3 Steps to Take If You Suspect Employee Fraud

Natalia Autenrieth In her professional lives across the United States, Natalia Autenrieth, CPA has audited Fortune 500 clients as part of a Big 4 team, built an accounting department as a controller of a large hospital, and served as a CPA consultant to municipalities. Today, Natalia coaches in the financial industry and writes about business finance, financial technology, and personal money management. Her ghost-written articles have appeared in thought leadership and expert blogs, as well as Kiplinger and Accounting Today. Read more about Natalia and her practice at www.AutenriethAdvantage.com.

3 Steps to Take If You Suspect Employee Fraud

Your guide to clarify, protect, and recover

When you discover the possibility of fraud in your small business, your initial reaction may be one of shock and disbelief. This stressful time is made worse by the uncertainty and the risk of financial losses. And yet, your next actions can significantly impact the investigation. They could even make or break the outcome!

So, it is of critical importance to not spook the person you suspect — or tip them off to destroy evidence. By making sure that your first steps are strategic, measured, and thoughtful, you can improve your odds of getting to the truth — and recovering your losses.

Step 1: Gather as much information as possible.

Learn as much as you can before anyone is confronted directly. There may be an initial urge to just talk it through with the person you suspect – especially if they are a trusted team player and a part of a small close-knit group. Resist that temptation! A poorly timed hint of a suspicion can accidentally compromise a future investigation.

So, keep things quiet – and use this short time to gather invoices, checks, purchase orders, journal entries, receipts, etc. Pay special attention to digital evidence because it’s very easy to miss or destroy. List everything with the date acquired and keep it all in a secure location for a well-documented chain of custody.

Step 2: Maintain confidentiality.

It’s hard to keep secrets, especially in a small business that feels more like a family. Still, stay under the radar for as long as you can. Don’t share your suspicions unless someone else absolutely needs to know. Remember that fraud often turns out to be much more serious than you initially suspect. Multiple people might be involved, or the suspect might be using more than one mode of stealing from your business.

Step 3: Document everything.

As you dig into the details and the possibilities, make sure that you maintain a set of notes to keep track of what you uncover.

  • What do you allege happened?
  • Who do you believe is involved?
  • Where did it happen?
  • What’s the value of the estimated loss?
  • Is it possible or likely that the fraud is still ongoing?

By writing down specific answers, you are arming yourself — and preparing to transition everything you know to the experts who will eventually take over the investigation.

Small business owner’s guide to responding to fraud

It is critical that your first steps are responsive — not knee-jerk reactive. Be patient and thorough in learning as much as you can without tipping off the employee you suspect. Document everything. Enlist the help of trusted employees, especially if they are in a supervisory position in relationship to the suspect.

Finally, this is a situation where you should invest in laying the groundwork for your next steps before you need it. While full-on proactive fraud detention programs are uncommon for a small business, a crisis response plan is a good alternative step.

You probably don’t have the luxury of having a separate fraud investigation or response team. But you can still think through the possible what-ifs — and map out your next steps for a variety of scenarios.

You might also build a contact list with emails and phone numbers for various professionals who could assist you in the event of suspected fraud. Include your bank’s fraud hotline, an attorney, a forensic investigator, your insurance company, your local police department, etc. Build this list as you attend local networking events — and you won’t feel helpless and if and when you need it!