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© 2015 Association of Certified Fraud Examiners, Inc.

Fraud-Related Compliance

Investigating and Reporting

© 2015 Association of Certified Fraud Examiners, Inc. 2 of 27

Investigations, Reporting, and Compliance

Investigations benefit victim organizations by:

• Recovering property

• Deterring future fraud

• Promoting a culture of integrity

Benefits aside, regulations can require:

• Investigations of certain crimes

• Disclosure of the results to the proper authorities


When Is an Investigation Necessary?

Investigations may be necessary to:

• Fulfill duties of loyalty and care

• Honor employees’ rights (e.g., wrongful termination)

• Halt wrongful conduct

• Demonstrate that the company has an effective

compliance program

• Mitigate fines and penalties in an enforcement action


Investigation Team

Should consist of a good variety of expertise,

but also be limited in number

• CFEs

• Legal counsel

• Auditors

• Security personnel

• IT and computer forensics experts

• Human resources personnel

• Management representative

• Outside consultants


Conducting the Investigation

Developing evidence for investigations

• Testimony, documents, objects, etc.

• Consult with legal counsel to ensure proper collection

of evidence.


Sources of Information

In-house sources of information

• Personnel files

• Computer files and logs

• Communications (voicemails, emails, memos, etc.)

• Prior audits/investigations

• Access codes

• Security videos



Public sources of information

• Government records and filings

• Court records

• Information from company’s vendors and customers

• Third-party information

• May require voluntary submission or court orders



Other sources

• Social networks

• Digital data analysis

• Computer forensics

• Covert operations

• Informants

• Surveillance

• Subpoenas/search

warrants


Conducting Interviews

Determining whether an

interview is the best way

to acquire the desired

information

Legal issues with

interviewing

Order of interviews—

often least to most

knowledgeable


Signed Statements

Reduce a verbal confession to a short written

statement.

The confession should state that it is voluntary

and truthful.

Provide each element of the offense (intent,

damage, etc.).

Note specific details (dates, number of

instances, etc.).


Reporting the Investigation

Report to whoever is overseeing the

investigation.

Be aware of legal issues in disclosing results.

• Privileges and confidentiality

• Statements that could give rise to defamation claims


Reporting the Investigation

Some investigations need to be reported to:

• Board of directors

• Audit committee

• External auditor

• Regulatory agencies

• Insurers


Purpose of the Report

Conveys evidence

Adds credibility

Accomplishes

objectives of case


Know the Reader

Internal readers

• Board of directors

• Audit committee

• Internal auditors

• In-house counsel

Potential outside

readers

• External auditors

• Outside legal counsel

• Law enforcement

• Government attorneys

• Regulatory agencies

• Insurers


Report Format

Authors and date

Brief summary of findings

Introduction/purpose

Body

Results

Follow-up/recommendations


Opinions and Conclusions

Opinions should only be on technical matters.

Conclusions should be self-evident.

Refrain from deciding guilt or innocence.


Presenting the Case

After presentation of the report, management

must decide how to handle the case.

• Report to government authorities.

• Optional in certain cases

• Seek financial recovery.

• Insurance

• Litigation

• Sever business and employment relationships.

• Take disciplinary employment action.


Presenting the Case

If further action is not pursued, the reason for

not pursing the case should be documented.

The audit staff should review internal controls

and include the incident in future fraud risk

assessments.


Reporting to Law Enforcement

Reporting could be in

the organization’s best

interest.

Decision to report

depends on a variety

of factors.


Reporting to Law Enforcement

Disadvantages

• Less control over

case decisions

• Cannot control

sentences

• Penalties may render

defendant insolvent.

Advantages

• Saves litigation

expenses

• Stronger government

investigatory power

• Quicker case resolution

• Imprisonment as a

deterrent

• Findings are available

for civil suits


When Is Disclosure Required?

FAR 3.1003(A)(2) requires all government

contractors to disclose credible evidence of

criminal violations, civil violations, and

significant overpayments.

• Duty to disclose lasts three years after the final

payment on the contract.

• Disclosure must be made to inspector general and

affected contracting officer.

• Failure to disclose is basis for suspension and

debarment.


Voluntary Disclosure Programs

Available when law enforcement has yet to

detect a violation.

• If the agency is already investigating the company,

the program may no longer apply.

Voluntary disclosure programs offer lenience.

Agencies with voluntary disclosure programs

include the SEC, IRS, DOJ, and FDA.



Typical benefits of voluntary disclosure:

• Recommendation by the agency to not press charges

• Decreased or eliminated fines

• Decreased sentences

• Prevention of dissolution of the company for serious

offenses

Agency will not always grant reprieve.



Whether a disclosure is “voluntary” varies from

different agencies, federal or state.

Typically, companies must:

• Disclose without being compelled to.

• Be timely (the agency must not have been aware of

the violation through independent means, e.g., an

informant or the media).

• Willingly cooperate to remedy the violation.

• Adopt policies to prevent future violations.


Antitrust Leniency Program

Department of Justice Antitrust Division

Similar to voluntary disclosure programs

The first party to confess to participation in an

antitrust violation granted leniency

Different eligibility requirements for individuals

and corporations

If Antitrust Division has already learned of the

violation—may still grant leniency


SEC Enforcement Manual

Decides how much credit to give to cooperating

organization based on:

• The level of assistance in the investigation

• The importance of the violation

• The societal interest in holding the organization

accountable

• The appropriateness of the cooperation given the

profile of the organization


SEC Enforcement Manual

Seaboard Report credit factors

• Self-policing, including effective compliance program

• Self-disclosure

• Remediation

• Cooperation with the government


Deferred Prosecution Agreements

Prosecutors agree to drop charges in exchange

for the company’s cooperation.

Requirements usually focus on preventing

future occurrences, such as internal controls.

Fines still typically attach to DPAs.

Example: Arthur Andersen refused a DPA.

Filip Memo—Department of Justice memo

stating the key factor of cooperation is timely

disclosure of relevant evidence.


DPA Example—Fiat

Fiat subsidiaries violated FCPA by paying over

$5 million in kickbacks to Iraqi officials and

falsifying accounting records.

Criminal penalty: $7 million

Terms for Fiat under the DPA:

• Mandatory review of current anti-corruption policies

• Revising and maintaining internal accounting controls

• Appointing FCPA and anti-corruption compliance officer

• Ongoing training for employees and contractors

• Create a reporting mechanism


Discussion Question #1

Why might you be required to perform an

investigation in this situation?



You decide to commence an investigation into

the issue. Who should be involved in the

investigation team?



What evidence do you think will likely be

necessary? Discuss the methods you will use to

gather information.



To whom within the company should you report

your investigation?



Should you report the findings of the

investigation to law enforcement? Why or why

not?

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