your plan into a greater suite of risk management programs covering topics such as natural disasters, disease outbreaks, IT failures — even terrorist attacks.

And, most of all, keep your fraud contingency plan updated. Revisit it annually at least to make sure you’re incorporating newer fraud schemes and changing the names of those on your fraud response team to account for employee turnover. Having an outdated fraud contingency plan in place could significantly hinder your efforts to combat an incidence of wrongdoing.

Please contact Feeley & Driscoll's Boston Accounting team by Email or call us at 1 (888) 875-9770.

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