Tag-Team Approach to Tackling Fraud

Introduction

A phone call comes in from a panicked client, the owner of a small, successful business. Your client was reviewing some financial records – a task usually handled by a long–time and trusted employee – and the client noticed a series of unusual transactions. There is a pattern of withdrawals in which the amounts get larger and more frequent over time and are all made to a handful vendors the owner does not recognize. After flipping through the financial reports from the past five years, the owner realizes more than $3 million is unaccounted for. 

This scenario is too common for many business owners. Often, their CPAs are called in to help unravel what has become apparent: a fraud has been committed. Often, that means engaging an attorney and forensic accountant to conduct an investigation. 

The following steps outline how forensic accountants and attorneys with experience in white-collar matters can work together to ensure a client’s rights are vindicated, legal issues are properly addressed, and accounting safeguards are implemented to protect the client’s finances going forward. 

Engage the Experts 

As soon as it is presumed that fraud may have occurred, engage an attorney. Retaining an attorney for the investigation will allow communication to and from the attorney to be covered by the attorney-client privilege. Discussions between the client, forensic accountant, and attorney are therefore protected from discovery should the investigation lead to legal action on behalf of the client, the government, or any third parties. 

Attorneys can help the client understand the big picture and evaluate potential legal pitfalls as an investigation moves forward. Attorneys are also more likely to have relationships with law enforcement should a criminal referral ultimately be necessary. Knowing how to facilitate conversations with law enforcement or government agencies when warranted – and knowing when to recommend against engaging those entities if not in the client’s best interest – is an important component of the attorney’s role. 

Understand the Client’s Goals

Before beginning an investigation into potential fraud, determine the client’s goals. Typically, they prioritize recovery of the lost funds and will want to keep the matter confidential. Some may want to avoid involving law enforcement, while others may be more interested in referring the matter to authorities. Assessing the client’s objectives early, and tailoring an investigation plan accordingly, can help ensure the scope of the investigation addresses the client’s needs. 

Create an Investigation Plan

Working together to plan the investigation is a key next step. The investigative work plan will be customized to the facts and circumstances of each case. It will consider data collection, data analytics, email review, general ledger account, focus areas, document review, interviews, and reporting. Information technology (IT) professionals with relevant expertise preserving and collecting electronically stored information in a forensically sound manner may be needed. In addition, the investigative work plan will include which employees are to be interviewed and in what order. 

Attorneys and forensic accountants should have a game plan for how interviews will be conducted. Attorneys often have experience interviewing individuals suspected of misconduct and have the skills necessary to elicit useful information from those witnesses – even when an interview may not be in the employee’s best interest. It is also important to structure interviews in a way that maximizes the likelihood of obtaining useful information. For these reasons, attorneys will often take the lead, and forensic accountants will ask follow-up questions that require technical financial and accounting expertise to help gather important information related to the scheme. The forensic accountants can help gather information related to the company’s internal controls and identify other accounting and financial employees to interview who may have knowledge of the suspicious activity being investigated. 

CPAs who are members of the AICPA and who engage in investigative matters are subject to the standards outlined in the AICPA’s Statement on Standards for Forensic Services No. 1. The general standards of the profession that apply to all services performed by a member, including investigatory services, are as follows: 

• Undertake only those professional services that the member or member’s firm can reasonably expect to be completed with professional competence. 
• Exercise due professional care in the performance of professional services. 
• Adequately plan and supervise the performance of professional services. 
• Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed. 

Communicate Early and Often 

The most effective investigations are those where the attorney, forensic accountant, and client’s key stakeholders communicate frequently. It is important for the attorney and forensic accountant to work with the client to gain a better understanding of the business model, systems, personnel, and other information relevant to the investigation. The attorney and forensic accountant may come from different firms, but successful investigations often feel like they are conducted by a single team. This may involve collaborating on identifying topics and/or transactions to address during interviews, sharing interview notes, or holding regular calls to discuss the status of the investigation. Because of the attorney’s role in the investigation, these communications are privileged and should facilitate an open dialogue between the attorney, forensic accountant, and client. 

Prevent Fraud Before It Occurs 

While a joint investigation conducted by attorneys and forensic accountants is a best practice in response to suspected fraud, CPAs can help their clients early on by recommending some commonsense safeguards to mitigate the risk of theft: 

• Encourage clients to perform regular reviews of their financial statements – Too often, business owners delegate this responsibility to other employees. Clients should be encouraged to take ownership of their fi nances and personally perform regular oversight. Disorganized processes for recordkeeping create opportunities for fraudsters. CPAs can assist their clients in maintaining organized books and records. 
• Empower clients to trust their instincts – Even if a business owner has reason to believe fraud has occurred, they may be inclined to doubt themselves because the employee they suspect is a seemingly loyal staff member. Sadly, employees who know their supervisors’ habits – such as how often they review the company’s financial records and how sophisticated they are about financial matters – are frequently responsible for creating an environment in which corporate theft goes undetected.
• Establish checks and balances – Ensure that clients have procedural safeguards in place so that employees – even those with access to the company’s fi nances – cannot withdraw funds without a proper review and approval process. CPAs can assist clients in developing a robust internal controls environment as well as the hiring of competent professionals for its implementation. 

Acknowledgements

We would like to thank our colleague L. Erik Ringoen, and Zachary R. Epstein and Richard J. Zack, both of the Troutman Pepper law firm, for providing insight and expertise that greatly assisted this research.

L. Erik Ringoen, CPA, ABV, CFF,  is a Senior Vice President in J.S. Held’s Economic Damages and Valuations practice. He joined J.S. Held in January of 2024 as part of J.S. Held's acquisition of Forensic Resolutions, Inc. He has more than 30 years of experience assisting clients on matters including financial investigations, litigation and dispute consulting, financial auditing, tax, and economic damages. Erik is a licensed certified public accountant in Pennsylvania and Delaware and is certified in financial forensics and accredited in business valuation by the American Institute of Certified Public Accountants. He has led multi-disciplined teams performing fraud and financial investigations, due diligence, Foreign Corrupt Practices Act (FCPA) investigations, bankruptcy, and claims management services, domestically and internationally. 

Erik can be reached at [email protected] or +1 856 433 6059.

Zachary R. Epstein is an Associate in the White Collar & Government Investigations practice of Troutman Pepper. He focuses his practice on corporate and individual clients facing investigations by the U.S. Department of Justice, internal investigations, and providing clients with compliance and regulatory guidance. Zach also maintains an active practice representing corporate clients accused of False Claims Act violations. 

Zachary can be reached at [email protected] or +1 215 981 4030.

Richard J. Zack is a Partner in the White Collar & Government Investigations practice of Troutman Pepper. A former federal prosecutor, Richard has extensive experience in representing businesses, individuals, and particularly financial services firms, before federal and state prosecutors and regulators. He regularly advises businesses regarding the prevention of corruption and compliance with anti-bribery laws. Richard also is a seasoned trial attorney who has tried more than 35 civil and criminal cases to verdict in jurisdictions around the U.S. He regularly provides advice regarding dealing with money transmission licensure and related issues, as well as government sanctions against foreign countries, in addition to compliance with regulations of the Office of Foreign Asset Control, (OFAC), and the Financial Crimes Enforcement Network (FinCEN). He also leads the firm’s Sanctions + Trade Controls practice and regularly handles matters across the globe, often involving multiple jurisdictions. In that capacity, he routinely represents clients before OFAC, DOJ, the FBI, the Department of Commerce, and other government agencies. 

Richard can be reached at [email protected] or +1 215 981 4726.