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Categories of Fraud
The potential for fraud and misconduct reaches far and wide within any company,
including procurement2, sales and marketing3, finance and accounting4,
operations5, foreign and domestic subsidiaries, portfolio companies, joint
ventures, merger and acquisition targets.
Generally, the categories of corporate fraud and misconduct include:
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Within each of these categories, the accountant and investigative team must
distinguish fraud/misconduct, which exposes the company to potential criminal or
civil liability from fraud/misconduct, which victimizes the company. Sometimes,
the company can simultaneously lose money and face potential liability to third
parties.
Examples of external fraud and misconduct include (i) procurement fraud, (ii)
theft of inventory and property, (iii) theft of intellectual property and proprietary
information and (iv) false statements of acquired companies and strategic
relationships.
Examples of frauds involving collusion between outsiders and insiders include (i)
conflicts of interest schemes, (ii) commercial bribery and (iii) accounts payable
fraud schemes.
Examples of internal frauds include (i) travel and expense schemes, (ii) phantom
vendors, (iii) misappropriation of corporate assets, and (iv) theft of trade secrets.
3.
The client may first ask for counsel as to whether even to initiate an investigation.
One of the most important factors in deciding whether to conduct an investigation
are the circumstances giving rise to the allegations. Has the company learned of
the allegations from the commencement of legal proceedings such as the
execution of a search warrant or receipt of a grand jury subpoena? Typically, if a
prosecutor is conducting an investigation or has served a subpoena or executed
a search warrant, a company has no choice but to conduct an internal
investigation and assess the viability of the allegations.
The more difficult decision is when the company is aware of internal allegations
of wrongdoing, but no private lawsuit has been filed, or the government has not
initiated an investigation. Should the company investigate claims, which, if true,
may subject the company to civil or criminal liability? Should the company throw
good money after bad when it has been the victim of a fraud? Is it better to
ignore the problem and hope that the allegations will never become public?
While there is no hard and fast rule, generally the law, good business judgment
and common sense favor conducting an investigation. Knowledge of the facts
will enable management to examine options and respond effectively, and enable
the company to decide whether it is necessary to disclose the allegations and the
company's findings in response to the government. An internal investigation
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enables management to fulfill its duty of care and receive the protection of the
business judgment rule.
The disadvantage of conducting an internal investigation must also be
considered. For example, an investigation may yield damaging information that
may be subject to discovery in litigation. In addition, the cost of conducting the
investigation, of both the actual expenditures as well as lost in management and
employee time can be quite high. Further, the company must be aware and be
prepared to deal with the consequences if what begins as a narrow, focused
inquiry leads to discovery of deeper, broader-based corporate misconduct.
Notwithstanding the potential disadvantages of conducting an internal
investigation, on balance the advantages of commencing an investigation clearly
outweigh the disadvantages in most circumstances. When confronted with
allegations of wrongdoing, an internal investigation is necessary to uncover the
facts so the viability of the claim can be assessed, and appropriate remedial
action taken.
4.
The accountant's role in the investigation will depend upon the nature of the
allegations, the resources of the accounting firm, and the relationship with the
client. The accountant frequently will assume a primary role with responsibility
for managing the investigation. This typically occurs where the allegations
involve a crime or fraud against the company. As the project manager, the
accountant will devise the investigative plan, supervise the investigation and
advise the client regarding the business implications as well as the short-term
and long-term consequences of the investigation.
In many instances, the accountant will serve in a supporting role. For example,
where the allegations involve allegations of misconduct by the company, it is
likely that in-house or outside counsel will be leading the investigation. In these
instances, the accountant typically will be performing forensic accounting and
auditing either in relation to determining the ultimate facts and/or quantifying
damages. The accountant likely will be assisting to develop controls to prevent a
recurrence of the misconduct. These tasks are discussed separately in this
chapter as well as other chapters of this book.
5.
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The planning phase requires both short-term and long-term planning and
involves an evaluation of the investigative needs and objectives. The covert
phase consists of investigative activity taken before the subject of the
investigation becomes aware that an investigation has been implemented. The
transition phase occurs just immediately before or contemporaneous to the
subject's learning of the investigation. The overt phase, which occurs after the
subject is aware of the investigation and typically is the most extensive phase for
the accountant, involves more traditional investigative and audit techniques. The
remedial phase involves both financial recovery and/or settlement of criminal and
civil liabilities as well as the development of controls to ensure that the
misconduct does not recur. While these phases generally follow one another, in a
larger internal investigation the investigative plan must allow for the flexibility to
switch back and forth between phases; that is, changing the circumstances may
require the investigative team to return to the covert or transition phases even
though the investigators and accountants are already conducting an overt
investigation.
6.
There will be a natural tendency and almost immediate and irresistible impulse to
confront and/or suspend the individuals alleged to have engaged in wrongdoing.
Understandably, management will want to get to the bottom of the problem as
quickly as possible. Where internal fraud is alleged, the prospect of having a
criminal continue his employment, and perhaps his wrongdoing, is intolerable.
Indeed, management must consider the prospect of criticism from regulators, law
enforcement authorities and civil attorneys if immediate, aggressive action is not
taken, especially if the illegal conduct continues. Accordingly, management will
frequently opt to confront and/or suspend the suspected employee(s) and
confront third parties at the outset of the investigation.
While such a decision may appear to be entirely appropriate and perhaps
necessary under the circumstances, it must be balanced against the extent to
which critical fact-finding will be impeded at an essential stage in the
investigation. Pre-confrontation investigation will frequently uncover important
facts reflecting the nature and extent of the misconduct, enabling the company to
assess the harm it has suffered. Facts directly or circumstantially implicating the
subject may also be uncovered, thereby enhancing the likelihood of a successful
confrontation. Additionally, prior to the confrontation, the company must consider
and evaluate the legality of certain investigative techniques, the subjects rights
and the business implications of the employees possible dismissal. Moreover, in
situations where substantial funds are stolen, the company should determine if it
can recover a portion or all of the funds through asset searches and legal
process.
In short, when serious allegations of misconduct arise, a company and its
management must address a myriad of investigative, legal and business issues
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The accountant should seek a major role in the planning phase regardless if
serving a primary or support role in the investigation. Invariably, there will be a
financial aspect to the alleged wrongdoing. The accountant's advice will be
necessary regarding the staffing of the investigative team, defining the scope of
the investigation, devising an investigative plan, and counseling on the business
consequences of the investigation.
6.2
The decision as to who will participate in the investigation is crucial and merits
considerable thought and discussion. Corporate counsel and management have
a number of options to choose from: in-house resources such as legal, human
resources or security departments, and/or outside resources, such as law,
investigative and accounting firms. If the allegations are significant, the company
must assemble a multi-disciplinary team. Professionally trained investigative
resources will be needed to develop the facts and evidence. Experienced legal
counsel may be necessary to manage the various legal issues affecting the
investigation, including issues of labor law and corporate civil and criminal
liability. Among the factors that must be considered in making this determination
are:
Independence
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Investigative Resources
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accounting and computer data retrieval which are frequently necessary to learn
the particulars of a fraudulent scheme.
6.3
The company will have more flexibility if the company if the company learns of
the allegations of wrongdoing before the government has initiated an
investigation, or a private lawsuit has been filed. The company will need to
investigate all plausible allegations of misconduct and ensure that the
investigative leads are followed. All potential witnesses should be interviewed,
and potentially relevant documents should be reviewed.
But there are limits. Credibility and common sense are determinant. The
company should not finance a wild goose chase or investigate baseless or
frivolous allegations. It must, however, be prepared to expand the investigation
as needed and to justify any limitations placed on the investigative team.
6.4
The investigative advisers must carefully consider and plan for a host of legal
and business implications. Chief among these concerns is the propriety of the
investigative techniques, the rights of the suspect employee, the companys
relationships with third parties and the companys ability to function in the wake
of the investigation.
A recent addition to the list of issues that must be addressed concerns whether a
report will be produced following the investigation. Although companies
frequently request a report, especially if negative employment action or referral to
law enforcement agencies is contemplated, a recent Federal Trade Commission
(FTC) staff opinion letter concluded that outside attorneys or investigators might
be considered consumer reporting agencies under the Fair Credit Reporting
Act, thereby obligating the employer to notify employees under investigation and
furnish them with copies of the investigative report.
Following publication of the staff letter, a number of commentators and
practitioners expressed concern that the staff letter would inhibit companies
ability to hire experienced attorneys and investigative firms to fully investigate
allegations of wrongdoing. In response, the FTC issued a letter that sought to
clarify, and perhaps soften, the implications of the staff opinion letter. The letter,
however, did not suggest that the staff letter was incorrect in its interpretation of
the FCRA; instead, it merely provided advice for dealing with the FCRAs
provisions. For example, the letter recommended that employers obtain
employee consent at the start of employment to procure consumer reports,
thereby relieving the employer of the duty to disclose. Although the FTCs
opinions regarding the FCRA do not have the force of law, its interpretation of the
FCRA must be considered prior to issuing an investigative report.
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Electronic Surveillance
Workplace Searches
Generally, the workplace is under the control of the employer, and property
provided by the employer to the employee, such as lockers and desks, typically
may be searched without the employees consent. 11 Computer hard drives and
networks, as well as e-mail, are generally subject to search 12, although
companies in at least two states, Maryland and Florida, cannot monitor e-mail
absent employee consent.
However, the ability to search work areas and items within those areas is not
absolute. Searches may be limited depending upon the employees privacy
expectations and the employers express or implied recognition of those
expectations. For example, allowing employees to use personal locks on lockers
may restrict an employers ability to search for evidence of wrongdoing. 13 Unless
the employer has written policies concerning unannounced searches, and
obtains signed waivers by employees, careful consideration should be given to
the scope of searches conducted in the course of the investigation.
Polygraphs
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If an attorney for the company interviews the employee, the attorney must advise
the employee that the interview is being conducted on behalf of the company and
that the attorney represents the company, not the employee. Further, the
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employee should be told that the information obtained from the interview will be
protected within the companys attorney-client privilege, but that the company
may choose to waive the privilege and disclose the contents of the interview
without the employees consent. In sum, there should be no confusion on the
employees part as to which counsel is representing in the investigation.
Defamation
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At the outset of the investigation, the company must begin its evaluation of
whether or not it will disclose the misconduct to law enforcement authorities. If
there is no legal obligation to report the misconduct, voluntary referral requires
careful consideration of the effect disclosure may have on the companys
business operations.
Generally, absent a statutory reporting requirement, such as in the case of
federally insured financial institutions or publicly traded companies 21, a company
is not required to report knowledge or evidence of criminal conduct to law
enforcement authorities.22 The misprision of felony statute is violated only if an
individual, having knowledge of the commission of a felony both fails to notify
authorities and deliberately takes and affirmative step to conceal the crime. 23
Mere silence is insufficient to establish the affirmative step element of the crime. 24
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Although the company may not be required to report criminal conduct, it must
consider voluntarily disclosing the conduct to the authorities. In determining
whether voluntary disclosure is appropriate, the company must first assess any
liability it may incur through the criminal behavior of its employee. For example,
if the conduct appears isolated, aberrant and restricted to a lower-level
employee, it is unlikely that a prosecutor would pursue criminal sanctions
against the company.
If, on the other hand, the criminal activity is pervasive and implicates senior
management, or if it victimizes the government, law enforcement authorities may
very well consider prosecuting the organization. Under these circumstances it
may be prudent for the company to voluntarily disclose the conduct and take the
opportunity to present mitigating circumstances, possible defenses and
exculpatory evidence. Coming forward before any government investigation is
initiated, coupled with evidence that the company promptly responded to the
allegations and instituted remedial measures, may persuade the prosecutor to
proceed against the individual wrongdoers and not the company. In the event
the company is prosecuted, enters a guilty plea, cooperates and accepts
responsibility for its wrongdoing, it will benefit from its voluntary disclosure under
the United States Sentencing Guidelines.25
Lastly, if the company does business with the federal government, a number of
agencies, including the Department of Defense and the Internal Revenue
Service, have created formal voluntary disclosure programs. Again, promptly
disclosing the improper activity may enable the company to argue persuasively
that declination of prosecution is appropriate.
Another factor the company must consider in determining whether or not to
report the allegation is the effect a government investigation will have on its
business. Government prosecutors and agents are very busy, with many matters
under investigation and prosecution. Unless the magnitude of the misconduct at
issue is such that prosecutor and investigator deem it a priority, the investigation
will proceed at a deliberate pace, leaving an ominous cloud hanging over the
company for an extended period of time.
A lengthy law enforcement investigation will also distract employees and result in
workplace inefficiencies and morale problems. Most important, the existence of
a criminal investigation may have serious business implications for the company,
including, restrictions on third-party financing, vendor reluctance to supply
materials other than on a C.O.D. basis, customer concerns about timely shipping
and receipt of products, and reputation damage in the business community.
In most circumstances, the decision as to whether or not to report the conduct to
criminal authorities, and when, is complex and requires a weighing of many
factors. It is important to evaluate these factors at the earliest stages of the
investigation.
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Third-Party Liabilities
The company must also evaluate whether any potential liabilities exist with
respect to its suppliers and customers. If, for example, customers were
defrauded, efforts must be made to make the customers whole and restore
confidence in the business relationship. Other times the company will be the
victim, and consideration must be given to the manner in which remedies will be
pursued, if at all, against third-parties.
6.5 The Engagement Letter
The accountant should not participate in an active investigation until an
engagement letter has been executed. Issues to be addressed in the
engagement letter include:
7.
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An accountant generally performs a very limited role in the covert phase of the
investigation with the exception of analysis of records and the preparation of a
visual link analysis. It is essential, however, that an accountant be familiar with
the availability of covert techniques so that he can advise the client as needed.
Moreover, the accountant needs to work in tandem with the covert investigative
team.
7.2
Investigative Techniques
Forensic Accounting
Forensic accountants piece together financial data and search for anomalies and
irregularities that are the hallmarks of fraud. Depending upon the circumstances,
the client may be about to furnish the forensic accountant with key data without
jeopardizing the secrecy of the investigation. Financial transactions that directly
implicate the subject or corroborate evidence obtained through other
investigative techniques constitute powerful ammunition with which to confront
the alleged wrongdoer.
Commercial Databases/Internet/Public Records
The explosion of information sources available on the Internet and through
commercial online services has revolutionized the investigative process. Virtually
every business investigation now begins with some form of online research. In a
matter of hours, a skilled investigator can develop information, which can provide
critical leads and make connections that may never be found through traditional
field investigation.
As a practical matter, an accountant will probably not be trained in these various
database sources. The accountant, however, needs to be familiar with the
sources of information that are available so that he can bring the proper
resources to the investigation. The subject is discussed at some length because
this investigative resource has become so crucial.
For certain types of information, the Internet cannot match the offerings of
commercial services. For others, the Internet is the best and only place to find
information. Knowing when to use the commercial databases and when to use
the Internet is key to developing a comprehensive and thorough investigative
strategy.
Whether to rely on the Internet or commercial databases will depend on the
nature and extent of the information you are seeking. Before going online, the
investigator will need to identify which databases or Internet sites are most likely
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Whether retrieved from commercial databases or the Internet, the most valuable
sources of information fall into two main categories, news and media sources,
and public record sources. It is usually best to start the online investigative
process with a media search, one of the key sources for historical and
background information regarding entities and individuals. These sources
include local, national and international newspapers, magazines, trade
publications, and television and radio broadcast transcripts. Often, a subjects
legal, financial or business troubles are written about in the news media in wellresearched and thoughtful articles. Media can also be helpful in identifying a
subjects prior employment and personal history.
When using the commercial media databases, the researcher should give careful
thought as to which databases to use. In general, Lexis-Nexis 26, Dialog27,
Datastar28 and Dow Jones29 provide the most extensive news and media
coverage. Each database provides different levels and types of local, national
and international coverage. The database vendors are constantly adding new
and removing underused sources. Paying attention to content must be an
ongoing process. Researchers must check their habits and change their search
strategies accordingly.
On-Line Public Records
After exhausting online media sources, the next stop in the online investigation is
to search the vast compilation of abstracted public record information. This
resource includes: federal and state civil court proceedings, federal criminal
records, federal bankruptcy court records, UCC filings and other asset locators,
corporate records, property records, judgment indices, motor vehicle records,
regulatory agencies actions, professional registration and licensing information,
Securities and Exchange Commission (SEC) records and other business
databases. On-line public records information is perhaps the fastest growing
area of online information and is routinely included in any business investigation.
The availability of on-line public records information varies from state to state and
covers variable time periods, so the extent of coverage in a particular jurisdiction
must be carefully considered. Another word of caution: online records are often
inaccurate and incomplete. While a great source of leads, online research
should never be exclusively relied upon. Investigators encounter situations in
which a manual search of the public record reveals significant litigation matters
that were not identified online, despite the fact that court records were
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supposedly online for that particular jurisdiction and time period. Additionally,
many of the online records, most of which are abstracted, are likely to contain
only a portion of the information available from the original document. A
combination of online searching and onsite searching at relevant courthouses or
agencies is the best approach.
Further, in international investigations, only limited public records information is
available online. The reasons for this are twofold. First, many records, such as
lawsuits and bankruptcies, are not considered public information. Second, other
countries tend to lag behind the U.S. when it comes to automating their publicly
available information into searchable online databases. Even in those foreign
countries that do have some information available online, it is generally limited to
corporate records, some Dun & Bradstreet company reports, and varying
degrees of media. There are also CD-ROM products available that have
international corporate records. Again, it is important to know specifically what is
available in the jurisdictions you are concerned about in order to maximize the
information you can obtain from these sources.
In general, the most used public records database providers are Lexis-Nexis 30,
CDB Infotek31, Information America 32, Autotrack33, Pacer34, Courtlink 35, and
Superior Information Services.36 All of the commercial database providers
provide some form of global search capability, which allows the user to search
simultaneously millions of records from across the country. Because there is a
great deal of overlap in the content of these databases, however, the accountant
must retain an on-line database and Internet investigator who is well acquainted
with the unique public record sources that each database provides. In cases of
overlap, an investigator may base the decision to use one over the other on cost
and search features, which differ widely across the public record databases.
In addition to the commercial vendors, many state and federal regulatory
agencies now make records available directly on the Internet. 37 Some of the
commercial vendors also offer a web-based product. 38
While the availability is increasing at a fast pace, presently public records
offerings on the Internet remain insignificant when compared to the commercial
services. Even though some public record information is available, the Internet is
not a viable alternative to the commercial vendors. However, used in tandem with
commercial databases, the Internet can provide valuable leads and critical
information about individuals and entities.
In addition to media and public record sources, several other online investigative
sources deserve mention. These include Dun & Bradstreet, which provides selfreported business and credit information on both public and private, domestic
and international companies39, and people locator services, which can be critical
in locating key witnesses.40
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The Internet
Despite its shortcomings when compared to the commercial online databases for
purposes of media and public record searching, the Internet has spawned a
number of unique research resources. By virtue of the extraordinary pace at
which it reinvents itself, this medium demands creative thinking for use as an
investigative tool.
Message Boards
Most search engines, as well as many Internet sites, "message boards", "bulletin
boards" or discussion groups locate sites where people can inquire about and
respond to various topics. Researchers can both monitor ongoing discussion or
search the vast pool of archived postings. These sites can provide a wealth of
information, particularly in a litigation context.
Home Pages
Most companies, and even many individuals, have their own website. These
sites can provide a wealth of information relating to a companys sales
information, geographic territory, biographical information of corporate officers,
names of joint venture partners, and updated product information. A private
company may provide a more detailed history or corporate structure on its home
page than it provided to a commercial credit reporting service. It may also
inadvertently leave outdated but perhaps useful information on its Web site
that a commercial vendor will delete once the information is updated. 41
Other Sites
The Internet investigator can use the Internet for other purposes. If the company
or individual being investigated does not have a website, information might be
located in other websites. Websites exist to allow the investigator to quickly
locate individuals or businesses across the country as well as conducting reverse
telephone directory services. There are even web services available, which, for
a nominal fee, will verify an academic degree and professional certifications.
The Internet is also a useful tool for locating outside experts to assist in difficult
investigations.
Computer Forensics
Frequently, computer forensic professionals are able to retrieve deleted,
encrypted and password sensitive files, as well as e-mail, that may bear directly
on the alleged wrongdoing. Potential sources include the subject's desktop and
laptop computers, the subject's secretary's computer, the subject's electronic
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organizer, the server, backup tapes, voicemail systems, floppy disks, and home
computers.
This data often includes "smoking gun" evidence. The investigative team must
ensure to retrieve the data in a manner that meets evidentiary requirements for
admission in subsequent legal proceedings.
Workplace Evidence
Frequently, more traditional evidence gathering techniques can prove even more
successful than the high tech efforts described above. Desk and file searches
frequently yield incriminating evidence, as do personnel files, travel and expense
reports, telephone records and statements (including office, cellular and calling
card) and company credit card statements.
Field Interviews
Interviews of employees, former employees and third parties such as vendors,
suppliers and customers many times provide insight into the suspected
employees activities and, perhaps, the alleged wrongdoing itself. However, the
risk that the suspected employee will learn of the investigation and attempt to
subvert the fact-finding process through document destruction and/or witness
manipulation must be considered.
Surveillance
Physical, audio and video surveillance should be considered provided the activity
is ongoing and susceptible to this investigative technique. Surveillance is
generally most successful when the improper activity involves theft of physical
property or trade secrets.
Sting Operations
If circumstances permit, sting operations should be considered as a means to
obtain unequivocal proof of misconduct. For example, in the case of ongoing
misconduct, undercover operatives may pose as willing purchasers of stolen
trade secrets or merchandise or as vendors seeking to obtain business from a
purchasing agent suspected of taking kickbacks in exchange for the awarding of
contracts.
8.
The transition phase is a critical, albeit very brief, phase of a corporate internal
investigation. It is that moment that the subject of the investigation becomes
aware that he or she is the subject of an investigation.
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The transition phase also requires contingency planning for next steps. The
investigative team must plan and guard the preservation of documentary,
physical and electronic evidence. Additionally, the investigative team, together
with the client, must plan for the on-going operation of the business, including the
possibility of a disruption of relations with employees, vendors and customers
and, where the circumstances are newsworthy, the public.
8.1 Role of the Accountant
The accountant performs a vital role in the planning of the transition phase. The
accountant's role in the actual confrontation of the subject varies depending upon
the accountant's experience and the circumstances of the investigation.
An accountant's presence, for example, is absolutely critical in internal
investigations of finance and accounting personnel as well as in investigations of
accounting irregularities. Effective confrontation of the subject in these sort of
cases demand the technical expertise of an accountant.
Investigators and lawyers frequently, however, consider the confrontation of the
subject to be within their exclusive domain. The accountant should gauge the
facts and circumstances to determine whether his presence is essential and, if
so, be prepared to insinuate himself even if uninvited.
8.2 Who Confronts The Subject
Planning the transition phase requires careful consideration of the most effective
team for confronting the subject. Usually a two-person team is most effective.
Two people are required so that there is a witness if the subject later disavows
his or her earlier statements. More than a two person team risks being too
intimidating.
An experienced interviewer should lead the confrontation of the subject. The
more difficult decision usually concerns the second person. Depending upon the
circumstances, the second team member might include the subject's immediate
supervisor, a senior company official, a human resources representative, another
member of the investigative team, or counsel.
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9.
The overt or open phase involves more traditional investigative techniques and
typically is the most extensive phase of a corporate internal investigation. It is
during this phase that the accountant and other members of the investigative
team conduct witness interviews, analyze and reconstruct data, financial records
and other documentary evidence, examine physical evidence and issue an
investigative report.
9.1 The Investigative Mentality
Corporate internal investigations rarely require highly sophisticated technical
accounting skills. Rather, the challenge for most accountants and auditors is
developing the necessary investigative mentality. The investigative mentality will
be counterintuitive to some.
Materiality, for example, means something quite different to an investigative
accountant than to a financial auditor. Financial auditors primarily are interested
only on issues that have a potential material financial impact. An investigative
accountant maintains a much more expansive view. Even the smallest detail can
be material to an internal investigation.
An accountant who joins an investigation thus must be prepared to shake his or
her traditional orientation and assume an investigative mindset. The
characteristics of an effective investigator should include:
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9.2
Advice to Employees
The first step in the open phase frequently involves advising company employees
of the existence of the investigation. Some practitioners believe that it is
better to refrain from announcing the investigation to corporation employees
generally. They believe that the disadvantages of making an
announcement are too great. Disadvantages include:
While it is certainly the case that these concerns have some merit, we take the
view that, in most circumstances, the results achieved from properly
communicating the existence of an open, honest, ethically undertaken
internal corporate investigation often outweigh the potential disadvantages.
One of the benefits of an internal corporate investigation is that the company is
provided with a good opportunity to reinforce their message with respect to the
culture, integrity and ethical compass of the organization. For this benefit to be
obtained, it is vital that the conduct of the investigation itself is undertaken in a
way that employees and management alike can view as fair and equitable.
The announcement itself should probably be brief, should indicate that the
investigation is being undertaken by outside expert consultants and should
indicate that the Board of Directors or a special committee of the Board will
supervise the investigation and consider findings from the investigation. The text
of the announcement should discourage employees from internal discussion,
especially if the investigation is being done by lawyers under privileged
conditions, although it is nave to expect there to be no conversations about the
news.
It is always a good idea in this initial announcement to advise employees that no
documentation in the relevant departments or for the relevant periods should be
destroyed. It may be necessary to be more specific about exactly what
documentation should be retained. Internally, a hold should be placed on the
normal routine of record destruction activities.
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There is no single right or wrong method for conducting an interview. What might
work for one interviewer will be wrong for another. Following are some common
characteristics of an effective interview:
Number of Interviews - Err on being over-inclusive rather than underinclusive. It is essential to interview all individuals with potential
knowledge. Most importantly, it is often the low-level employee and/or
former employee who provide the most valuable information. Too
many investigations do not uncover critical information because the
investigative team failed to interview secretaries, clerks, etc . . .
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clients are unwilling to bear the extra cost of having more than one
interviewer.
With critical witnesses, the problem sometimes is that too many
interviewers wish to be present. More than two interviewers should be
avoided, and rarely should there be more than three interviewers.
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There are several ways of memorializing an interview just as there are several
methods for conducting them. The most common and traditional method is for
one person to make handwritten contemporaneous notes of the interview. The
interview team then follows with a formal memorandum of interview. The
original, handwritten contemporaneous notes may or may not be maintained.
The investigative team should, however, be consistent. If contemporaneous
notes are maintained for one interview, they should be maintained for all
interviews. The investigative team will be subject to attack if handwritten notes
are preserved only for selected interviews.
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The memorandum of interview should begin with the time, location and list of
participants at the interview. The memorandum should note if certain participants
join late or leave early. The memorandum should also record any promises,
representations or assurances provided to the witness.
The memorandum should summarize the themes and subjects discussed during
the interview. It is more important for the memorandum to contain a clear
summary of the subjects discussed than it is for it to re-state each question and
response in the order that it was asked and answered.
An interview frequently will raise the same subject more than once during the
interview. For example, the interviewer may return to a subject two or three
times during the interview both for clarification and to test the consistency of the
interviewee's statement. It is clearer if the interview memorandum discusses the
subject as a whole rather than in the actual order discussed during the interview.
Handwritten notes are preferred over notes keyed into a computer. Keying notes
into a computer discourages an informal atmosphere. From the perspective of
the interviewee, it appears that a stenographic transcript is being taken.
Moreover, interviewers who key rather than write notes by hand are vulnerable to
producing poor interview memoranda. Our experience is that keyed notes
frequently result in "blow by blow" interview memoranda rather than well thought
out discussion of the subjects.
The investigative team will need to decide whether to record (voice, video,
stenography) the interview. Recording of interviews is not recommended in most
instances. Recording discourages the development of a rapport between the
interviewer and interviewee.
Recording of interviews is recommended when formality is desired or an exact
record of what was asked and answered is needed. For example, recording the
interview can be useful for foreign speaking interviewees who may later claim
that they did not understand the question being asked. Similarly, recording the
interview can be useful if the investigative team seeks to impress upon the
interview the seriousness and importance of the interview.
Absent unusual circumstances, the investigative team should obtain the consent
of the interviewee prior to recording the interview. It certain States it is illegal to
record an interview without consent.
9.5 The Investigative Report
The organization, contents and style of the investigative report will vary from
case to case. Some clients and companies will desire no written report.
- 30 -
Elements of the Report - Following are various features that the accountant
should include in the preparation of the report:
- 31 -
- 32 -
10.
Quantifying damages
Negotiating subject's resignation of employment or disciplinary action
Negotiating financial recovery from the subject and other parties
Negotiating financial recovery with third party victims
Advising on business implications of investigative results
Lobbying prosecutors and other law enforcement authorities to file
criminal charges against the subject
Providing litigation support to counsel in criminal, civil and regulatory
proceedings
Conducting fraud audits of other business units for vulnerability to
similar misconduct
Developing controls to deter recurrence
Monitoring of future business activities
Conclusion
- 33 -
Jonny J. Frank and Michael Carey conduct corporate investigations at PricewaterhouseCoopers LLP. Mr.
Frank served as the Executive Assistant United States Attorney in the Eastern District of New York and is a
member of the law faculties of Brooklyn Law School and Fordham University School of Law, where Mr.
Frank co-founded the Fordham University Law School International Criminal Law Center. Michael Carey was
an audit partner at Ernst & Young and Assistant Director of the Serious Fraud Office of the United Kingdom.
1
See generally, W. Schmidt and J. Frank, Uh-oh, Now What: Responding to Allegations of Corporate
Misconduct, Directorship, April 1997.
2
Common external fraud schemes include: (i)kickbacks and Illegal payments, (ii) bid rigging, (iii) defective
pricing, (iv) fictitious, false and inflated invoices, (v) product substitution, (vi) mischarging. Common internal
fraud schemes include (i) conflicts of interest, kickbacks and illegal payments, (iii) phantom vendors and
purchases for personal use, and (iv) unjustified sole source awards.
3
Common sales and marketing schemes include (i)travel expense fraud, (ii) kickbacks and other illegal
payments, (iii) foreign corrupt practices act violations, and (iv) conflicts of interest schemes.
4
Common finance and accounting schemes include (i) misappropriation of cash, (ii) payroll fraud, (iii)
accounts receivable schemes, (iv) accounts payable schemes, (v) revenue recognition schemes, and (vi)
improper treatment of costs and expenses.
5
Common fraud schemes affecting operations include (i) management fraud, (ii) misappropriation of
inventory, (iii) misappropriation of intellectual property, (iv) external thefts and frauds and (v) procurement
fraud.
6
18 U.S.C. 2511(1)(a)
18 U.S.C. 2510(5)(a)
8
United States v. Murdock, 63 F.3d 1391 (6th Cir. 1995), cert. denied 116 S.Ct. 1672
(1996)
9
18 U.S.C. 2511(2)(d)
10
See, e.g., Cal.Pen.Code 631, 632
11
OBryan v. KTIV Television, 868 F. Supp. 1146 (N.D. Iowa 1994), revd in part 64 F.3d 1188 (8th Cir. 1995).
12
Smyth v. Pillsbury Co., 914 F. Supp. 97 (E.D. Pa. 1996)(We find no privacy interests in [e-mail]
communications); see also, United States v. Simons, 29 F. Supp 2d 324 (E.D. Va. 1998)(Court found that
CIA employee had no reasonable expectation of privacy in Internet use nor in files downloaded to his
computer hard drive.)
13
See e.g. OConnor v. Ortega, 480 U.S. 709 (1987)(doctor evidenced privacy interest in office desk and file
cabinets by clearly barring others from these areas)
14
29 USC 2001-2009
15
29 U.S.C. 2006(d)(1) - (d)(4)
16
29 U.S.C. 2007(a)
17
See, e.g. N.J.S.A. 2C;40A-1
18
29 U.S.C. 2005
19
NLRB v. Weingarten, Inc., 420 U.S. 251 (1975)
20
See e.g., Cal.Lab.Code 2856 (West 1989)
21
The Securities and Exchange Act of 1934 requires the disclosure of material facts in certain filings and
reports. Counsel should be consulted to determine whether facts discovered during the investigation are
material within the meaning of the statute. States and stock exchanges may also impose similar disclosure
requirements.
22
United States v. Baez, 732 F.2d 780 (10th Cir. 1984)
23
18 U.S.C. 4; United States v. Hodges, 566 F.2d 674 (9th Cir. 1977)
24
Id.
25
United States Sentencing Guidelines Manual 8C2.5(g)
26
Nexis, the news database of Lexis-Nexis, provides a massive collection of news sources, with extensive
archives of national newspapers and business and industry news sources. Nexis has the largest archive of
the New York Times, and a growing number of local newspapers. It also offers access to the Bloomberg
Newswire, a highly respected and fast growing provider of business news. Its strong content, combined with
software that make both searching and reviewing documents quick and simple, makes this a good first
source in any investigation.
7
27
In terms of news content, Dialog rivals Nexis in scope. It has various full-text local newspapers not
available on Nexis (for example, the Philadelphia Inquirer and the Detroit Free Press) and an extensive
collection of industry-specific newsletters (IAC Newsletter database, file 636), unique to Dialog. In
addition, Dialog, in conjunction with Dow Jones and Financial Times Information, recently added a vast
collection of international news sources (World Reporter Database, file 20).
28
International news sources, primarily from Europe, represent Datastars greatest strength. Although
recently merged with Dialog, many of these European news sources have not yet been included in the
Dialog database. These include unique newspapers, newswires and business magazines from Switzerland,
Germany, Italy and the Baltic States, among others. Datastars search language can be a challenge to use,
and requires much practice to master.
29
Dow Jones is the only database, which provides full-text access to the Wall Street Journal, the Dow Jones
Newswire and Barrons, essential sources for any business investigation. It also boasts an extensive
collection of local newspapers, industry publications, and international news sources.
30
Lexis-Nexis provides bankruptcy filings, state and federal civil lawsuits, tax liens, judgments, UCC filings,
corporate records, and property records in most jurisdictions. Lexis-Nexis greatest strength in searching
public records is its full text search feature. For example, if you have a post office box number used by a
subject, the number could be searched in Secretary of State records to identify other companies or Dab's
associated with the subject that may not turn up through a search of the subjects name. This type of search
cannot be conducted through other database service providers, which limit searches to specific information
fields within the database record, such as the name of the company.
The Lexis database also contains reported legal decisions at the federal and state levels. Even though most
often used by law firms for general legal research, a search in Lexis can also be used to find court cases
relevant to an investigation. These opinions often have extensive factual information that may not have been
reported in the media.
Another feature of the Lexis-Nexis public records library is the "Finder" file, which can be used to
locate/identify individuals from over 300 million credit header and telephone records nationwide. Other
noteworthy files include the military locator file which allows one to investigate an individual's reported
military service; driver license information for 24 states; and the Social Security Death Master File, which can
quickly tell you whether your subject is using a social security number that has already been retired.
Disciplinary actions and sanctions from various federal and state agencies including the NASD, the SEC,
HUD, state real estate regulators and other agencies are covered in the Sanctions file in Lexis-Nexis.
Additionally, the FEDSEC library in Lexis-Nexis contains civil lawsuits and administrative proceedings
initiated by the SEC.
Real property ownership and sale records can be reviewed in a global search that covers the District of
Columbia and the majority of counties in every state except Maine. These records, which can be searched
by name or address, are often very useful when quickly attempting to identify assets in relation to a
bankruptcy or other fraudulent transfers.
31
This database provides bankruptcy filings, civil lawsuits, limited criminal case information, liens, judgments,
property records, UCC filings, professional licenses, corporate records, voter registration information and
aircraft and vessel ownership records. CDB Infotek includes records from most states in the country, and is
particularly strong in California, with its inclusion of criminal cases and municipal court civil cases. The
database also has unique regional public record search features, which allow the user to search all available
records in specific groups of states. CDB Infotek also has a feature that allows you to locate individuals
nationwide; and it has the ability to trace social security numbers.
32
This service provides the most extensive coverage of state-level civil lawsuits, covering selected counties
in all 50 states, the District of Columbia, Puerto Rico and the US Virgin Islands. The vendor also provides
county level records, liens, corporate records, bankruptcy filings, UCC filings, liens, judgments and real
property, some of which are not available through any other online sources. It also provides very powerful
global search features, which allow the researcher to cover virtually all the public records on the database,
nationwide.
33
AutoTrack is one of the best online resources for locating individuals anywhere in the U.S. The national
report feature provides the social security number, and month and year of birth for the subject. It also lists all
of the business and residential addresses associated to the subject within the last 8-10 years. The report will
also include a list of all individuals associated with the addresses listed for the subject, as well as telephone
numbers. AutoTrack is particularly strong in Florida and the Eastern region of the U.S.
This online service provides critical identifying information on a subject, which then allows the investigator to
focus subsequent searches in the appropriate jurisdictions. For example, if the subject is known to reside in
New York, but AutoTrack also lists addresses in Colorado and Florida, the investigator will know to look for
property, litigation, criminal records, businesses, and other public records in those additional jurisdictions.
For both individuals and businesses AutoTrack can quickly identify property ownership information, boat and
aircraft registration, DEA controlled substance licenses, firearms and explosives licenses, professional
licensing information, motor vehicle records, business affiliations, bankruptcies, liens, judgments, driving
records, phone listings, secretary of state filings, and other useful records. AutoTrack, as well as CDB
Infotek, maintains a service whereby they will manually retrieve relevant public records if the information is
not readily available online. The information is then reported back to the user online, typically within a day or
two.
34
Pacer provides access to the U.S. District (criminal and civil) and Bankruptcy courts in 49 states, the
District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Unlike federal court records that might be
found in other databases, which are limited to case citations, PACER usually provides a complete docket
sheet. While PACER recently introduced a nationwide search capability, the search is limited to identifying
the court where a case is located. Each court must then be dialed into separately to retrieve relevant court
docket sheets. The ability to search the majority of federal court indices across the country in a just a few
minutes is an extremely powerful search tool. Remember, however, that each court has a different archiving
policy so careful attention should be paid to coverage dates in each district.
35
This service also provides access to U.S. District Court and Bankruptcy cases and, like PACER, provides
full docket sheets. Courtlinks advantage lies in its proprietary software, which allows the researcher to more
easily navigate the PACER system. For example, Courtlink allows the user to search combinations of
disparate courts simultaneously, a feature not available on PACER. In addition to federal court records,
Courtlink provides the most comprehensive access to criminal cases and civil lawsuits in Washington and
Oregon, dating back in some instances to the 1970s, as well as limited coverage of civil suits in Texas.
36
This system provides the most comprehensive source of civil litigation, judgments, tax liens, and
foreclosures for the Mid-Atlantic region, including New York, New Jersey, Pennsylvania, Maryland,
Washington, D.C. and Delaware. Because the database gathers its information from primary sources, it has
a high degree of reliability. Superior also offers a very powerful search engine, which returns names that are
similar to the users search terms that may be relevant. The search engine also picks up name synonyms
when searching individual names (for example Tom/Thomas; Maggie/Meg). Further, the database includes
bankruptcies, UCC filings and corporate records.
37
The SEC's website (www.sec.gov) provides instant access to quarterly, annual, and other reports filed by
public companies, as well as the adjudication of any disciplinary matters relating to individuals or public
entities. The NASD website (www.nasdr.com) allows one to research the licensing status of any individual or
firm broker/dealer, including any potential disciplinary history. The Better Business Bureau website
(www.bbb.org) provides access to business and consumer alerts. The Federal Trade Commission website
(www.ftc.com) maintains a compilation of news briefs and warnings relating to illegal business practices.
Perusing these sites can make the investigator's job much easier as it eliminates having to spend hours on
the phone with governmental regulatory agencies.
38
For example, Information America, one of the pioneers in providing public records data, has a website
(www.knowx.com) that allows Internet users without a commercial account to search these records and bill
the costs to a credit card. The Web product, however, does not offer certain powerful search capabilities
available on the proprietary dial-in system, such as a global search across all available public records.
39
The information available includes the names of officers and directors, the date and place of incorporation,
type of business, annual sales, and in some cases, limited public records information such as bankruptcies,
judgments, liens and UCC filings. There is often biographical information on the officers and directors.
Ownership information may also be provided. One important item worth noting, however, is that the basic
company information and biographical information is self reported by the company and is not necessarily
verified through independent investigation.
40
Finding a witness or a former employee of an adversary in litigation can be critical. Databases such as
Autotrak, CDB Infotek, Lexis-Nexis and Metronet are powerful in this area, primarily because of their
inclusion of information provided by the credit bureaus, which is not restricted by the federal Fair Credit
Reporting Act. Autotrak and CDB Infotek provide access to personal information such as address histories,
telephone listings, neighbor listings, social security numbers and dates of birth. Even though access to this
information is limited to qualified customers, this includes investigators and attorneys. Metronet provides a
comprehensive collection of telephone listings, addresses and neighbor information in the United States. A
researcher again may be tempted to use the various people locator databases available on the Internet. In
our experience, however, these fall considerably short when compared to the commercial offerings.
41