Chapter 16

Remediation & Litigation Advisory Services

Critical Thinking ExercisesThis is an unusual paragraph. I’m curious how quickly you can find out what is so unusual about it. It looks so plain you would think nothing was wrong with it. In fact, nothing is wrong with it! It is unusual though. Study it, and think about it, but you still may not find anything odd. But if you work at it a bit, you might find out. Try to do so without any coaching!

What is unusual about this paragraph?

Introduction to Remediation“Clean up the mess”– Recovery of money and assets– Support client through the litigation

process– Return to the “scene of the crime”– For financial statement fraud• Where was the deficiency in corporate

governance?• Was management involved?• How was the fraud hidden from the audit

committee, auditors and board of directors?

Recovery of Money and Other Assets• Cost-benefit aspect of fraud examination• Issues to consider when attempting to recover

assets– Amounts stolen and amounts that may be

recovered– The prospect of winning the case– The value of the assets held by the defendant and

whether they are sufficient– The legal costs involved in pursuing the financial

claim and subsequent collection

Identification of Money and Assets for Recovery

• Types of losses available for recovery– Compensatory damages and restitution of losses– Economic losses– Reliance– Punitive damages

• In a civil framework, plaintiff must demonstrate 3 attributes– Defendant was the proximate cause of any damages– Reasonable certainty as to the amounts claimed– That the defendant could reasonably foresee their

actions, or lack thereof, resulted in damages

‘Following’ Vs. ‘Tracing’ the Money• “Following the money”– Track funds from victim to alleged perpetrator– Specificity– Original identifiable form– No exchanges or substitutions

• “Tracing the money”– Illegal money combined with legitimate sources– What happened to money or property?– Who handled it?– Where is it now?

Legal Methods for Recovery of Assets

• Freezing Orders• Insurance and Bonds• Judgments• Confiscation orders, compensation orders,

forfeiture and seizure of assets• Third party debt orders• Recovery against third party defendants

Freezing Orders• Secure funds so they don’t disappear prior to

obtaining favorable verdict or settlement• To obtain freezing order– Reasonably strong case– Suffered significant damage or financial harm– Risk that assets will disappear– Damage done to defendant will be less than

damage suffered by plaintiff or victim• Attempt to obtain as early as possible• Cover the longest period possible• Cover as wide an array of property as possible

Insurance and Bonds• Cover losses caused by dishonest

employees, vendors, or customers• Sworn proof of a loss claim within

timeframe– Supporting evidence– Statement of the loss

• Some policies pay for the investigation• Once insurance company pays a claim,

they normally obtain the rights against the defendants

Judgments

• Formal and final decision made by a court of law

• Leaves no further action available to losing party, absent an appeal

• Plaintiff or victim is in a more secure position to demand payment

• Entered on the defendant’s credit report• Cover amounts lost, interest and legal costs

Confiscation Orders, Compensation Orders, Forfeiture and Seizure of Assets

• Defendant does not pay amounts owed to victims and plaintiffs

• Forfeiture orders apply to specific assets• Confiscation and compensation orders refer

to amounts covered by available assets• Auction “on the courthouse steps”

Third Party Debt Orders

• Defendant’s debtors pay the claimant instead of remitting money to defendant

• Satisfies 3rd parties’ obligations and the defendant’s obligation to the claimant at the same time

Recovery Against Third Party Defendants

• Accountants, lawyers, executives, managers, directors, audit committee and officers may be held responsible for actions of company

• Threshold for such legal action is negligence or gross negligence

• Direct claims against those who benefited from the fraud or financial crime

Support for Criminal and Civil Court Actions

• Support plaintiff or prosecuting attorney• May be hired as a consultant, expert witness

or may be court-appointed expert or master• Independent and objective professional

Fact Witnesses vs. Expert Witnesses• Fact witnesses– Testify to first hand facts and knowledge– Not permitted to offer opinions • Unless they are based on specialized knowledge as part

of normal responsibilities

• Expert witnesses– Have specialized knowledge by virtue of

education, profession, publication or experience– Subject to 2 types of challenges• Daubert Rule• Frye Rule

Supporting the Investigation

• Explain technical issues to those orchestrating the broader legal activities

• Independent and objective• Look into issues that require further

investigation• Evaluate evidence from every angle• Identify missing data• Keep asking questions

Evaluation of the Evidence

• Independent and honest• Conclusions and opinions should be grounded

in evidence that is supportable and defensible• Identify key assumptions behind conclusions

and opinions• Identify resources used as a basis for the work

performed and conclusions and opinions• Be aware of potential weaknesses and

vulnerabilities in the investigation

Report Writing• Present analyses and central issues in coherent

storyline• Storyline should be grounded in the evidence• Report facts without bias or commentary• Include all relevant information in the report• Sections of report– Executive summary– Introduction– Case material– Conclusion

• Expect to be rigorously examined over your work

Credibility• Make complicated matters seem simple• Credible information is more likely to be believed

and accepted• Protected by being independent, honest,

objective and ethical• “Dueling experts”• Attention to detail• Understand how listeners evaluate your work• Story framing• Rapport• Positive appearance

Deposition Testimony• Parties to a civil litigation are allowed to

examine other side’s expert and fact witnesses– Pre-trial process

• Functions of a deposition– Gather testimonial and documentary evidence– Limit the scope of what witnesses may say– Test or confirm theories and hypotheses– Develop a record under oath and “freeze” a witness’

testimony– Move the case towards settlement or trial– Compare to prior statements– Test the expert witness’ report

Direct Examination• Intersection of credibility and preparation• Heart of the case for the attorney• Question and answer• Expert witnesses often use analogies and metaphors• Other key points– Listen– Watch the jury and judge to ensure they seem to

understand– Use summaries of testimony and exhibits– Enumerate points– Demonstrate “open-mindedness” without compromising

the integrity of your conclusions– Use visual aids to maintain attention

Cross Examination• Search for the truth• Attorney’s goal is to destroy expert’s credibility• Selective questioning to minimize damage• Yes/no format• Fraud examiner or forensic accountant’s goals– Be cooperative– Maintain the credibility of their conclusions and

opinions– Be alert for reasonable and proper opportunities

to provide explanation and disagree

Cross Examination• Understand what opposing lawyer will do• Opposing counsel may attempt to get opposing

expert to acknowledge lack of knowledge about certain aspects of the case

• Opposing attorney may challenge the professional’s objectivity and sources

• Techniques used in cross examination– Primrose Path– Nodding Chicken– Ask Until You Admit– You’ve Got to be Kidding– This Means Nothing

Restructure the Internal Control Environment

“Fool me once, shame on you; fool me twice, shame on me.”

• Pain of litigation or financial loss is motivation to assess anti-fraud program

• Perfect time to consider anti-fraud tools and techniques

Overview of an Anti-Fraud Environment

• Critical thinking and problem solving• Analyze potential frauds and implement

procedures to reduce the risk– How will others exploit the system?– “Think like a criminal”

• “Tone at the top”• Ethical culture• Code of conduct• Willingness to enforce penalties• Proactive fraud auditing

Internal Control Policies and Procedures

• Provide reasonable assurance• Collusion and management override are risks for

even the best internal controls• Impossible to prevent all frauds• Shift focus from prevention to deterrence• 4 areas of responsibility– Safeguarding assets– Authority over transactions associated with asset– Recording transactions for assets– System of audits

• Constantly monitor the control environment

Risk Assessment and Internal Control

• Discuss internal controls with executives, management and other employees

• Narrative form with graphic• Internal questionnaires, pre-developed

checklists and policy and procedures manuals• Test system by tracing documents through

system• Address controls that appear to be absent

The Importance of Corporate Governance

• Set of processes, customs and policies that affect the way an organization is directed

• Relationship among stakeholders and the goals of the organization

• Issues of accountability and fiduciary duty• Should address 3 issues– Creating and maintaining a culture of honesty and

high ethics– Evaluating fraud risks and implementing programs

and controls to mitigate them– Develop an appropriate anti-fraud oversight process

The Risk of Management Override“Management Override of Internal Controls: The Achilles’ Heel of Fraud Prevention”– Maintain skepticism– Strengthen the audit committee’s

understanding of the business– Brainstorm to identify fraud risks– Use the code of conduct to assess the financial

reporting culture– Cultivate a vigorous whistleblower program– Develop a broad information and feedback

network

Early Reaction to SymptomsSix symptoms that may indicate fraud is occurring– Accounting anomalies– Internal control weaknesses– Analytical anomalies– Extravagant lifestyles– Unusual behavior generated by stress– Tips and complaints

Risk Factors Related to Misstatements Arising from Fraudulent Financial Reporting

Incentives/Pressure– Financial stability or profitability is threatened by

economic, industry, or entity operating conditions– Excessive pressure exists for management to meet

the requirements or expectations of 3rd parties– Management or the board of directors’ personal

financial situation is threatened by the entity’s financial performance

– Excessive pressure on management or operating personnel to meet financial targets

Risk Factors Related to Misstatements Arising from Fraudulent Financial Reporting

Opportunity– Nature of the industry or entity’s operations

provides opportunities to engage in fraudulent financial reporting that can arise

– Ineffective monitoring of management– Complex or unstable organizational structure– Internal control components are deficient

Attitude/Rationalization– Risk factors that allow members of organization to

engage in and/or justify fraudulent financial reporting

Risk Factors Relating to Misstatement Arising From Misappropriation of Assets

• Incentives/pressures– Personal financial obligations may create pressure on

employees to misappropriate assets– Adverse relationships between the entity and

employees that may motivate them to misappropriate assets

• Opportunities– Certain characteristics or circumstances may increase

susceptibility of assets to misappropriation– Inadequate internal control over assets may increase

susceptibility of asset misappropriation• Attitudes/rationalization– Justify misappropriation of assets

The Fraudster’s Perspective

• Fraudsters know that investors want confident leadership and strong financial performance

• Fraudsters will exploit your humanity and investors’ lack of skepticism

• Fraudsters may participate in charitable events to make investors comfortable

• White-collar criminals know how to “talk the talk and walk the walk”

Lessons Learned• Careers in the field• Who commits fraud and why• Various complex frauds and financial crimes• Cybercrime• Legal, regulatory and professional environment• Fraud’s red flags and targeted risk assessment• Detection and investigations• Effective interviewing and interrogation techniques• How to use information technology• Various schemes used to perpetrate fraud• Deterrence strategies• Consulting, litigation support and expert witness

engagements• Fraud remediation