Situational Assessment

fraud-examinationAs a follow-on to our last post, newly minted CFE’s working for their first client can find themselves at something of a loss about the best way to initiate an investigation; I know that was certainly true of me at what now seems so many years ago.

Every fraud investigation is a minefield whose first steps can impact the final outcome significantly. Insufficient care, coordination or discretion at the launch of the investigation may tip off the suspect, causing the destruction of potentially vital evidence. Moreover, information collected hastily without sufficient attention to procedure might prove inadmissible in court, or even lead to sanctions and fines. Any experienced practitioner will tell you that a whole host of challenges beset those of us responsible for looking into potential wrongdoing. But, as the ACFE also tells us, taking the right steps before an investigation can significantly reduce the risk of error, helping to ensure the entire investigation is planned correctly and carried out efficiently.

The ACFE advocates the performance of an initial fact finding or situational assessment phase of every investigation.  The CFE (and his or her employing attorney, if there is one) first need to assess whether an allegation has merit. This process should begin with consideration of the complainant’s credibility and motives (when that person’s identity is known) as well as other possible indications of the allegation’s likely validity. The examiner should avoid snap, simplistic judgments. Just because a complainant lacks credibility or may have ulterior motives doesn’t necessarily mean there is no need for an investigation. By the same token, even a highly credible individual can make an unfounded allegation. Upon close examination, allegations often contain specific facts, especially those related to the workings of the organization, that can help support assertions and provide the CFE a basis for corroboration moving forward.

The recommended initial situational assessment can be additionally vital because insider wrongdoing especially can have a significant impact on the organization, even more so when committed by a member of senior management. The assessment should include examination of monetary, regulatory, reputational, and other known risks.

An obvious goal for the CFE in every fraud case we work is to determine the extent of existing damage and prevent further losses. This can be difficult, as allegations rarely include an exact amount of stolen funds or an assessment of organizational impact. For example, the monetary impact of vendor kickbacks to employees is often hard to assess, as it involves gauging the extent to which the organization may have received insufficient value for the products it purchased. In these circumstances, the CFE may want to assess the extent to which the vendor is used and consider the common fraud risk associated with the industry, organization and type of vendor.

What’s more, in today’s gold fish bowl regulatory environment, issues of concern to regulators increasingly include insider trading, bribery of public officials, manipulation of publicly listed companies’ financial statements, money laundering, and privacy or data breaches. If an organization fails to conduct an adequate fraud investigation or take appropriate corrective measures, the regulator may initiate its own investigation or, where a funding relationship exists, withdraw support from the organization altogether. If allegations relate to an organization’s foreign operations, or involve activities in jurisdictions with extraterritorial legislation, international regulatory requirements should also be considered. Many countries have enacted anti-bribery legislation, including the United States’ Foreign Corrupt Practices Act (FCPA), Canada’s Corruption of Foreign Officials Act, and the United Kingdom’s Bribery Act. Running afoul of these laws can have significant consequences for any of our clients.

And finally, the potential reputational damage to an organization from fraud must never be taken lightly. Examples of circumstances that may pose significant reputational risks include payments to foreign government officials, circumvention of local or foreign laws, and accepting incentives from suppliers.

The CFE and the employing attorney are in a unique position in carrying out the initial situational assessment to collect and evaluate available evidence to assist the organization in its initial understanding of the case and to plan the investigative response. This process may include preparing a preliminary evaluation of the losses or follow-on risks to which the organization has apparently been exposed.  Once the attorney has communicated to the organization the facts and issues, consideration should be given to whether to pursue criminal charges or civil remedies (i.e., recovery of funds), as it will affect the CFE’s approach to the entire inquiry process. For instance, in the United States and Canada, the standard of proof for criminal charges is higher than that of civil remedies. Further, the makeup of the CFE’s investigative team may be different depending on the objectives of the investigation. Decisions may change over time and as new circumstances of the case come to light, the investigative strategy may also need to change.

Ideally, the investigative team for the initial assessment should be kept as small as possible, and participation should be on a “need-to-know” basis. Moreover, team members must not have any conflicts that would, or even be perceived to, impair their judgment or objectivity in the investigation.

ACFE Standards also require that the team be comprised of appropriately skilled and qualified individuals to perform, or at least oversee, the evidence collection process, particularly of electronic evidence. Team members need to be informed that any one of them may be called upon to testify as a witness in court and that notes and work papers are discoverable and could appear before a judge or jury. Therefore, work paper files, including interview notes and communications, should be thorough and carefully maintained. Numerous additional considerations should be kept in mind when choosing members of the investigation team on the front end, including participants’ independence, as well as the potential need for additional legal counsel, supplementary investigative experts, and other expertise. Maintaining independent oversight is crucial to the investigation’s credibility; failure in this area leaves all the investigative findings open to criticism by opposing counsel, regulators, or law enforcement agencies. In many cases, especially those involving financial matters, corporate counsel supported by CFE’s or forensic accountants might be in the best position to manage the overall investigation.

To protect litigation privilege, the employing attorney or independent external counsel will be included in the CFE’s investigation from the beginning. These experts can also advise the CFE on legal matters such as employee suspensions or terminations and evidence gathering techniques to help ensure future court admissibility. Moreover, by adding credibility, counsel, internal or independent, provides assurance that the investigation will stand up to external legal scrutiny.

The independent, reputable CFE can add credibility to a fraud inquiry from first to last, bring current knowledge of relevant issues, and provide or coordinate the acquisition of skills that many companies lack in areas such as computer forensics, analytics, and forensic accounting. Such help is also important if opinion testimony may be required, as the testimony is admissible only if it comes from witnesses (like CFE’s) whom the courts determine are experts. When needed, for example, in cases that may lead to pursuit of criminal charges or civil remedies, supplementary experts should be retained early on. To maintain litigation privilege, investigators and experts should always be retained through the CFE’s employing attorney or external counsel.

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