Financial Fraud Prevention and Detection: Governance and Effective Practices

CHAPTER EIGHT

Investigating Financial Fraud: Objectives and Approach

FACED WITH EVIDENCE OF FRAUDULENT financial reporting of uncertain dimension, everyone involved will have a strong intuitive sense that an investigation is necessary. They will be right. However, a strong intuitive sense by itself may not carry the day upon the realization that the investigation may cost millions of dollars and keep the company in legal limbo for months on end. Therefore, let's look beyond the intuitive sense and break down some of the key reasons that an investigation will ordinarily be in order.

The starting point is that the company has now lost faith in its public disclosures of financial performance. That will need to be fixed. And it is not enough to simply alert markets that previously issued financial results are wrong—outsiders will want to know what the correct numbers should have been. The only way to find out is to dig into the numbers and distinguish falsified results from the real ones.

Beyond the need to set the numbers straight, the company will need to identify those complicit in the fraud and deal with them. This is not a matter of revenge or a quest for justice. The fact of the matter is that the company will need to restore its credibility, and it will be unable to do so until outsiders are satisfied that the wrongdoing executives have been identified and removed. Absent voluntary confessions by everyone involved, an investigation is ordinarily needed to distinguish the guilty ...