Chapter 16 Remediation & Litigation Advisory Services.
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Transcript of Chapter 16 Remediation & Litigation Advisory Services.
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