The CPA as Sleuth: Working the Fraud Beat
Beek, Craig M., Rexroad, W. Max, Leinicke, Linda M., Ostrosky, Joyce A., Journal of Accountancy
When dealing with swindled clients and their lawyers, it pays to know the rules.
CPAs can trade in their spreadsheets for trenchcoats and fedoras. They'll need to if a client ever requests help with a business fraud investigation. In fact, often it's a CPA who finds the "smoking gun"--the forged check or the purchase orders for nonexistent goods. Because most frauds usually have a financial component, CPAs can be of great help in solving them.
But those uncovering fraud need to take care to avoid costly missteps. Accountants who serve as consultants to their clients, or even those who work as controllers or CFOs, need to be aware of the key legal issues, so they can work effectively with a company's lawyers. Their reward? CPAs who know their way around fraud investigations greatly increase the likelihood of financial restitution to clients, and thus provide a value-added service.
FIRST, THE LAWYER
Once a company has asked a CPA to look into a business fraud, the first step he or she needs to take is to advise the client to hire an attorney, specifically to establish privilege of information. (Of course, CPAs who suspect fraud while performing an audit are bound by additional rules and regulations. See "The Auditor and Fraud," JofA, Apr. 97, page 32, and "The CPA as FraudBuster" JofA, May 98, page 69.) Basically, privilege of information means attorney/client privilege will cover any information the CPA discovers. (Also see "A Matter of Privilege," page 21.) The CPA's engagement letter must specify that he or she will work on the case at the direction of the client's attorney. The letter also should clearly state the legal purpose of the accounting services to be provided; failure to do this could result in the loss of privilege.
Additionally, upon learning more about just how complex the fraud case is, the CPA may want to advise the client to hire a professional investigator with a law enforcement background. While CPAs bring a knowledge of the client's financial transactions and systems to the investigative effort, the professional investigator also brings expertise in proper investigative procedures, interviewing techniques and civil and criminal laws.
PLAN OF ATTACK
Early in the investigation, the attorney and the CPA need to agree on an appropriate legal strategy. For example, if they're contemplating a civil suit, who--what individuals or corporate entity--would the suit be filed against and what charges would be brought? Likewise, if they want to pursue criminal charges, what jurisdiction has venue and what statutes have been violated?
The attorney understands the legal elements the client needs to win a civil suit or criminal case. Thus, at a very early stage, the CPA and the attorney must determine what type of evidence they need. For instance, if they want to file a federal mail fraud case, the CPA must gather evidence to meet the necessary elements of proof under that statute. In such cases, establishing that a document traveled through "the mail" is essential. Specifically, the CPA must establish who prepared the document, who mailed it, that it went through the mail, that it was fraudulent and that the prepared knew it was fraudulent. CPAs should be aware that any private or commercial interstate carrier, such as UPS and Federal Express, may qualify under the federal mail fraud statute. The envelope is critical because it bears the carrier's name and the mailing date. Also, it may be necessary to dust the fraudulent document for fingerprints.
Select the jurisdiction. The attorney and CPA need to carefully consider the many factors that can come into play when selecting the case's jurisdiction. For example, has a federal or state law been violated? One problem: With state cases witnesses normally cannot be subpoenaed across state lines; in federal cases they can. The dollar amount of the fraud is important, as well. In the Chicago area, a $10,000 fraud case may barely interest local prosecutors, but prosecutors in a rural jurisdiction may relish the opportunity. …