Financial Investigation and Forensic Accounting: Consultant Expert - Assignment Example

Exam 06 November 2009 Q1. – Answer: Consultant experts are hired for purposes of acting as an adviser, mediator, referee and arbitrator, member of a professional tribunal or as expert in an expert determination case. Independent experts are engaged by the court to express an opinion based on the expert’s specialized training or previous work experiences or broad exposure to certain industries. Their opinions are valued for their objectivity and therefore more credible in matters like whether certain standards were breached or calculating the amount of damages that can be awarded that is reasonable. A further distinction is that consultant experts are usually insiders or employees of an organization who had spent several years with that organization and had acquired the requisite expertise. Independent experts are people brought in to for their objective disinterested third-party opinion and are not in any way related or connected to the organization. A consultant expert will be to defend a position but an independent expert’s duty is to give an opinion. The impact is that a forensic accountant must clearly define in what capacity he or she is giving expert opinion – whether as a consultant expert or as an independent expert. This will give the court and the jurors an idea as to how an expert’s opinion could be influenced or swayed by the connections he has with the organization in question and to what degree they can rely on his opinion based on the perceived level of objectivity. An independent expert is put to a higher standard in terms of mindset (his opinion is objective, has integrity and not influenced by extraneous factors) and also in substance by avoiding facts and circumstances that puts his objectivity into question or doubt. A) A consultant expert can still give evidence in court but only on matters in which he is familiar with. Secondly, he can do so for one side only, either for the defense or for the offence and not as an independent court expert witness. He therefore takes only one side and gives evidence or opinion based on his limited experience such as being an employee of the firm and therefore has an insiders knowledge of only that firm. B) Weaknesses in the expert opinion of the opposing counsel can be brought to the court’s attention by pointing errors in methodology, insights and conclusions. He can even question the expertise of the opposing counsel’s expert by casting doubts on the professional integrity of the opposing expert’s opinion. Q2. - Answer Brad should limit himself to being a lay witness and not risk being an expert witness despite his background knowledge of the matter in court. He had been called to testify as a lay witness and therefore only answer questions as related in that capacity. Although he had been hired as an expert witness on behalf of the firm, this engagement is internal only, meaning it is between the firm and the client and not between the court and the client. He should answer the questions that were directly related to the issue in court and not go beyond that. As far as the court is concerned, his presence at the interview could be irrelevant to the case at bar. Brad is well advised to always bear in mind that he might trip himself up if he discloses something he might know which is not relevant to the case anyway and get caught by the opposing counsel. He must remember that the opposing counsel had accepted the adversarial nature of court litigation as the best and fairest method of reaching a just and equitable conclusion in court cases (Kadane 2008:12) and therefore will pounce on any slight error he might commit. Q3. – Answer The utmost professional issue for a forensic accountant to consider is that all the data and information he had gathered are strictly confidential and must avoid accidental disclosure to other third parties during the course of the investigation. He must also ensure that all and any information obtained during the investigation are intended only for that specific purpose in the performance of the professional work that was engaged (APES 215, Sec. 17, p. 6). For legal issues, any information obtained from informants, witnesses, suspects and potential suspects should be above board which means these are obtained under proper circumstances, such as properly informing the interviewees of their rights and the possible ramifications of the statements they will give during the course of the investigation. This will ensure any piece of evidence or testimony so obtained will be admissible in court as valid evidence or testimony. The danger is improperly obtained evidence could be thrown out by the court and could weaken or lose the case. The forensic accountant should not promise anything to the confidential informant (discloser or whistleblower) that he could not honor later on such as total secrecy of the informants identity (Manning 2005: 403). This is because a court may order the disclosure of the informants identity at some later date during the course of the hearings or by request of the opposing counsel and by that time, the forensic investigator will be compromised as he had earlier promised his informant total secrecy. The forensic accountant can be subjected to severe penalties or even imprisonment if he refuses to divulge the identity of his informant as ordered by the court. So as not to be caught in a no-win situation, the investigator must never pledge total secrecy but only a limited commitment in that aspect. Furthermore, a forensic accountant must identify and distinguish certain possible conflicts of interest, such as when a big accounting firm also engages in business consulting services in addition to the traditional professional auditing services because a moral hazard equivalent exists. Most consultants or business partners are not as rigidly trained as ethical auditors and therefore may not be aware ethical standards had been breached (Mattessich 2007: 204). Q4. – Answer A) An important first step to take is to determine how long the records should be kept. In some firms, this could be five years after which they are either archived or disposed of. For some industries like banking, there are statutory regulations regarding how long certain bank documents should be kept precisely in anticipation of possible legal requirements, such as verifying the amount of deposits in a certain deceased depositor’s accounts before these are subjected to escheat proceedings or in settlement of inheritance tax liabilities. Most banking regulations issued by central banks require records to be kept on hand for at least ten years and then warehoused for another five years before these documents are finally disposed of. The next step will be to develop a classification system that will categorize documents in terms of their importance to any future litigation or anticipated legal requirement. This will in effect prioritize documents in degree of importance, relevance and bearing on any case. Other criteria could be developed later to refine this system of keeping records as the need arises or as experience dictates. The crucial aspect of this classification system is to separate the important documents from the unimportant documents so that the firm will not be unduly overwhelmed with mountains of useless documents. This will keep the need for space to a bare minimum and keep warehousing costs down at the same time by leasing a smaller space. B) The best way to ensure integrity of all documents is to assign a single person who is to be held responsible for all the firm’s documents. To do this, it is highly recommended that a central custodian be hired who is experienced in keeping track of documents in a systematic manner. There will be only one department for this to be headed by the said central custodian and one ideal person with background on information management is a school librarian. This is only a suggestion on my part but a librarian is used to handling large amounts of printed information and moreover, has the ability to retrieve this information and all documents in a timely fashion whenever the documents are urgently needed, for example during litigation. C) A computerized database should be installed that will contain all relevant details of documents gathered by the firm during the course of the years. This database will ensure fast retrieval by easily locating the exact place where a document has been warehoused, like on what shelf or in what particular box. To protect against any accidental loss such as due to fires or floods, documents need to be digitized (scanned) and stored in secure data servers with a backup in disk form. For good measure, the documents can also be stored on microfilms but this might entail additional costs to the firm. A cheaper way is to photocopy all documents and keep these duplicate copies in a separate location or warehouse. The criteria I would use in developing a record-keeping system will entail classifying the documents by degree of importance (such as assigning numbers to documents), arrange the documents chronologically according to each individual firm and then arranging all the documents of each firm alphabetically by topic. For example, Company A will have all its documents in one box and all the documents in that box have been arranged by topic such as balance sheets, expenses or income statements. Each of these will be arranged chronologically starting from the latest to the oldest by date. The importance of certain documents could be color-coded such as red for those most likely will be used in future litigation such as income statements of particular years or periods which had been restated due to some erroneous entry. To ensure compliance by all staff members, each document obtained during the course of a forensic investigation should be signed somewhere by the staff who obtained it (signature at the corner, bottom or back page) and then prepare transmittal letter to the central custodian. Each staff will use the recommended numbering or classification system I had outlined earlier in the transmittal letter to ensure each document is numbered consecutively or sequentially. All document transmittals will have to be acknowledged by the custodian. Personnel who will leave or resign will need security clearance before given their severance pay and then an exit interview will be conducted of all cases he or she had handled and reviewed one last time. Finally, it is important in any record-keeping system to devise a way to ensure that the names of informants are kept secured and confidential at all times. Along this line, access to files should be restricted to a few authorized persons only and the details of the access be kept in a logbook such as the name of the person who accessed the file, date, time and purpose. A final note on a good records system is the disposition of the case whether it was dropped or pursued to its logical conclusion in the courts and what was the outcome of the court action. To be included here are details like acquittal or conviction, the prison sentences, the amount of fines imposed by the court, forfeitures, seizures, restitutions and judgments (in civil cases). Q5. - Answer The possibility of getting protection under Part 9.4AAA of the Corporations Act 2001 is nebulous at best. Guardian Angel is not directly contracted by the firm for a supply of either services or goods by the company under investigation. What Guardian Angel is that he is the manager of a subsidiary of Townsville Ltd. which was the company that was contracted and not the subsidiary of which he is the manager. This means the protection he is seeking could be challenged in court based on the flimsy ties he has with the company being investigated. If it can be proven that he is not directly contracted by the company in question, then protection under Sec. 1.a.iii or Sec. 1.a.iv will not be given or accorded to him by his disclosure. The two sections mentioned here apply only to persons who have a direct contract for the supply of either services, goods or both to another company or to an employee of those persons. As the manager of the subsidiary, he is therefore not directly contracted by the firm itself. Another compelling reason why protection may not be afforded to him is that he had not made his identity known prior to making the disclosure or intimating that he is going to make a disclosure. It is required that his identity be made known first prior to the disclosure; in this case, he is making or providing some information anonymously. Furthermore, it cannot be ascertained if Guardian Angel is making the disclosure in good faith or not. For all we know, he might have some ulterior motives, like a personal desire for revenge against the director of the company being investigated. The information he is offering could perhaps be very tempting but in the end, he will not be afforded protection as a whistleblower. His claim to protection could be very doubtful or tenuous at best. Some whistleblowers are motivated by financial considerations which is getting the reward or incentive (Secunda 2008: 490). Q6. - Answer A) The answer could depend on the judges own competence regarding accounting and financial matters. Some judges are sufficiently knowledgeable about accounting procedures and can easily understand how manipulation occurs and how it could affect the outcome of a balance sheet or the profits in an income statement. For the jury members, some of them may not be proficient with how accounting works and the procedures used by accountants when trying to manipulate certain figures on financial statements. A question-and-answer format may therefore not be sufficient for some of these jury members to fully comprehend the effects of certain manipulations and how they affect the eventual outcome of certain figures on the financial statement. In fact, some of them may not even understand what the manipulation is all about and for what purpose. Secondly, the very adversarial nature of courtroom proceedings could complicate their understanding because not a few lawyers can intentionally confuse or muddle the issue by asking questions in an often very roundabout way. Some brilliant lawyers can actually achieve the opposite effect instead by obfuscating certain issues about financial statements to intentionally mislead the jury or lead them down a certain way of thinking, such as implying such practices are not really or totally illegal but accepted industry practice or allowed by some obscure accounting rule. Using a narrative could be extremely helpful to explain how one item on the balance sheet could be manipulated to produce a certain desired result that will enhance the earnings of a company to impress investors and other interested users of financial statements such as stockholders or even the board of directors to give the impression of a sterling performance. There are two ways to manipulate and these are by improperly recording the values of certain assets or liabilities and the second way to do it is by removing liabilities from the balance sheet entirely. This second option was what happened with Enron and Worldcom, two famous business collapses in business history. They did not record certain liabilities incurred by their firms, which in effect, overstated or bloated the assets by several billions (Advani 2006: 31). Admittedly, there is a fine line between fraud and manipulative accounting practices because a company can legally remove certain liabilities from its balance sheet if it is being done properly according to strict accounting rules. This is done mainly through a process that is called off-balance sheet transaction through the use of SPE or special-purpose entities. SPE is actually any subsidiary created primarily to hold debt and other liabilities so that the parent company will have a clean balance sheet that is enticing and appealing to bankers, creditors, potential investors, credit analysts and credit rating agencies. A narrative explaining these SPEs will be helpful for the jurors to understand why the Enron, Worldcom, Cendant, Lucent, etc. accounting scandals happened in the first place. It is a fairly simple accounting trick that can be sufficiently explained through a narrative in a manner understandable even by laymen jurors. SPEs are essentially nothing but shell firms which are controlled by the parent company and formed mostly either as a limited liability company or as a limited partnership. Most off-balance sheet liabilities remained unknown to their stockholders because they are in fine print that appear in the footnotes to financial statements that most people do not even have the time or bother enough to read. Majority of these liabilities are also contingent in nature hence they do not attract closer scrutiny than those balance sheet items which are very visible in the reports (Geisst 1995: 83). References Advani, R., 2006, The Wall Street MBA: Your Personal Crash Course in Corporate Finance, Columbus, Ohio, USA: Mc-Graw Hill Professional. APES 215, December 2008, Accounting Professional and Ethical Standards Board. Geisst, C. R., 1995, Exchange Rate Chaos: Twenty-five Years of Finance and Consumer Democracy, Florence, Kentucky, USA: Routledge. Kadane, J. B., 2008, Statistics in the Law: A Practitioners Guide, Cases and Materials, New York, New York, USA: Oxford University Press US. Manning, G. A., 2005, Financial Investigation and Forensic Accounting, Boca Raton, Florida, USA: CRC Press. Mattessich, R., 2007, Two Hundred Years of Accounting Research, Florence, Kentucky, USA: Routledge. Secunda, 2008, Retaliation and Whistleblowers: Proceedings of the New York University 60th Annual Conference Labor, Dordrecht, the Netherlands, Kluwer Law International. Read More