When matters arise at a company requiring investigation; in-house or outside counsel often participate in, or directs an investigation. The forensic accounting investigator often works with such counsel. That relationship is the subject of this section.
Teaming With Forensic Accounting Investigators
Forensic accounting investigators can make significant contributions to a financial crime investigation, provided that they can work effectively with the company's internal and external auditors, as well as with other constituents involved in resolving allegations or suspicions of fraud.
Forensic accounting investigators work in a highly charged atmosphere and often present their findings in forums ranging from the boardroom and the courtroom to hearings before government agencies.
All parties with a stake in the process-management, audit committee, auditors, and legal counsel-should consider including forensic accounting investigators in the process of decision making about the investigation. One of the key decisions, usually, is the degree to which the forensic accounting investigators can work with and rely on the work of others-specifically, the internal and external auditors. Another common decision is whether forensic accounting investigators-with their knowledge of accounting systems, controls, and typical fraud schemes-may be added to the team that evaluates the organization's business processes to strengthen the controls that allowed the fraud to occur.
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The party or entity engaging the forensic accounting investigators- for example, audit committee, management, or counsel-may be committed to a thorough investigation of all issues and is ultimately responsible for the investigation.
The committee may engage forensic accounting investigators directly and look to them for guidance, or it may ask outside counsel to engage forensic accounting investigators, who usually will work at counsel's direction in fulfilling counsel's responsibilities to the audit committee. In some cases, the audit committee may need to work with two forensic accounting teams. One team, deployed by the external audit firm, gets charged with assisting the external auditors to meet their 10A responsibilities and provide advice on the adequacy of the investigation conducted by the company. The other team, engaged by 10A counsel, is responsible for an investigation that assists counsel and the audit committee in determining whether there was an illegal act and, if so, what remedial action is needed.
Forensic Accounting Investigators' Cooperation with Internal Auditors
We have found in the majority of our experiences that teaming with internal audit enhances both the efficiency and effectiveness of the investigation: internal audit knows the company and its personnel and systems better than outside forensic investigators, which causes the investigation to be more targeted. While it is ideal to work with internal audit in conducting investigations, it is important that a number of factors (explored later) be considered by those assigned the responsibility of conducting an internal investigation-usually the audit committee.
Internal Audit's Position and Function
Note the group's position in the company's organizational chart and its actual, day-to-day role-which due to any number of factors may differ from the role implied by the organizational chart. If possible, consider the way in which the internal auditor is measured by the company with respect to coverage, number of locations visited, types of issues raised, financial savings, and improvements to operating metrics.
Among the considerations are the following:
â€¢ Is the internal audit unit focused on controls assurance-typically evidenced by location-based or compliance auditing-or on controls consulting, typically evidenced by forward-looking projects, early involvement in system deployments, and so on? Does the internal audit plan comply with IIA standards for a risk-based approach-usually in the form of a risk assessment? A coverage-based metric, such as a site visit to every location every three years, is evidence that risk is not the primary driver.
â€¢ Are any internal auditors trained in forensic investigative accounting? How experienced are they? Do they provide for a separate and distinct group of investigators? When fraud is suspected, do the internal auditors conduct investigations by means of this specialized group of forensic accounting investigators, or do they use auditors already assigned to the particular project?
â€¢ Is there consensus about the role of the internal audit unit within the organization?
â€¢ Are internal audit's recommendations implemented, and if not, why not?
Further considerations: How is the auditor evaluated and by whom? What degree of interaction exists between the internal audit group and the audit committee? Do the two meet frequently and discuss matters in depth, or do they meet only at several formal meetings a year?
Always on Time
Marked to Standard
After gaining a thorough understanding of the factors discussed earlier, consider ways in which the investigative team can best work with the internal auditor and be prepared to make recommendations to the audit committee. Each group brings different skills to the task, and the best solution is usually one that incorporates both working together. The internal auditors usually bring:
â€¢ Core skills in auditing. Collecting and corroborating documentation, sampling, interviewing, and testing and analyzing data
â€¢ Core skills in project management. Planning, scheduling, document management, creating audit steps (including follow-up), managing issue resolution, and recording and communicating results
â€¢ Knowledge of the company and systems. Organizational structure, how transactions take place, how errors are likely to evidence themselves, and the strengths of the company's people, systems, and processes
With these competencies, the internal auditor is very well positioned to obtain background information on people, systems, and processes. Past audits may provide insight. The auditor is also a valuable team member in collecting data or serving as an adviser to the forensic investigators on matters of approach, specific issues that come to light, and potential follow-up actions.
Forensic Accounting Investigators' Cooperation with External Auditors
The external auditors of a company are commonly engaged to perform an audit under generally accepted auditing standards, and the primary focus of those external auditors is on auditing the financial statements in compliance with professional standards. How well forensic accounting investigators interact with external auditors typically depends on several factors, including the following.
The external auditor may be a trusted adviser or may have a strained relationship with the company owing to previous events. Because the forensic accounting investigator is often placed between the company and its external auditor during an investigation, understanding their current relationship is likely to be critical to successful communication during an investigation.
Because external auditors likely know the company better than a newly appointed team of attorneys and forensic accounting investigators, selected in part because of their limited prior experience with the company, they may be very useful sources of information. The audit firm's knowledge about a company's areas of risk, business processes, documentation, systems, and personnel can get the investigative team off to a fast start.
The forensic accounting team will also be able to use the auditor's working papers and audit staff to assist in gaining an understanding of the client's systems, culture, and personnel, as well as other important data. Gaining access to information contained in the working papers of the external auditors may require formal access letters, the terms of which should be carefully considered by counsel. Also, the process of obtaining access letters may often take time away from getting the investigation started promptly.
Objectives of All Interested Parties
The forensic accounting investigator must bring independence and objectivity to the investigation and recognize the objectives of each of the interested parties to the investigation.
Forensic Accounting Investigators' Objectives
Forensic accounting investigators' objectives are determined by the scope of work and the desire to meet the goals of whoever retained their services. Regardless of the differing interests of the various constituencies, forensic accounting investigators must typically answer the following questions:
â€¢ Who is involved?
â€¢ Could there be coconspirators?
â€¢ Was the perpetrator instructed by a higher supervisor not currently a target of the investigation?
â€¢ How much is at issue or what is the total impact on the financial statements?
â€¢ Over what period of time did this occur?
â€¢ Have we identified all material schemes?
â€¢ How did this happen?
â€¢ How was it identified, and could it have been detected earlier?
â€¢ What can be done to deter a recurrence?
Forensic accounting investigators should always keep in mind that they are primarily fact finders and not typically engaged to reach or provide conclusions-or, more formally, opinions. This differs from the financial auditor's role, as often noted in previous chapters. The financial auditor is presented with the books and records to be audited and determines the nature, extent, and timing of audit procedures.
On one hand, the financial statements are management's responsibility, and an auditor confirms they have been prepared in accordance with generally accepted accounting principles after completing these procedures and assessing the results. The forensic accounting investigator, on the other hand, commands a different set of skills and works at the direction of an employer that may be management, the audit committee, counsel, or the auditing firm itself.
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The selection of audit procedures is judgmental and an integral part of the audit team's responsibilities. Not surprisingly, when auditors choose to enlist the services of subject matter experts such as forensic accounting investigators they expect the investigators to offer suggestions on appropriate procedures to be performed as well as related costs, risks, and expected outcomes. The investigators should be careful not to execute such procedures unless specifically asked to do so by the audit team (or whoever is directing the investigators). This approach can lead to frustration on the part of the investigators if, during an investigation, forensic accounting investigators are ordered to stop and in effect put down their pencils. Should that situation occur, it may be entirely appropriate to discuss their concerns with the audit team? But keep in mind that the audit team is generally more knowledgeable about the client's business as well as other audit procedures that may mitigate the forensic investigator's concerns. But the forensic accounting investigators should take direction from those who engage them, as requested, be they auditors, directors, or counsel.
Objectives of Other Parties to the Investigation
During an investigation, each interested party may view the same facts differently. For this reason, it is important to understand the likely biases and goals of all stakeholders and to view, in a broad context of expected and quite naturally differing points of view, any conflicts that may emerge.
Management understandably may be eager to bring the investigation to a quick conclusion. The chief financial officer may be defensive over the fact that his or her organization "allowed this to happen." The CEO may be concerned about the investigation's impact on share price, company reputation and liability, and employee morale. Perhaps citing cost or scope issues-but likely more concerned about staying as close as possible to events as they unfold in the interest of no surprises-management's overall reaction may be to tightly manage the investigation.
The board of directors, through the independent members of its audit committee, is likely to focus on conducting a thorough and complete investigation, but its members may lack the experience needed to assess the effort. In addition, they may be concerned about their personal reputations and liability. The board is likely to look to legal counsel and in some cases, to forensic accounting investigators to define the parameters of the project.
Regulatory agencies, including the SEC and law enforcement agencies, have enforcement and prosecutorial objectives beyond the scope of the investigative team's objectives.
As such, the forensic accountants should not expect to participate in all activities typical of financial crime investigations. For example, the legal team may or may not see a need to include the forensic accountants in all interviews, favoring instead to have them attend only those interviews in which the legal team expects accounting issues to surface. In most investigations in which counsel is involved, they are responsible for the conduct of the investigations and will assign and allocate resources accordingly.
The internal auditor may have a variety of objectives, including not alienating management, staying on schedule to complete the annual audit plan, and not opening the internal audit team to criticism. The internal audit team may also feel embarrassed, angry, and defensive that it did not detect the wrongdoing.
The external auditor may have several concerns, including whether the investigation team will conduct an investigation of adequate scope, whether the situation suggests retaining forensic accountants from the auditors' firm, whether forensic accountants should be added to the audit team, and even whether the investigation will implicate the quality of past audits. The concerns on this front are complex.
Stockholders may become concerned once suggestions of financial impropriety surface. They may file a class-action lawsuit with the objective of extracting the largest possible settlement from the company and other parties, including the external auditors.
The company's lenders are likely to be concerned about their exposure to losses. The investigation may take place during a period of financing negotiations and may therefore need to address the lenders' objectives.
The public at large may feel some degree of vested interest in the investigation, particularly if the entity is a public, quasi-public, or charitable organization or if it is a significant regional employer. These concerns are often reflected in and fed by media attention, and they create pressure to "get to the bottom quickly."
Who Should Direct the Investigation and Why?
A ship has but one captain and, generally, a company's audit committee must proactively lead the investigation. Forensic accounting investigators follow the evidence wherever it leads and communicate their findings to the audit committee or to the committee's designee, such as counsel, whose decisions direct the conduct of the investigation. While the external auditors must be satisfied that the audit committee has directed a proper investigation, they neither direct the investigation nor decide what remedial actions are required by the circumstances.
Financial crime investigations are fraught with uncertainty, and a wrong move can produce harmful results. Audit committees recognize the value of consulting with a competent team of advisers, including counsel and forensic accounting investigators. A forensic accounting investigator working for an audit committee that does not seek advice or that interferes with the investigation would be well advised to resign the assignment.
In the course of an investigation, a time may come when the forensic accounting investigator is alone in advocating a certain course of action or series of procedures. Suppose the audit committee interprets whistle-blower allegations as implicating the revenue recognition practices of the company but not policies involving the deferral and amortization of related marketing costs, and the forensic accounting investigator disagrees? What is the forensic accounting investigator to do? The evidence should be the driving force in determining the scope and course of the investigation. On one hand, in situations of this kind, be insistent while following the standards, methodologies, and practices that experience suggests are most appropriate in the circumstances. On the other hand, unlike decisions about the scope of the audit procedures-which rest solely with the auditors-decisions about the adequacy of an investigation's scope rest with the audit committee. .
Ideally, the forensic accounting investigator should have significant influence over procedures pertaining to the financial aspects of the investigation. Counsel should obviously take responsibility for the legal aspects of the matter and support the efforts of the forensic accounting investigator by providing appropriate guidance. The audit committee should rely on these and other professionals, but in the end it is the audit committee's investigation. The committee must take ownership, albeit with the advice of other parties in the core team that influences the direction of investigation. These may include forensic accounting investigators, legal counsel, internal and external auditors, and possibly others such as a public relations firm. Conferring early and often is routine in these matters and should be strongly encouraged by the forensic accounting investigator.
In The Company of Lawyers
The first person to be contacted when there is a suspected fraud is typically in house counsel. Depending on the apparent severity of the matter and its apparent location in the company, other internal resources to be alerted at an early stage, in addition to the board typically through its audit committee, may include corporate security, internal audit, risk management, the controller's office, and the public relations and investor relations groups. Investigations usually begin with extensive conversation about who should be involved, and the responsible executives may naturally wish to involve some or all of the functions just mentioned.
Depending on the circumstances, the group of internal auditors can in fact be a tremendous asset to an independent forensic investigative team. As participants in the larger team, internal auditors' knowledge of the company may improve both the efficiency with which evidence is gathered and the forensic team's effectiveness in lining up interviews and analyzing findings. Our advice to client executives and in-house counsel is to engage an external team but to consider making available to that team the company's internal auditors and other internal resources for any investigation of substantial size.
Forensic accounting investigators can expect to work with or for attorneys in a number of circumstances, including:
â€¢ Internal investigations with respect to accounting or reporting matters, generally triggered by:
Audit committee concerns
Internal audit concerns
External auditor findings
Media or regulatory reports or communications
â€¢ Regulatory investigations such as investigations by Securities and Exchange Commission (SEC)
Tax authority inquiries
Civil litigation such as contract issues, shareholder lawsuits, wrongful termination claims, and fraud recovery actions
The number and kinds of attorneys are broad and varied. The forensic accounting investigator may work with the general counsel for the company; SEC counsel; special independent (external) counsel to the board of directors or the audit committee, often referred to as 10A counsel; attorneys for specific board or audit committee members; counsel for specific employees or groups of employees; civil or criminal counsel; counsel for personnel who may be under suspicion or who hope to avoid that unwanted designation; and still others.
A potentially material overstatement of asset values or understatement of liabilities is often the focus of investigation, and there may be an urgent need to inform stakeholders and markets that previously published financial statements may be unreliable. The extent of the problem should be determined and corrective action taken. In that scenario, a multitude of questions often swirl around the company:
Was the misstatement deliberate? Who knew or should have known of the misstatement?
What needs to be done?
In such investigations, confidentiality is usually very important. Leaks of information to the press or competitors may be particularly damaging. If the investigation is to be successful in uncovering the facts, the number of people within the company who are aware of day-to-day developments should be properly limited to avoid such leaks. The company may, however, voluntarily disclose information to regulators during such investigations.
Forming the Investigative Team
Forensic accounting investigators are frequently called upon to investigate potential financial statement manipulations or misstatements and asset misappropriations. For purposes of this discussion, we refer to such engagements as internal accounting investigations. When investigating asset misappropriation, the forensic accounting investigator may be engaged by the general counsel of a company or by the outside attorney who represents the company.
The forensic accounting investigator conducting an asset misappropriation investigation typically receives excellent cooperation from company executives, who perceive themselves and the company as the victim. Experience has shown, however, that an investigation focused on asset misappropriation may produce evidence suggesting other schemes, in which the company may have been benefiting from illegal acts. Once the forensic accounting investigator picks up on a loose thread and follows it, there often is no telling where it might lead. When potentially material accounting irregularities-or allegations of potentially material fraud-come to its attention, the board of directors typically seeks the advice of counsel on a number of considerations that may include the following:
â€¢ Identification of an independent committee-generally a subset of the board of directors and typically the audit committee-to lead the investigation and determine the company's approach
â€¢ Initial communications with stakeholders, including employees, the market, stockholders, bondholders, lenders, and regulators
â€¢ Formation of an investigative team, generally through retention of appropriate counsel and other experts such as forensic accounting investigators and other specialists
â€¢ Urgent personnel decisions such as arranging for paid leave, restriction of duties or access, and termination
â€¢ Data stabilization and security to avoid any loss of critical information
â€¢ Notification of insurance providers at the company and board levels
The investigating team often includes:
Forensic accounting investigators
Forensic technology experts
External auditor partner and key staff
â€¢ Based on the specifics of the investigation, the team may include other experts or specialists such as:
Valuation or appraisal specialists
When working with attorneys, forensic accounting investigators should specifically understand:
â€¢ Their expected role and responsibilities vis-à-vis other team members
â€¢ What other professionals are involved (current or contemplated)
â€¢ The extent and source of any external scrutiny (SEC, IRS, DOJ, and so on)
â€¢ Any legal considerations (extent of privilege, expectation that the company intends to waive privilege, expectation of criminal charges, and so on)
â€¢ Anticipated timing issues, if any
â€¢ Expected form, timing, and audience of interim or final deliverables
â€¢ Specifics of the matters under investigation, as currently understood by counsel
â€¢ Any limitations on departments or personnel that can be involved, interviewed, or utilized in the investigation process
Independent counsel, with the help of forensic accounting investigators, often takes the lead in setting up, organizing, and managing the investigative team. This process may include the selection and retention of other parties who make up the team. Independent counsel's responsibilities typically encompass the following:
â€¢ Preparing, maintaining, and disseminating a working-group list (very helpful in sorting out which law firms or experts represent whom)
â€¢ Establishing the timetable in conjunction with the board of directors or management, disseminating the timetable to the investigating team, and tracking progress against it
â€¢ Compiling, submitting, and tracking the various document and personnel access requests that the investigating team members will generate
â€¢ Organizing client or team meetings and agendas
â€¢ Preparing the final report with or for the board or its special committee, or doing so in conjunction with other teams from which reports are forthcoming
â€¢ Establishing and maintaining communication channels with the board of directors and other interested parties, generally including internal general counsel, company management, regulatory personnel, law enforcement or tax authority personnel, and various other attorneys involved
Although the attorney may lead the investigation formally, the forensic accounting investigator frequently is the cornerstone of a successful investigating team.
The forensic accounting investigator may provide the following types of assistance and support for the larger team directed by the attorney:
â€¢ Ability to plan and conduct a proper financial crime investigation
â€¢ Expertise in accounting, in regulatory (such as SEC) auditing, in internal controls, and in financial analysis
â€¢ Interviewing skills, both fact-finding from witnesses and admission seeking from targets
â€¢ Expertise in performing data mining and data interrogation of the company's books and records, including e-mail
â€¢ Experience in document authentication and knowledge of a network of subspecialists trained in highly technical authentication procedures such as typewriter/printer analysis and authentication through forensic laboratory science
â€¢ Ability to review and interpret internal accounting transactions and their compliance with various rules
â€¢ Ability to accumulate public financial and nonfinancial information, including SEC or company registry filings, if applicable
â€¢ Forensic imaging and other information technology (IT) expertise such as e-mail search tools
â€¢ Support of counsel in developing various hypotheses and investigative procedures and techniques
â€¢ Background checks on relevant personnel
â€¢ Vendor validity checks on the basis of publicly available information
â€¢ Preparation of specific sections of the draft and final reports or support of counsel for report sections that focus on accounting, reporting, or financial information
â€¢ Coordination with both internal and external auditors and the audit committee
â€¢ Review and critique of financial, accounting, or reporting analysis and advice provided by other specialists
â€¢ Among larger firms, a global network of investigators to assist in multinational
Particularly when investigations include review and analysis of accounting and financial information, the forensic accounting investigator is often a critical member of the team. Some attorneys do not have extensive accounting or auditing experience, and certain accounting concepts may be foreign to them.
For complex investigations or investigations that involve public companies, it is often wise for the lead forensic accounting investigator to assemble a team that includes the following skills and experience:
â€¢ Ability to conduct or assist with the investigation
â€¢ Knowledge with respect to generally accepted accounting principles relevant to the applicable time period of the investigation
â€¢ Knowledge with respect to SEC-compliant accounting, financial disclosure, and other reporting
â€¢ Familiarity with the regulatory investigative process
â€¢ Knowledge with respect to generally accepted auditing standards and procedures
â€¢ Ability to immediately access industry or specialist knowledge as required-for example, expertise in derivative financial instruments, bank regulation requirements, and long-term contract accounting
â€¢ Familiarity with the uses and abuses of offshore companies and trusts
â€¢ Ability to identify departures from customary commercial behavior and business practices
â€¢ Relevant language skills and ability to meet the challenges of a geographically diverse investigation, as required.
In particular, the forensic accounting investigator should take care to avoid:
â€¢ Providing legal advice or making legal assertions in their work or deliverables
â€¢ Providing actuarial or valuation guidance unless appropriately credentialed and trained
â€¢ Acting as a judge or jury by making judgments as to the guilt or innocence of particular people or groups
â€¢ Expressing an audit opinion on financial statements or internal control effectiveness.
Note, however, that commenting on specific elements of financial statements is entirely appropriate and can be legitimately expected of forensic accounting investigators with accounting and auditing experience.
â€¢ Creating legal exposure as a result of comments that may lead to claims of defamation, libel, slander, and the like
The forensic accounting investigator can expect to work with or for attorneys in most investigations. To help ensure that the investigation progresses as smoothly as possible and reach appropriate conclusions and satisfactory resolutions, each member of the investigating team should:
â€¢ Work collaboratively within the investigative team assembled by the client:
Frequent conference calls are likely to facilitate this objective.
â€¢ Communicate early and often with the team: When disagreements arise as to approach, which is not uncommon, discuss them immediately and thoroughly to reach a mutual understanding.
â€¢ Demonstrate respect and recognize the distinct expertise of the various investigative team members: Both counsel and the forensic accounting investigator have unique skills that may be critical to the success of the investigation. Egos should not get in the way of serving the client.
â€¢ Foster a professional, cooperative environment: "We have a job to do.
Let's work together to get it done."
â€¢ Acknowledge and manage the typically high-pressure environment and the likelihood of external scrutiny.
â€¢ Understand the rules of the game in terms of documentation and reporting expectations, other parties involved, expected level of assistance from the company, 6(e) restrictions, Section 10A requirements, and so on.
â€¢ Have clearly understood roles and delineated responsibilities in an effort to minimize both duplication and gaps in the investigation process. Generally speaking, qualified forensic accounting investigators and attorneys work well together. Many engagements end with the appreciative recognition among all team participants that cooperation and a mix of highly professional skills brought clarity and resolution.