Chapter 3 Flashcards
What obligations or rights do employees have in fraud investigations?
- Individuals have an obligation to cooperate w/ employers or be subject to dismissal
- Federal and state law protect emplyees who report improper acts of their employers
Rights during Employees Interview
- If nonpublic entity conducting interview, an employee has no right to have a lawyer present and no due process of the law
- Rights altered via employement contracts, and various nondiscrimination statutes
Common Law Protections w/ Regard to Interview
- Minimization of Invasion of empoyee’s privacy
- Limitation on content of employee duties and respo
- Limitation on public disclosure of employee’s private facts
- Limitation on intentional inflication of emotional distress
- Limitations on defamation
- Duty to deal fairly and in good faith
- No false imprisonment
Rules about Confessions
To be valid, they must be deemed voluntary and small deceptions are permitted
-Can’t be coerced, promises by interviewer of leniency can nullify a confession
Rules about Searches
Public employers not required to obtain a search warrant to conduct workplace seraches for investigations of work place misconduct
When is a Workplace Search Reasonable?
Likely to reveal evidence of work misconduct & necessary to further investigate
Workplace Search Limitations
Exclusive Control: Limited to the property the company owns/controls - gen property employee has no reasonable expectation of privacy within
Public Employers duties when Discharging a Suspected Wrongdoer
Governed by stricter standard, employer rights depend on the jurisdiction of operation
Private Employers duties when Discharging a Suspected Wrongdoer
- Allowed bc employment as will
- Document a good cause: conduct against written policy, conduct unsafe for ops, punishment fits crime, evidence supported
- Actions well documented
- Employer can still be sued in civil court
What is Attorney-Client Privilege? What does it not protect?
Right to not disclose confidential communication relating to professional relationship - client can compel non disclosure
* Applies to communications intended to be confidential
* Does not permit attorney to conceal physical evidence and does not apply to future acts of crime
What is Attorney Work-Product Privilege?
Protects all materials prepared by an attorney in anticipation of litigations
* Materials that would disclose attorney’s theory of the case
* Any written materials in prep of case
* Must be prepared in anticipation of litigation
How do companies maintain attorney client privileges when investigating fraud?
Audit committee gets their external legal counsel to hire a fraud examiner instead of directly hiring
What othe privileges exist and what do they protect?
health, relationship, misc
Physician-Patient Privilege: confidential when obtaining treatment or diagnosis - privilege is waived in litigation
Marital Priveleges: spousal immunity - protect from testifying against own spouse, Spusal defendent- protection from adverse testimony, covers statements during marriage
Miscellaneous: Confidential communications made to clergy, gov protected from disclosure of senstive info disclosure, trade secrets for business
No accountant-client privileges
Daubert’s Standard: Test of Admissibility of Expert Testimony
1.Whether theory or technique can be and has been tested
2.Whether subject to peer review and publication
3. Its known or potential error rate
4. Existence & Maintenance of standards controlling its op
5. Whether it has attracted widespready acceptance within a relevant scientific community
What is Probable Cause Needed for?
- To make an arres
- To conduct a search
- To obtain a warrant
- For grand juries
What are the 3 classifications on the Culpability Scale?
1. Witness: A person not suspected of the crime
**2. Subject: **may have unethical behavior & potentially involved but not involved enough to be judged criminally
3. Target: Believed to stand >50% probability of being criminally charged
What are the two main types of evidence?
Real Evidence: Speaks for itself and is authenticated
Demonstrative Evidence: Purpose is to educate, summarize, or amplify real evidence
- tells a story , must not create prejudice
- heart of forensic accounting
5 Considerations for Documentary Evidence
1. Documents must not be forged
2. OG documents preferred
3. Document may not be hearsay or objectionable
4. Documents must be authenticated
5. Document must be reliable
Best Evidence Rules
Allows copies to be presented at trial under certain circumstances
What is chain of custody and why is it necessary?
Evidence
Individuals who had posession of physicial evidence and what they did with it, ensures integrity of evidence
- Not that important for civil disputes bc documents transferred among parties during discovery
What is Testimonial evidence and relevance of hearsay?
Person testifies what they saw, to be valid must testify based on his or her own experience
Hearsay: a statement made other than those made during legal proceedings - not admissible - must hear from the person who made the statement
Steps in Criminal Justice Syste
- Sufficient evidence to bring case to trial
- Indictment stage: Defendent is officially charged
- Arraignment hearing: Defendent is informed of crime and charges and advise of right
* D asked to enter plea: Guilty, Not Guilty, NOLO Contenderence
* Pursued by gov on behalf society
What cases go to the Civil Justice System?
Purpose: To recover losses and possibly reap punitive damages, right a wrong
* Torts, breach of contract, negligence, misrepresentations
Where are Civil cases handled?
Most in state court in jurisdiction of the plaintiff or defendent
- Can go to a federal court for larger cases that are multijuridictional or involving > $75k
Beginning Process of Civil Litigation
1. Must begin with a complaint: If fraud must be specific to fraud mirsrep, the victime, and how misreps were false
2. Defendent answers to complaint: Denies liability, & adds counter claim
3. Discovery is entered: Interrogatories, requests to produce documents, depositions, requests for admission
How do Negotiated Settlements tend to occur instead of trial?
1. Out of Court Settlements: Both sides come to settlement position and attorney negotiate
2. Mediation: Indep 3rd pty w/ no authority to decided case, helps both sides, mutually agreeable resolution
3. Arbitration: Indep 3rd pty acts as judge & jury, authority to determine case outcome, Binding or non binding verdict
Civil Trial if Negotiations Fail
- Pre trial motions follow
- Take months for civil action to be heard
- Jury of 6 ppl
- If opposing attorneys agree, unanimous verdict not req
- Requires preponderance of evidence, rather than beyond a reasonable doubt
- Post judgement discover
Role of an Audit and Requirement of Auditing Standards
Audit is performed to ensure that financial statements are fairly represented and free from material misstatement
Auditing standards require audit be completed w/ due professional care
According to Auditing Standards, Fraud can arise from which two sources
- Misappropriation of assets that rises to the level of materiality
- Material financial reporting fraud
What is professional skepticism?
Attitude that includes a questioning mind and critical assessment of audit evidence
- Consider the possibility of misstatement due to fraud
- Dissatisfied with less-than-persuasive evidence
- Trust, but verify
SAS 99 8 Step approach
- At outset of audit engagement undertake staff discussion concerining risk of fraud
- Gathering info to identify fraud risk
- Auditors attempt to identify risk that may result in fraud
- Auditor Assesses fraud risk after consid programs and int controls to prevent FS fraud
- Auditor develops specific responses to fraud risk
- Consider audit evidence & req auditors to continuosly assess fraud risk throughout the audit
- Auditor must communicate his findings
- Auditor ensures each step well documented
What info should Auditors Document?
- Staff discussion
- Info used to identify Fraud risks
- Fraud risk identified
- Assessed risk after consid int controls
- Results of assement
- Evaluation of audit evidence
- Communication rquirements
What is required from CEOs and CFOs of public companies in filing after SOX?
CEO & CFO must presonally certify annual & quarterly SEC filings - taking responsibility for FS
What are the two types of officer certifications?
- Criminal Certification: Periodic filing must be signed to certify the report fully complies w/ SEC periodic reporting reqs –> imposes criminal penalties
- Civil Certifications: Has more strict acknowledgements
Civil Certification of Sec 302 for CEOs and CFOs
- Personally reviewed the report
- Based on knowlegdge, does not contain any material misstatement that would financially mislead
- Financial info in report fairly present in all material aspects, the fin cond, results of ops and CF of comp
- They are responsible for designing , maintaining, and evaluating comp int controls
- Disclosed to auditors tha the audit committee any material weaknesses in controls and any fraud
- Indicated in report whether signif changes to int controls
Sox requires an internal control report that states what?
- Mngmts responsibility for establishing & maintaining an adequate IT structure and procedures for fin rep
- Contains an assessment of the effectiveness of IT control stuct, and proceds for fin rep
- Independent auditor to issue attestation report on mngmt assessment
What are sox reqs for Audit Committee?
- Audit Comittee shall be directly rep for appointing, compensating, and overseeing work of auditors
- Each member of audit com must be a member of BoD and independent
- Disclose whether at least 1 audit comm member is a financial expert
- Establish hotline for complaings and anonymous employee tups
Other SOX reqs?
- Requires public acc firms to rotate lead audit partner every 5 yrs
- Unlawful for PA fim to audit comp if - within the PY - clients CEO, CFO, CAO, or controller worked for accounting firm and participated in comps audit
- Auditors must report directly to audit committee
- List of prohib services on behalf of audit clients
What services can a PA firm not do on behalf of audit client?
- Book keeping, Fin info systems design and implementation
- Appraisal services and Actuarial services
- Internal audit services
- Management functions
- Broker or dealer, IB services
- Legal services and expert services
What enhanced financial disclosure reqs do firms have?
- Report off balance sheet transactions
- Direct SEC to Issue rules on pro forma financial statements
- Illegal for comps to make loans or extend credit to exec officer
- Disclosure req for stock transaction by direct and officers that own mor ethan 10% of publicly trade company sotck
- Disclose if code of ethics adopted for senior fin officers
- SEC make regular and systematic review of disclosures in pd reports
- Comp report material changes in fin cond
- Protections for whishtle blowers and civil liability for retaliation
- enhance penalties for white collar crime
- increases jail time for mail & wire fraud 5 –> 20yr max
- Illegal to destroy evident to obstruct investigation –> 20 yrs and 250k fine
- If req to prepare accounting restatement due to material non compliance, bonuses must be disgorged
