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Forensic Accounting Investigations:
How to Work with Outside Counsel
Richard A. Sibery, Partner
Ernst & Young LLP
Whistleblower allegations, irregularities detected or revealed in a financial statement audit, and inquiries from regulators are common examples of what may trigger a company to launch an internal investigation. With a large number of these allegations related to books and records, the audit committee or its outside counsel often will retain a forensic accountant to assist in the investigation. Ideally, the forensic accountant will work very closely with counsel in conducting the investigation. Areas of focus for the accountant include accounting issues, assistance in witness interviews, and the review of documents and electronic records.
While a certified public accountant is easily identifiable as a member of the accounting profession (and a significant percentage of forensic accountants are CPAs), an equivalent identifier is not yet available for a forensic accountant. The Association of Certified Fraud Examiners offers certification, and this is one way that forensic accountants may choose to distinguish themselves. The CFE certification requires passing an exam and a level of education and experience. One of the main differentiators of forensic accountants from traditional accountants, though, is their experience performing investigations, usually with a concentration in specific forensic areas.
Role of Forensic Accountants during a Financial Reporting Fraud Investigation
The role of the forensic accountant during a financial reporting fraud investigation is to assist counsel in validating or refuting allegations of fraud. Experienced forensic accountants understand that the company’s survival is often at stake, and often start an investigation within hours of being retained.
The first step in an investigation is to identify and organize the forensic accounting team, paying attention to the nature of the allegations, the necessary credentials, industry experience, technical requirements, and cultural aspects. These elements may have significant effect on the team’s ability to execute a high-quality investigation.
Next, a forensic accounting team will determine the procedures and resources required to perform the investigation. The assessment may include helping identify physical and electronic documents and the steps that will be necessary to secure them; gaining a basic understanding of the company’s accounting systems and financial reporting structures; and identifying individuals within the accounting and finance organization who may be candidates for interviews. The accountants also will perform macro-level analysis of financial statements and accounting records to identify areas for further investigation.
As an investigation moves forward and the investigators gather evidence, the forensic accountants work with counsel to apply the relevant accounting and reporting rules to the identified facts and circumstances. This analysis often is the key to concluding the who, what, when, where, how, and possibly why of the investigation.
Investigations, Step-by-Step
One of the first steps the lawyers and forensic accountants take in embarking on an investigation is setting a scope. Initially, this scope should include the most likely witnesses, the period under investigation, and the areas of the books and records most likely affected. A forensic accountant typically recommends a scope that allows investigators more flexibility to adjust it as necessary.
Another matter to determine at the outset of the investigation is the timing. Companies understandably want allegations of fraud and any ensuing investigation resolved as quickly as possible, but the appearance of an insufficient investigation can leave the company worse off. The attorneys may focus on interviews and legal interpretation of the gathered evidence, but the forensic accountant likely will be sifting through and analyzing volumes of accounting and other electronic records. This type of analysis can be very time-intensive and can sometimes be a limiting factor in completing an investigation within a specific time period.
During the course of a fraud investigation, a forensic accounting team can assist in identifying the types of records, both paper and electronic, that may be useful in determining exactly what happened and who was involved. These records include financial and management accounting systems and data, hard copy books-and-records (e.g., receipts, invoices, contracts), and electronic records.
In addition to documents, forensic accountants also rely heavily on witness interviews in a financial fraud investigation. Interviews may be formal meetings with counsel, or they may be a more informal factual discussion, taking place as the accounting investigators are identifying or analyzing the books and records. Often, the forensic accountants may need to talk with junior level employees to understand the accounting and documentation procedures and related internal controls followed by the company.
Typically, a forensic accountant will participate in interviews along with counsel. Prior to the interviews, the accountants work with counsel to help them understand the relevant financial issues likely to arise, prepare lines of questioning, pull together supporting exhibits, and set the goals for the interview. During the interview, the forensic accountant’s role includes paying close attention to discussions of accounting and finance matters and asking relevant follow-up questions when necessary.
Because forensic accountants have experience working in an environment in which regulators, courts, and others scrutinize their work, they understand the need to properly document and substantiate their work and findings. In addition, the forensic accountant is familiar with the concepts of attorney-client privilege and the attorney work-product doctrine and makes sure to consider these issues during any investigation. The company’s outside auditor, regulatory agencies, prosecutors, and others, may ask to discuss the forensic accountant’s scope and findings in detail.
In order for auditors to issue an opinion on a company’s financial statement, they may require a detailed understanding of the status or results of an investigation, and the forensic accountant may be best able to answer the auditors’ questions. This is particularly important in situations in which a company is trying to complete an investigation and finalize its financial statements on a timely or expedited basis. The external auditor needs to be satisfied that the company has thoroughly investigated the accounting issues, addressed any shortcomings in the internal controls, made thorough findings and observations regarding integrity of management, and taken any necessary remedial actions.
Finally, the forensic accountants will assist in reporting the results of the investigation. This report may or may not be written by the forensic accountant, depending on the nature of the allegations and the parties involved. Forensic accountants also may become fact witnesses, either in court or before a regulatory body.
Teamwork and Communication
While each investigation is unique, most investigations operate with a high level of coordination and interaction between the attorneys and the forensic accountants. The team approach has proven to be a very effective way to handle what is always a very time-sensitive situation.
From the start of the investigation, attorneys leading the inquiry will determine the ground rules and expectations based on his or her work style and preferences. Issues may include accountant involvement in witness interviews, how the forensic accountants will communicate with the client, the format for reporting, documentation standards, document access, and control and use of company personnel.
In the throes of a dynamic and fast-paced financial fraud investigation, a number of factual issues need input from both a legal and an accounting perspective. For this reason, a teaming approach often is the best method of investigation. For instance, a lawyer and an accountant could be assigned to each major issue in the investigation. This approach helps facilitate communication between the legal and accounting sides in the inquiry and mitigate the risk of facts falling between the cracks.
The forensic accountant clearly fills a vital role in the conduct of a corporate internal investigation. By working closely with counsel, the accounting team’s knowledge and experience is invaluable in discerning the nature of any wrongdoing, its cause, and necessary remediation. From inception to report, the forensic accountant will provide a unique viewpoint on a financial investigation. The deadlines may be tight and the hours long, but the work can be fascinating and rewarding as well.
More About Forensic Accounting
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