One of the biggest trends for companies is ‘going green.’ This trend does extend beyond legitimate businesses and is now being used by more and more criminals. It is a nice gesture on their part, especially from a Digital Forensics standpoint. According to the  FBI, crime rates in America have been declining, and are actually lower than before the recession. However, the FBI has seen cases involving removable media double in the last year alone.
There is a great deal of information to be found on computers, ranging from Internet history and email to reports and invoices. In order to analyze the relevant data, digital forensic specialists like to focus on user-created documents, commonly referred to as e-docs. These documents are files that the user has created after they received the computer and logged in. From a litigation perspective, these files are important because they can associate a person with a file.
For instance, in a court of law it can be difficult to prove that a person sat down at a computer and wrote a threatening email. However, if that computer user accessed a personal bank account, Facebook, and used online chat during the same session, then it could be much easier to identify the user. Let’s focus on a few on the more important and interesting e-docs.
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Last Updated ( Wednesday, 14 September 2011 )
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Part 1of this article on forensic accounting expert witnesses covered why a legal team would want or need to use an expert witness and Part 2 reviewed the specific focuses a witness may bring to the table, and the differences between testifying and non-testifying experts. Our series concludes with a look at the many skills and special qualities a forensic accounting expert witness may possess that will aid in reaching a successful outcome to a case. Traits of a Great Expert Witness An expert witness brought in for their accounting and financial background should have strong technical, analytical, and communications skills. At ease reviewing standard accounting tools and documents, pointing out accounting irregularities, knowing laws relating both to their field and to the laws regarding fraud – these are all requisites. Communication in all its forms – written, oral, visual – gives the legal team options in being able to reach understanding to all involved. One expects a “numbers-cruncher” to be savvy with financial data, but beyond technical skills, an attorney also needs an expert who testifies well and is credible and likable to juries. This would be true of an expert witness in virtually any field, because once we are in the courtroom we are dealing with both facts and humans. Bringing Those Traits to the Case Prior to Trial In our example, the financial / accounting expert needs to work well with the lawyer(s) from the start, in great part to shape the case and decide how to pursue it. The attorney needs to understand the expert in order to build the case, so this rapport and ease of communication must be evident pre-trial. The analytical savvy is most important here, as the expert witness may early on be able to identify signs of fraud, dig up evidence for the case, find information during the interview process that could change the direction of the case, and basically help build the case. Examination and reporting skills are used here first; the written form of communication will be paramount as presented as evidence, especially as anything available to opposing counsel may be subject to severe scrutiny. Gaining the Understanding of the Judge and Jury Bringing our financial / accounting expert witness example to the trial stage, the stereotype of the boring or difficult to understand accountant needs to be smashed for all in the courtroom, especially for the jury and judge. Instead the selected expert should be able to explain in a clear and straightforward manner what the accounting and financial issues are, while balancing a respect for the intelligence of the jury members while instilling confidence that said expert witness clearly knows what is appropriate in a given situation regarding the case. The smartest accountant in the world may still alienate the jury, or remain unable to break down the concepts in a palatable manner. In addition to the spoken word, any prepared visuals could be shown to the jury and have an impact – at this stage the expert witness could be called upon to verbally explain the visuals, so their understanding crossing over forms of communication needs to be smooth and clear. An explanation should clarify, not make the jury members more confused. Impatience or arrogance will likely harm the credibility of the testimony. Additionally, a testifying witness is subject to cross-examination, so being able to maintain one’s cool and keep focused on the facts at hand is of paramount importance. There is certainly more to selecting a forensic accounting expert witness, but this overview is intended to provide some food for thought for the attorney who is preparing for a fraud-related case. We would be interested in hearing from attorneys about any difficulties they have encountered when searching for a forensic accounting expert witness, or during an actual trial (for them or for opposing counsel). |
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In the first part of this series, reasons to consider a forensic accounting expert witness and the Federal Rules of Evidence for expert witnesses were reviewed. An expert witness is a witness who, by virtue of education, training, skill, or experience, is believed to have knowledge in a particular subject beyond that of the average person, sufficient so that others may officially (and legally) rely upon the witness’s specialized (scientific, technical or other) opinion about an evidence or fact issue within the scope of their expertise. For this second part, the background specifics of potential witnesses are reviewed, and the differences between a testifying and non-testifying expert are explained.
Which Accounting Specialist Suits the Needs of the Case?
How forensic accounting expert witnesses are selected for a legal team will vary by the focus of the case. Some specialists within the accounting field cast of characters may include a standard accountant, a CPA, a fraud examiner, an auditor and an accounting IT specialist, among others. One of these specialists may be needed to: speak as to what the standard job duties and responsibilities of an accounting position are; provide an understanding of Generally Accepted Accounting Principles (GAAP) or other definitions in the field; give documented past case evidence of accounting fraud; explain how an inside or outside auditor may initially discover potential fraud; or give examples and explanations of how accounting software and other IT tools may be used to commit fraud.
To Testify or Not Testify: That is the Question
Once the specialty of the accountant is decided upon, the legal team needs to think about how they will use their expert witness(es). The two primary types of experts are non-testifying and testifying. The differences are critical in how the expert is utilized and how the court does or does not provide protection. A non-testifying expert’s opinions are considered work product, typically protected by attorney/client privilege, and used from start to finish of a case. The preparation of a fraud case may rely in great part on this expert, who may:
- Provide counsel with an evaluation of the case .
- Assist in planning strategy.
- Search, obtain, examine and evaluate evidence.
- Interview witnesses and potential witnesses.
- Explain developments in the case as the original theory may become altered by discovered evidence.
- Assist in pre-trial motions, pleadings and responses.
- Attend trials and assist counsel in unexpected changes during trial, thereby being able to assist in cross examination of the opposing parties witnesses and alert counsel to inconsistent testimony.
- Take notes and conduct investigations during the trial.
In contrast, a Testifying expert is not protected by attorney/client privilege and the expert’s identity and most if not all documents used to prepare the testimony may become discoverable. Opposing counsel would be aware of proposed testifying witnesses and would likely counter with their own witnesses with opposing expert opinions. These “testifying” experts must satisfy the requirements of Federal Rule of Evidence 702 (first referred to in Part 1), where an expert is a person with “scientific, technical, or other specialized knowledge” who can “assist the trier of fact,” – usually a jury. A qualified expert may testify “in the form of an opinion or otherwise” if: “(1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.” So choose wisely, counsel.
Depending upon whether the expert witness is needed to assist behind the scenes of a trial, or to appear center-stage as a testifying expert, there are many skills and special qualities that will aid in reaching a successful outcome to a case. The final part of this series will look at what these are, and how forensic accounting expert witnesses use these in the courtroom during a trial. |
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Last Updated ( Monday, 10 January 2011 )
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During legal proceedings, there often arise analyses of situations, background, or other detailed information regarding a case that the average person would simply not know much about. When someone is shot in a suspicious manner and there were no witnesses, a ballistics expert may be called in as an expert witness to rule out some scenarios based on how the bullet entered the body, or help confirm the weapon used by identifying specific bullet size or material it was made of or coated with. In the case of commercial fraud, a forensic accounting expert could be just the witness needed to explain the complexities of how computer programs, accounting variances, etc. could have been manipulated to allow fraud to pass through a company’s system. What Every Expert Witness Needs to Know The Federal Rules of Evidence cover both criminal and civil US Court proceedings, and were designed and are amended to ensure fairness in judicial administration, reduce or eliminate unjustifiable delay and expense, and promote the growth and development of the law of evidence so that truth may be ascertained and proceedings justly resolved. As these rules apply to expert witnesses in any field, who may serve to primarily “promote the growth and development of the law of evidence,” the potential forensic accounting expert witness should keep the following in mind the following requirements: - Opinions must be disclosed in an oral or written report.
- The basis for all opinions must be identified.
- The report must include a list of information that was considered in forming the opinions and exhibits used as supporting documentation for the opinions.
- Qualifications including articles written for publication and history of expert witness testimony must be listed.
In many trials, including those involving fraud, there may be forensic accounting expert witnesses brought by both sides of the case. Representing the actual “innocent” party in the case is not a guarantee that the expert witness for the opposition cannot hurt your case. The next part of this series will delve further into the skills and background a forensic accounting expert witness may bring to the table. |
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Last Updated ( Sunday, 06 February 2011 )
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Recently, a CIO in Tacoma, Washington was convicted of the embezzlement of more than $500,000 from the company that employed him. How did he do it? He acquired computer equipment for the company and then resold it over the internet, retaining the proceeds for himself. He and a friend also set up a sham company to generate bogus invoices for computer supplies and services, which the company paid.
Such schemes by information technology employees are not uncommon. Why is such a scheme so easy for a CIO? There are usually two reasons that explain the ease with which they perpetrate such a scheme. First, they are in a position of trust. Second, the company relies on their expertise and their honesty because their talents are so unique that many of the other company employees do not really understand what they do and are forced to take their word for it when they say that the company has a need for goods or services in the technology realm.
While most technology people in an organization are probably talented hard working employees that deserve the trust that they receive, what can the company do to protect itself from the unscrupulous ones? At the very least, a company must establish basic internal controls to provide some assurance that a technology scheme can be deterred or detected and stopped. Is anyone outside of the IT department involved when a person provides consulting services? Does someone other than the IT department take delivery of purchased goods, and is the existence of purchased equipment verified by a periodic physical inventory? Does the company limit approved vendors to reputable service and equipment providers?
When a company puts so much reliance on its technology staff, basic controls are a must.
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Last Updated ( Saturday, 18 December 2010 )
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Last year, our Forensic Accounting Blog advised our readers about gift card fraud and how to avoid it (see http://www.bbforensic.com/blog/-tis-the-season-for-gift-card-fraud.html), and we still think it is useful advice. But there are several areas where individuals, businesses, regulatory agencies and the justice system need assistance in fighting fraud throughout the year, and especially during a holiday season in a slowly recovering economy. If a Forensic Accountant were to offer some gifts to these various parties, it may resemble something like the following, “The 12 Days of Fraudmas.” We’ll just start on Day 12 to avoid repetition.
The 12 Days of Fraudmas
On the twelfth day of Fraudmas, my Forensic Accountant gave to me:
12 Certified Fraud Examiners
11 Arbitrations
10 Assets Tracking
9 Damage Calculations
8 Trial Preparations
7 Fraud investigations
6 Accounting Discrepancies Revealed
5 Expert Witnesses
4 Business Appraisals
3 Processes & Procedures
2 Sarbanes-Oxley Forensic Audits
And the Discovery of a Kickback Scheme!
Although the list in this format is tongue-in-cheek, the fact is that forensic accounting continues to be a growing field, because the types, extent and number of fraudulent activities have also been growing. To address these increasingly sophisticated schemes and the technologies that white-collar criminals utilize to perpetrate them, forensic accountants have created several areas of specialization, and are on a continuous education track to better serve the legal system, regulators, businesses and individuals. Keeping the employees of a for-profit business employed because accounting processes and procedures have been examined to prevent accounting fraud, allowing the local non-profit to keep its funds meant for the needy out of the hands of an unscrupulous bookkeeper, preventing the grandchild from getting a gift card with funds stolen on cyberspace, helping a legal team bring justice to a fraud victim – these are gifts that can continue giving peace of mind through the holidays and beyond.
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Last Updated ( Wednesday, 15 December 2010 )
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Several of our blog posts in 2010 focused on the business end of forensic accounting, including some of the many things to look for to identify potentially fraudulent activity, or the areas ripe for this to occur. To this end, a business may be tipped off that a current or former employee may have committed fraud, and the forensic accountant may be brought in to follow the trail of evidence, discover or confirm where specifically fraud may have occurred, assess damages, and recommend process improvements to prevent recurrence. In fact, some businesses opt to be more proactive, and request audits to be performed to test the strength of existing processes and procedures, look for possible gaps in security, and find smaller accounting discrepancies that could be investigated to prevent a full-fledged fraud crisis.
From the Boardroom to the Courtroom
We are now shining a light on the litigation end of forensic accounting. Just as an attorney may seek a ballistics expert in a case concerning a shooting, a forensic accountant may be who is needed when a fraud case goes to trial. These forensic accountants who are retained for the legal team are often referred to as litigation support specialists, and they provide a laundry list of services for a variety of cases, for both the prosecution and the defense.
Getting By With a Little Help From My Forensic Accountant
There are many ways a forensic accountant, serving as a litigation support specialist, can assist the attorney(s) for a case. Before a trial begins or is even scheduled, the forensic accountant may provide their initial opinion on the known facts of the case. He or she could suggest possible motives, and assist in developing questions during the discovery phase. As a case progresses, the forensic accountant may provide ammunition to dispute claims from the opposing side, serve as an expert witness in the courtroom, and review the report of the opposition’s expert witness(es).
Not all fraudulent activity becomes a case; not every case goes to trial. But for many types of cases with a trial pending, a forensic accountant could be a valuable part of the legal team. A partial list of such situations includes:
- - Fraud, both in for-profit and non-profit businesses, and other white-collar crimes
- - Accurate business valuations, for cases revolving around the true value of a company
- - Divorce proceedings and other marital disputes
- - Insurance claims arbitration
- - Corporation, partnership and shareholder disputes
- - Personal injury and accident claims
Both the types of cases and services the litigation support specialist may provide are wide-ranging in this growing field. We will continue to explore how to best leverage this expertise in the coming weeks and months, encouraging your law firms’ inquiries to better address your most pressing issues.
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Last Updated ( Wednesday, 15 December 2010 )
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The Controller of XYZ Company
realized that the internal control system covering cash disbursements was extremely
strong. He wanted to steal but realized that theft would not go undetected in
the cash disbursements system. The Controller also realized that internal
controls covering cash receipts were weak. How did the controller steal? He
deliberately overpaid an invoice with a given vendor each month for many months
until a substantial overpayment balance existed. He then asked for a refund
check to be issued and also asked that the refund check be sent directly to his
attention. Several years ago, XYZ Company had a dormant bank account that the President
of the Company asked the Controller to close. He never
closed the account and managed to add his name as signatory to the account. He
then deposited the refund check in the account and later transferred the funds
to his personal account. How did he conceal the overpayment in cash
disbursements? That is a story for another day…
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In March, 2009, Bernie Madoff pleaded guilty to 11 federal crimes. He admitted that he had been operating a massive Ponzi scheme since the early 1990’s. The scheme was estimated to defraud investors of somewhere between $18 and $45 billion dollars. The investment operation that Bernie was overseeing may never have been legitimate.
There are certain lessons that can be learned about the Madoff case. These include:
• Returns that seemed too good to be true
• Lack of transparency
• Know the CPA firm doing the audit
• Exclusive nature of the club
• Promise of market beating returns
• Eggs and tennis balls
• Trust but verify
In future blogs I will explain each of the lessons learned from the organization relates to fraud and what action can be taken to prevent the fraud from occurring.
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Last Updated ( Monday, 12 July 2010 )
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Investment Income Disappears if No One Accounts for It
Most entities do an excellent job of accounting for their investments. If an investment disappeared from an investment advisor’s monthly statement, the entity would quickly discover the error. If the entity did not get credit for the scheduled interest or dividend payment on the investment would that payment be missed? Probably not.
A CPA firm was auditing a pension fund. The pension fund had numerous investments, including a $5 million dollar corporate bond. It was at a time when interest rates were high and the coupon rate on the bond was 9%. The pension fund should have been receiving $225,000 semi-annually in interest on that bond. The CPA discovered that one of the $225,000 had not been received in the past year. Further investigation revealed that a brokerage firm was “holding” the payment. Why? The answer to that question was never resolved. Without the CPA’s discovery, would the payment have been received? Probably not.
Someone within the entity should ensure that all investment income has been properly received and accounted for.
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Last Updated ( Thursday, 01 July 2010 )
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