Three brothers gave a long-time employee "the keys to the kingdom" at their family-owned construction firm. Over seven years, she was responsible for  major purchases at lumber yards and hardware stores using company credit cards. But investigator Bill Kowalski discovered she had secretly returned roughly $500, 000 in purchases and pocketed the money during her time with the company.

Confronted with evidence, the employee confessed and the brothers referred the case to law enforcement.

"I have a very low tolerance for criminal activity," said Kowalski, a former FBI agent who always recommends that his clients tell police about crimes committed by employees.

But clients don't always take the advice. Some would rather see a problem "go away" as quickly as possible, says Kowalksi – who heads up the corporate investigations division at Rehmann. Failing to report employee misconduct, however, prove even more detrimental.

Some Subject to Heightened Standards

Mandatory reporting obligations vary, depending on the status of the company – so its best to consult with legal counsel beforehand. But there are broad categories that see more heightened standards for reporting employee misconduct to law enforcement agencies, says Braden Perry, partner with Kennyhertz Perry, LLC former federal enforcement attorney and CCO who currently advises highly-regulated firms.

• Publicly traded companies. When employee misconduct, like fraud or insider training, affects the stock performance of a publicly traded company, the company has a mandatory obligation to report its findings to the Department of Justice. In
• Government contractors. Companies that secure federal and state contracts are often obligated to report criminal activity within their ranks, particularly when employee misconduct relates to government projects. The Federal Acquisition Regulation requires contractors to disclose evidence of criminal violations, or face suspension and potentially disbarment.
• Misconduct involving public safety. Businesses are obligated to report when investigators uncover employee misconduct that could be considered "a threat to public safety," Perry said. Evidence of child pornography, terrorism plans or legitimate threats to harm others are all examples where the impulse to "make the situation disappear" can be in breach of the company's legal obligations.

Benefits of Staying Above Board

Whenever an employee is caught defrauding a company, everyone else is "watching to make sure management does the right thing," investigator Kowalski told i-Sight (now Case IQ). Failing to take a strong stance against employee misconduct sets a precedent, and risks sending the wrong message internally, Kowalski says.

"If we find fraud in an internal investigation, it's very rare for us to recommend continuation of employment," Kowalski said. "Letting that employee come back to work doesn't act as a deterrent."

But above all, the veteran investigator said it's important to have a policy for employee misconduct and adhere to it -- because inconsistency between cases can lead to discrimination claims. Referring cases to law enforcement agencies or regulators can actually benefit the company, if the misconduct ever leads to a government investigation. According to Perry, companies who self-report internal malfeasance are more likely to receive lower sanctions from the Department of Justice.