Considerations During a Government Investigation: Perspective from the Forensic Accountant

To quickly recap the case introduced in the first blog:

1. XYZ Corporation is investigated by a state attorney general’s office for fraudulent activity

2. The corporation is sued by other states and individuals impacted by the fraud

3. The case reaches Federal court

4. A class action suit is filed

5. Executive officers and directors of the company are charged for violating federal laws

6. Ensuing litigation results in XYZ Corporation filing for bankruptcy

7. The bankruptcy is finalized after years of litigation and negotiations

Forensic accountants play a critical role in managing government investigations. They should be included in your organization’s response team, working together with company insiders, counsel, and other professionals to maintain control of the investigation for your organization.  Forensic accountants can perform an initial assessment of the situation and help the organization identify risk areas or gauge exposure for the organization. The organization may then undertake an initial assessment to develop a response plan to the investigation. This may include identifying individuals familiar with the underlying facts, determining supporting information that must be shared in the investigation, and formulating defense strategies.

Absent an initial assessment, the organization may wish to conduct a parallel analysis, reviewing the information gathered by the government organization in an effort to keep pace with the external investigation. This will help the organization avoid any surprise with the results of the investigation. Finally, the analysis may identify faults in, or key conclusions reached by, the investigation. This may prove critical in defusing the investigation and related exposure.

For this case, forensic accountants were retained to investigate the causes of actions existing against XYZ Corporation’s officers and directors. They worked with eDiscovery professionals to develop a project plan to identify relevant data and extract information from XYZ Corporation’s IT systems. Four teams worked collaboratively across the country to sift through volumes of documentation, conduct the analysis, and prepare a litigation plan.

Wealth of Information Needed for Analysis

It is assumed that expert evidence must be presented at a trial. Forensic accountants generally have to conduct an investigation and analysis to gather that evidence, then assist with the discovery, analysis, and presentation of information to be used in a trial.

With a complex, big data matter, there are generally very large quantities of information that need to be gathered and analyzed. To be successful, this requires hiring expert teams and using the right tools to extract the critical information in a timely manner.

Specific Skill-sets Required

Forensic accounting requires specialized knowledge and expertise beyond traditional accounting and audit skills. As such, forensic accounting professionals are trained to look beyond the numbers and leverage their understanding of accounting and auditing standards, business information and financial reporting systems, economic theories, data management, electronic discovery, data analytics, and litigation processes and procedures in order to complete their investigation and present their findings.

Understanding the Rules that the Expert Must Abide By 

These rules may vary from one jurisdiction to another. Federal rules may apply, or some other rules may impact communications with counsel and what must be disclosed to the adversary in discovery. The forensic accountant must be aware of these rules, as a mistake may significantly impact the organization. A misstep or misunderstanding of the rules may result in negative publicity or sanctions or fines from the court.  In the worst case scenario, the expert’s report and opinion may be excluded. Given this, it is important that an organization find an expert that not only has experience testifying, but has the ability to quickly build a rapport with counsel and the court when taking the stand.

Editors’ note: This blog was authored by Vincenzo Toppi from CohnReznick. It is the second in a three-part series presented by CohnReznick and eTERA Consulting and discusses some of the idiosyncrasies of investigations.  In the following installment, Mr. Toppi will discuss key considerations from the perspective of the forensic accountant.