Considering the Fraud Triangle in Compliance Risk Assessments

In the Spring of 2012 I published a five-part series of on-line articles through Corporate Compliance Insights under the heading of “Incorporating the Fraud Triangle into Compliance Risk Assessments.”  While those articles were publicly available, I understand they received a fair degree of attention and were quoted and/or cited by numerous persons doing white-papers or articles where this information was relevant.  A friend in the compliance profession recently told me that this series of articles was no longer available publicly/online and asked if I might consider updating/revising that work into one complete article and putting it back out into the public domain – here it is.

International Association of Independent Corporate Monitors

It is with great pleasure that I may announce the launching of the website for International Association of Independent Corporate Monitors (IAICM).   A not-for-profit Membership Organization established in 2015 and headquartered in Virginia, in the greater Washington DC area, IAICM is an organization of professionals dedicated to educating the public on the topic of Independent Corporate Monitors (“Monitors”) and advancing the use and quality of service of those individuals serving or seeking to serve as Monitors.

The purposes of IAICM are to promote and improve the professional practice of Corporate Monitoring, to be a recognized thought-leader in the field of Corporate Monitoring, to make available information on Corporate Monitoring to the public, and to provide high quality, relevant information, resources and training to professionals and others practicing in the area of Corporate Monitoring.

IAICM’s Code of Professional Conduct is an invaluable resource for standards and best practices for those serving or seeking to serve as a Monitor.  Indirectly, the Code also suggests best practices for Reporting Agencies and Host Organizations considering or using Monitors.  All Members of IAICM must certify that they will abide by and uphold the IAICM Code, providing both a guide and a performance measuring stick for Host Organizations, Reporting Agencies, and the public-at-large.

The mysteriousness of Corporate Monitoring is enhanced by the difficulty in obtaining information on the topic.  A person studying Corporate Monitoring not only must collect information from a wide variety of sources, but may also have great difficulty identifying reliable and relevant sources.

IAICM’s Public Resource Center helps address this by making available to the public the only repository of information on Corporate Monitoring.  From key government policy documents to actual Agreements requiring Monitors, the Public Resource Center makes them easy to search and find.  Interested in identifying all known Monitorships by a particular agency, underlying misconduct, or during a particular time frame?  Our search engine helps visitors not only identify these in our repository, but presents, in one easy-to-read screen, the relevant information and supporting documents for each matter in our repository.

All IAICM Members have qualifications that suggest they possess the breadth and depth of relevant skills, knowledge, and experience, together with reputation of character, to effectively serve as an Independent Corporate Monitor consistent with IAICM’s Code of Professional Conduct.  To facilitate the needs of those considering candidates for a Monitorship, finding a speaker on the topic, seeking guidance, or simply doing research, all IAICM Members are publicly listed on this site, along with each Member’s relevant contact and professional information.

American Bar Association Adopts Standards for Corporate Monitors

It is with great pleasure that I can announce that last month (August 2015), the ABA House of Delegates approved Standards for Corporate Monitors.  These “black letter” standards will be published with commentary in ABA Standards for Monitors, 4th ed., ©2015 American Bar Association.

This work originally began with an Ad-Hoc Task Force on Corporate Monitor Standards, that was assembled by the Criminal Justice Section (CJS) of the American Bar Association (ABA) in 2010.  In late 2013, after over two years of study on the topic, the Ad-Hoc Task Force was disbanded and a formal Standards Committee designated to develop the Standards.  I had the privilege of serving on both the Ad-Hoc Task Force and the Standards Committee, which delivered our product to the CJS in August of 2014.  After two readings before the CJS Council, these Standards were passed by the CJS Council in April 2015 and presented to and approved by the ABA House of Delegates in August 2015.

Though they presently lack commentary, they are the only official set of Standards currently applicable to lawyers who serve in the role of an Independent Corporate Monitor.  The Standards define a Monitor broadly, as a person or entity:

  • Engaged by a Host Organization pursuant to a Court Order or an Agreement and Engagement Letter;
  • Who is independent of both the Host Organization and the Government;
  • Whose selection is approved by the Government or ordered by a court; and
  • Whose responsibilities and authority are established by Court Order or by the terms of the Agreement and the Engagement Letter.

Recognizing that Monitors are used and/or contemplated beyond the DOJ Monitors whom many have come to be familiar with, we drafted these Standards broadly (see the definition within the Standards of “Government”).  For instance, the World Bank and Suspension & Debarment Offices have routinely used Monitors for years and we wanted to ensure that our Standards incorporated best practices sufficiently broad so as to include the many Monitorships that occur outside of DOJ.  In addition to the issues that have brought public attention/criticism to this practice, such as the selection process for Monitors, we devised and deliberated on a host of other issues affecting the practice and, where it was appropriate, devised Standards to address them.

One of the first steps taken during the Ad-Hoc Task Force’s work, was to open communication channels with a variety of government law and regulatory enforcement agencies, as well as other oversight organizations, who were using or considering the use of Monitors.  The purpose was to ensure that the concerns of such agencies and oversight organizations were considered as we developed these Standards.  The Standards Committee also included representatives of the DOJ and State AG Offices to further ensure that relevant concerns and issues would be considered.

I am humbled to have been included among such a distinguished group of professionals who comprised our Committee and very proud of the Standards that we created, which I believe to be robust, comprehensive, and thorough.  Given how eager the various agencies and oversight organizations were to share their concerns with us, I am certain these Standards will have a significant impact on future Monitorships.

I must caution readers that the “black letter” Standards can, at points, be difficult to fully appreciate absent commentary, which may not be available for quite some time.  If anyone has a question about what our Committee was thinking associated with any of the “black letter” Standards, please email me at JHanson@ArtificeForensic or call me at (202) 590-7702 and I would be happy to provide my personal opinions/thoughts (I speak only for myself and not the Committee, ABA, or CJS).

It should also be noted that these Standards only technically apply to attorneys.  Many Monitors are not attorneys (myself included).  It is hoped that they will nonetheless be broadly construed as “best practices” for anyone serving as a Monitor.  Towards those ends, the International Association of Independent Corporate Monitors (IAICM) was formed in 2015.  The IAICM is a 501(C)6 not-for-profit Membership organization serving those who practice in this field and is presently developing a Code of Professional Conduct that will establish Standards for its members.  The IAICM’s Code, though consistent with the ABA Standards, may cover additional areas and/or delve more deeply into some areas than the Standards.  The IAICM Code, together with the Standards, should be more than sufficient to establish best practices for Monitors, regardless of their professional designations/experiences/certifications/licenses.

The IAICM, though legally formed and anticipated by many government and oversight organizations that use Monitors, has not yet made its website publicly accessible – but be on the lookout for it soon!

DOJ Hiring a Compliance Expert

In November of 2014, I published a paper entitled “Improving Corporate Settlement Agreements” on JDSupra.  A few media people and industry experts picked it up and made comments on it – all the ones that I read were positive (thanks guys!).

In that paper, one of the issues that I raised was the lack of compliance and ethics program expertise among government agencies in the field of compliance and ethics programs.  For example, while DOJ prosecutors are exceptionally knowledgeable, trained, and experienced in white collar crime matters, I know of very few who can say the same about corporate compliance and ethics programs.  Yet it is exactly the robustness and effectiveness of an organization’s compliance and ethics program that dictates if or how the organization will emerge – prosecution, suspension/debarment, settlement, etc….

I would love to say that some DOJ people read that paper and took it to heart, but that’s probably doubtful.  Nonetheless, I was thrilled when I saw the announcement that the DOJ FCPA Unit was bringing on a compliance and ethics expert to do exactly what I was saying needs to be done in that regard (I had other criticisms in my paper as well that I would love to see addressed).

It has been reported that in July 2015, the Chief of the Fraud Section at DOJ confirmed that this position/role was being filled.  Here’s a link to an article on it.  The article stated: “This new compliance counsel position constitutes a significant change for DOJ, which in the past has relied on its cadre of white collar criminal prosecutors to evaluate compliance programs. The compliance counsel will help DOJ answer the recurring issue of whether an FCPA violation occurred because the company lacked an effective anti-corruption compliance program or because a rogue employee circumvented an otherwise strong program. Should DOJ decide to prosecute the company, the compliance counsel’s evaluation of the company’s compliance program will inform the final resolution with the company, including whether the company will be required to retain an independent compliance monitor.”

Kudos to the DOJ FCPA Unit for recognizing this need and doing something about it.  I and many others in the field will be anxiously awaiting to see it in action.  I also hope we will see this in other DOJ units (e.g. Anti-Trust) – this isn’t just an FCPA issue!

Also, I have seen some non-DOJ units picking up on this need.  For example, key decision makers in the Department of Interior’s Office of Inspector General and Suspension & Debarment Offices have become Certified Compliance and Ethics Professionals through the Society of Corporate Compliance and Ethics.  I have heard that the same is happening in at least one other Agency’s OIG and S&D offices.

There’s a long road ahead, but it seems people are at least seeing that a road exists.

Thomson Reuters Article on Deferred Prosecution Agreements and Monitors

I was interviewed earlier this year for this third part in a series of articles by Thomson Reuters on DPAs.  If you would like to read it, click here or you can download a pdf copy that Thomson Reuters provided to me: Thomson Reuters Article on DPAs Part 3 – 13Apr2015

Recent Series of Articles on DPAs in Morning Consult

I was recently interviewed by Morning Consult for a series of articles regarding deferred and non-prosecution agreements and wanted to share those here for anyone interested.  They are linked below (hopefully these links remain “live” for some time).

Part 1 – “More Banks Avoiding Trials in Era of Deferred Prosecution Agreements”
Part 2 – “Ripple Effects of Charging Banks Give Prosecutors Pause”
Part 3 – “Prosecutors in the Compliance Forest”

Messaging Risks – When IS the Right Time?

There was an awful lot of outrage about the Nationwide commercial drawing attention to home accidents affecting children during the Superbowl this year. It didn’t seem that the outrage was so much directed at the message as much as it was the timing – it was done during a time when people were trying to be entertained, not horrified.

I have four young daughters, so I get that anything that makes me think about their mortality (much less my delinquency or negligence contributing to something that harms them) causes a certain amount of discomfort. A lot of discomfort. But I was with my family watching the game when this commercial aired and I have to say, though it certainly put a temporary damper on our festive spirits, it also caused a moment of reflection. I had forgotten about securing a television set in our home that could fall if one of my kids climbed on it (such a scene was in the commercial).

So I am supposed to be angered that I suffered a brief interruption of my precious and fleeting television entertainment-induced happiness to be reminded that I needed to do something the consequences of which could cause a constant interruption of my happiness for the rest of my life?

When exactly is the time for delivering messages that draw our attention to risks? The argument that this commercial was poorly timed because it interfered with our entertainment is, in my mind, absurd. Television is predominately for entertainment. Therefore, there could be no appropriate time for a commercial like this. Perhaps there are some shows that cater to the melancholic, where “depressing” commercials might resonate better?

The idea behind heightening awareness of risks is to draw the largest amount of attention possible to those risks. In the case of this message, using a Superbowl commercial was sure to reach a heck of a lot more people than some educational/informational show that airs in the middle of the night watched by a couple hundred people.

The public uproar stimulated questions relevant to my professional compliance and consulting work – Are we living in a culture that has no appreciation for hearing about and taking actions to mitigate risks? A culture that actually takes offense when we do?

In business, we need to appreciate, understand and act on risks. Yet compliance and ethics professionals face similar challenges with Boards, Executives, Senior Management and even line employees and/or agents of an organization. Though there is an expectation that these roles know about and deal with risks, it’s not something they particularly care to hear about, particularly in the higher ranks, where it is of great importance and impact. They prefer to discuss financial results, stock performance, mergers & acquisitions, etc. – you know, the REAL and IMPORTANT stuff.

I face a similar challenge when trying to develop proactive compliance and ethics consulting work. Organizations simply don’t want to hear about faint, non-imminent, and “philosophical” dangers that could sink or significantly impair their organization.  Much less do they want to spend a little money to properly deal with it.

Using the Nationwide commercial as an analogy, one might think the risk of an unsecured weapon in the home is minimal because one’s children have been well educated on the risks and, due to their obedience, would not play with the weapon. Perhaps true. But what about the kids who come over to play?

The rationalizations in business are really no different.  I can’t tell you how often I heard victims of a fraud (both when I was an FBI Agent and now as a consultant) tell me something like “But Sally was such a nice and religious lady whose been with us for 15 years – she COULDN’T have stolen from us!  You must have made a mistake.” 

To all the compliance and ethics professionals out there working hard to do the right thing, whose risk messages too often fall on deaf ears, I raise my coffee cup to you. You ever need an ear, my number ain’t hard to find.

Mom’s Lessons

If you were wondering whether or not I had dropped off the face of the earth for the last six weeks, you guessed right.  October of 2014 was a month that, along with September 2001, I would love to utterly erase from my memory.

My mother, who had been so courageously battling cancer for the last five years, lost the battle on October 17, 2014.  Despite a contractor catching my house on fire and a kidney stone suddenly showing up, I was able to get to Bristol, VA and be with my mom before her passing.  I remained in Bristol to support my dad and help with all of the funeral arrangements.  After the funeral, I packed their house up and moved dad up to Fredericksburg, VA with my family.

As I reflected on my mom’s life and lessons, there were a few in particular that I find relevant to the work I do today, particularly in the area of compliance and ethics.  My mom was raised in a second generation Italian family in extreme poverty in New Orleans.  I recall hearing stories of how she slept together with her sister and brother in a small room where they had to take turns staying awake to keep the rats off of them.

Despite the obstacles, mom appreciated the value of hard & honest work, education, and selfless service.  Working various jobs, she put herself through nursing school and began what became a forty-one year long career as a nurse.   Mom’s nursing accomplishments were of no comparison with Nobel Prize winners and will never be remembered outside of the small circles of those whom they affected, but they are nonetheless as profound and meaningful, both to those affected and to those who might see in her life and work the impact and role of a positive high ethical tone and commitment to always doing what was right and in the best interests of her “customers” – her patients.

My mom always stressed the importance of honesty and showed me the benefits of it every time I owned up to something I did wrong as a child.  As long as I was honest about my mistakes, the punishment was appropriately reduced.  Thank God – or I would still be in “time-out” some forty years later!   That is a lesson I have carried all my life and am trying hard to pass on to my children, as well as those with whom I work.

Positive ethical tone within an organization begins with honesty.  And ends with dishonesty.

An effective compliance & ethics program will include on-going education and training.  While my mom worked hard to put herself through school to become a nurse, she never stopped her education there.  Over the course of her career as a nurse, she took on many new challenges/specialties, some of which she did pioneering work in.  The lesson is that education never stops.  We never stop learning and we always have room to learn more, regardless of where we are now in our lives and careers.  Compliance training IS on-going education.  It is not checking a box.

Being a nurse is among the most altruistic jobs one might have.  Caring for those who, in many instances, can’t care for themselves.  Helping them with the most humbling and/or simple tasks – many tasks that even family might shy away from.  Not losing sight of their human dignity and treating them with respect, even as they lost respect for themselves.  My mom was always a champion of the patients, even when being so was not always in the financial best interests of the hospital or kindly looked upon by her superiors.  As best as I know, mom never had to deal with any “corporate” fraud issues as a nurse/employee, but she certainly had her share of ethical issues.  Sometimes described as a “firecracker” when it came to advocating for her patients, I am sure mom upset her share of hospital superiors of lesser ethical constitution over the years.

It’s a great lesson for us.  By placing greater value on what we do and doing things right (rather than on where our stock price is), we find a more fulfilling and long-lasting success.  When someone acts unethically or engages in some sort of misconduct, we have to speak up – until somebody listens.

I recall with both joy and sadness a little boy named Stephen, who was a cancer patient under my mom’s care in a pediatric intensive care unit.  I was living far away at the time, working as an FBI Agent.  In caring for Stephen, my mom had learned that he had dreamed of one day becoming an FBI Agent and so she asked that I might visit him when I next came to town – in fact, she made certain to remind me of it MANY times as I planned my next visit!

When I got to town, my mom made sure that the hospital was my very first stop.  She also insisted that I wear a suit – my official FBI Agent “uniform.”   After Stephen’s chemo treatment(s) that day, she rolled him in a wheelchair to a private little waiting area where she had asked me to wait.  Stephen was probably about ten years old and his cancer was terminal – in its latest stage.   It was obvious that this child had suffered much and long, and was still in pain.  He didn’t have a single hair on his head and maybe weighed forty pounds in all his clothes.  Yet when my mom introduced me as her FBI Agent son, he lit up like a Christmas tree.  My mom and Stephen’s mom left briefly, so that we could have our “top secret debriefing.”  I let him hold by badge and credentials, let him see my handcuffs and the gun holstered on my hip, and answered every question he could muster the strength to ask – and many that I knew he would ask if he could.

When our time was over, I gave Stephen an official FBI t-shirt, a junior FBI Agent badge, some FBI pens, and other little things that I can’t even remember – though they meant the world to him.  I learned a couple months later that Stephen had passed and that he had specifically requested that he be buried in that FBI t-shirt that I gave him.  To this day I can’t think about that without tearing up.

This is just one example of how my mom took the time to listen to her “customers” and to appropriately do more for them than what just her job required.   She got no honors, medals, promotions, mentions or bonuses for this – and that was fine by her.  The joy brought to Stephen was priceless.

I’ll miss you mom.  Thanks for all you did for me and for everyone you touched.  I hope I can pass on the lessons I learned from you to my children as well as you passed them on to me.  I also hope that I might follow your example(s) with the same humble obscurity as you sought and that I might touch just one tenth of the number of lives that you did.

Tell Stephen hello for me.

Litigation Support Roles of Forensic Accountants

When I was an FBI Agent, my job was enigmatic to most people.  Now, as a “forensic accountant,” I find my job is nearly just as mysterious – and misunderstood.  Maybe I should become a plumber!

Forensic accounting has evolved significantly over the last fifteen years and the litigation support roles of forensic accountants have increased and changed dramatically.  Nonetheless, I frequently find that many accountants and attorneys still pigeonhole forensic accountants under the classical role/definition, which is primarily associated with providing expert testimony about technical accounting issues in disputes.  While that is still a viable, common, and valuable role, many accountants may not be taking advantage of additional service opportunities and many attorneys may not fully appreciate all the ways and how much an experienced forensic accountant can serve and help them.

Before I share some of these forensic accounting roles, it is best to differentiate a “testifying expert” (i.e. “expert witness”) from a “consulting expert.”  A testifying expert, as the title implies, is generally used in the context of a legal dispute to prepare a formal report and provide expert testimony regarding a particular topic relevant to the dispute.  All of the work of a testifying expert is focused towards testimony, and therefore follows a prescribed set of rules and standards designed to ensure fairness, completeness, legal & procedural compliance, etc….

A “consulting expert” is not primarily associated with providing testimony (though sometimes the role converts to “testifying expert” during the process) and works only within a framework of broad and general rules and standards, much less defined and stringent than those applicable to testifying experts.  Instead of focusing on a narrow area for the purpose of testifying, the consulting expert assists counsel by providing expertise in various and relevant areas that enable counsel to better represent, serve, and advise its client(s).

In the field of forensic accounting, the consulting expert role has become commonplace, though still largely underutilized.  Some of the most effective attorneys have come to appreciate all the ways in which an experienced forensic accountant can assist them and routinely incorporate forensic accountants into all of their white-collar defense work (corporate and personal) and even in many civil litigation matters.

For some of these attorneys, forensic accountants have become their “secret weapon.”  In some respects, forensic accountants may be the “best kept secret” in the litigation support world.

In this post, I hope to let the secret out by sharing some of the litigation support roles that forensic accountants have come to play.  This may be helpful, not just to attorneys who rely on litigation support professionals but have not yet been exposed to the range and variety of ways that forensic accountants can support and help them, but also for those accountants contemplating a career in forensic accounting or current accountants looking to build or expand their litigation support practices and/or service offerings.

It’s easiest to start with the most obvious.  Most forensic accountants are also Certified Public Accountants (CPAs), who have significant training and experience with accounting principles, methodologies, procedures, standards, and rules.   In many litigation matters, particularly those where fraud is a concern, counsel must consider and understand the accounting of its client.  Clearly, in situations where there are allegations and/or concerns of financial statement or accounting fraud, such expertise has very significant and direct relevance.

Accounting is also highly and directly relevant in matters where any alleged underlying misconduct had an impact on the financial statements of an organization, such as is commonly seen in government contracting, securities fraud, money laundering, and anti-corruption matters, among others.  Accounting may also be important in a variety of related ways, from calculating disgorgement to determining loss under the United States Sentencing Guidelines.

In reality, accounting is important in any fraud matter because accounting is a record of ALL activities (which translate into numbers as “transactions”) of an organization. The organization’s accounting cannot help but be impacted by any inappropriate and/or illegal activities within or by the organization.  A good forensic accountant can help counsel understand and appreciate that impact and put it into the context of the relevant laws and regulations.

Internal Controls
Probably the next most obvious area in which forensic accountants can provide significant litigation support value relates to internal controls, particularly, though not necessarily limited to, those around accounting functions.

All organizations have internal controls, even if some smaller organizations aren’t particularly conscious of and/or appreciate it.  Very simplistically, from a purely classical accounting perspective, such internal controls are largely in place to help ensure accurate accounting.  However, in fulfilling that objective, internal controls have evolved into the primary means by which an organization attempts to prevent and/or detect fraud.

Internal controls do not come in “one size fits all.”  Aside from where particular internal controls are necessary under regulatory or other requirements, the level of and effectiveness of internal controls is largely dependent on a variety of factors, including, but not limited to, the organization’s size, resources, industry, accounting system(s), and risk(s).  In many respects, risk(s), plays a key and greatly underappreciated role.  Internal controls must be risk-based, not only to maximize its effectiveness, but also to do so at a cost that is reasonable and bearable to an organization.

There are two primary internal control assessments that a forensic accountant would ordinarily conduct: (1) design and (2) effectiveness.  The design assessment is meant to assess the design of the overall internal controls structure.  This takes into consideration not only any specific regulatory/industry requirements and “best practices” as to design and structure (i.e. personnel responsibilities, reporting, independence, etc.), but also incorporates the organization’s risks and other factors, as was noted above.

An effectiveness assessment is meant to determine how effective the organization’s internal controls are in practice and is much more time intensive than a design assessment.  An experienced forensic accountant will incorporate into each internal controls effectiveness assessment ways that the internal controls might be circumvented and perform tests to determine how effective the controls are in preventing it.

It should be noted that a very experienced forensic accountant can often determine possible ways that internal controls could be circumvented that those not deeply experienced in fraud matters, including many of those who commit and/or contemplate fraud, would not have imagined.  The best forensic accountants not only have significant experience to aid them in these assessments, but also are highly creative in devising means by which circumventions may occur so as to cover the full range of possibilities.  The forensic accountant can then, if necessary, “reverse engineer” the internal controls to better prevent circumvention or identify instances where circumventions occurred.

One interesting phenomenon of internal controls is the affect of “over control.”  Some organizations, in an abundance of fear and caution, place so many internal controls around some functions so as to make a person’s ability to perform that function greatly difficult and/or time consuming.  While well intended, my experience has found that such over control often leads to employee discontent, causing them, with no ill intent, to devise creative ways to “work-around” the controls in order to perform their job functions.   Not only does this cause a control failure in and of itself, but it also plants the seeds feeding the perception that controls are not that important, which can blossom into a serious and systematic ethical tone problem.  A good forensic accountant can identify over controls and provide guidance to an organization about how to find an appropriate balance.

In instances of alleged misconduct and/or fraud, internal controls, or the lack thereof, will have necessarily played some role.  Forensic accountants can help counsel understand how effective internal controls were and are in preventing and/or detecting fraud.  As is frequently the case, forensic accountants can also help counsel understand how internal controls may have been circumvented.  Very experienced forensic accountants also recognize and understand government expectations about internal controls and how they fit within the context of prosecutorial and/or regulatory resolutions and can assist counsel with demonstrating those instances where internal controls were strong and successful – where they worked.  Such positive demonstrations of effective internal controls can have a significant impact on government decisions.

Where internal controls were not well designed and/or effective, the expertise of a forensic accountant can be invaluable in providing counsel with the information needed to best advise and guide the organization about how to improve/strengthen those internal controls.  As counsel is keenly aware, robust and timely remedial measures can be a highly favorable factor when discussing and/or negotiating resolutions with the government.

Corporate Compliance and Ethics Programs
§8B2.1 of the United States Sentencing Guidelines (“Effective Compliance and Ethics Program”) is widely recognized as the foundation and measuring stick for corporate liability, both criminally and generally (i.e. suspension & debarment matters).  This is evidenced by various policies and procedures, as well as informal guidance, used and/or publicly communicated by various government agencies (i.e. United States Attorneys’ Manual, FAR, SEC Enforcement Manual & Seaboard Report, etc…).  Ultimately, the design and effectiveness of an organization’s corporate compliance and ethics program plays a central and key role in the reporting and resolution of all matters involving corporate fraud and/or misconduct.

One of the key elements of an effective compliance and ethics program under §8B2.1 is the inclusion of monitoring and auditing to detect criminal conduct (§8B2.1(b)(5)(A)).  Forensic accountants, as was previously noted regarding “internal controls,” are perfectly suited to this task.  Moreover, an experienced forensic accountant can place the organization’s efforts in monitoring and detecting criminal conduct into the context of §8B2.1(b)(5)(A) and the underlying alleged misconduct.

Some experienced forensic accountants, having recognized the importance and role of compliance and ethics programs in corporate internal investigations, have taken the time to become experts in this field, which is not a traditional “accounting” field.  They have joined organizations such as the Society of Corporate Compliance and Ethics (SCCE) and/or the Ethics and Compliance Officers Association (ECOA), which, as leaders in the industry of corporate compliance and ethics programs, provide these forensic accountants with access to publications, resource materials, training and networking opportunities that improve and/or hone the forensic accountants ability to better assist counsel in these key areas.

The SCCE offers a formal “certification” as a Certified Compliance and Ethics Professional, which is presently the preeminent credential for those in the compliance and ethics industry, requiring not only the passing of a thorough, formal, and proctored exam, but on-going continuing education of at least twenty (20) hours of professional education annually.  Forensic accountants looking to expand services in these areas should seriously look into credentials in this field (as many have done with valuations, etc.).

Similar to the previously described expert assistance that a forensic accountant can provide counsel on internal controls, forensic accountants who are also experts on corporate compliance and ethics programs provide significant assistance to counsel in assessing, understanding, and remediating overall corporate compliance and ethics programs.  Moreover, such a forensic accountant can help counsel understand and articulate the successes and failings of such programs in the context of all of §8B2.1, both in preventing & detecting misconduct and fraud generally, as well as its relevance to the specific underlying alleged misconduct.

As experienced counsel is well aware, this is a central consideration of the government in its considerations and negotiations regarding punishment and/or what it will require of the organization.

Government Mentality & Counsel Liability
Some of the best forensic accountants often come from the ranks of law enforcement.  This background enables such forensic accountants to plan and conduct their work not only with more credibility to the government, but with a greater grasp of the government’s concerns, investigative techniques/tools, and mentality.  Additionally, such experience enables such a forensic accountant to better avoid actions that, as an “agent” of counsel, might be adverse to counsel’s ethical obligations and standards of practice.

Where a forensic accountant does not have such law enforcement experience, they may gain a degree of relevant fraud understanding, training and knowledge through the Association of Certified Fraud Examiners (ACFE).  The ACFE is the oldest and most established and reputed organization serving this field, providing accountants and others interested in fraud examinations with resource materials, training, publications, and a peer network that better enables them to effectively assist counsel and avoid issues.  The ACFE also offers a credential, the Certified Fraud Examiner (CFE), that requires the passing of a test and on-going relevant continuing education requirements.

In those instances where counsel does not have prosecutorial experience, a forensic accountant’s law enforcement experience may be invaluable, affecting counsel’s actions and guidance to the organization significantly, as well as counsel’s negotiations with government agencies.  Such a forensic accountant’s experience may also enable him or her to help counsel avoid ethical and/or standards of practice pitfalls.

Where counsel has former prosecutorial experience, a forensic accountant’s law enforcement experience supplements counsel’s experience.  In the same way that, for example, an Assistant United States Attorney (AUSA) and Office of Inspector General Special Agent coordinate and work together on matters, such a forensic accountant works with an organization’s counsel to assure the best possible uncovering of relevant facts & evidence and determine and articulate the arguments/defenses/strategies most relevant and effective towards defending the organization and/or negotiating reasonable settlement terms.  The dynamic, trust, and roles that make an AUSA/Agent team formidable and effective inside the government transition to and work to the same affect for those who have left the government for the private sector.

A forensic accountant’s prior law enforcement experience can significantly assist counsel in, among other ways:

  • Understanding relevant law enforcement policies & procedures and identifying the government’s compliance (or lack thereof) with such policies & procedures;
  • Identifying and calculating the impact of United States Sentencing Guidelines considerations and enhancements;
  • Identifying likely and relevant government investigative techniques (i.e. cooperating witnesses, Title IIIs (“wiretaps”), informants, surveillance, trash covers, search warrants, etc…) consistent with the government’s likely prosecutorial strategies/arguments and history;
  • Negotiating more efficient and relevant subpoena responses and returns;
  • Identifying possible Brady, Jencks and/or Giglio material(s)/evidence;
  • Negotiating the return of records seized by the government;
  • Identifying experts in areas of relevance to counsel’s arguments and/or in anticipation of the government’s allegations;
  • Identifying likely key evidence to be offered by the government and its role and impact on the government’s prosecutorial/regulatory strategy;
  • Determining, in matters involving suspension and debarment, compliance and internal control measures relevant to a government contractor’s “present responsibility” obligations/requirements under the FAR;
  • Identifying relevant mitigating circumstances/evidence and;
  • Identifying relevant and key system weaknesses/failures and providing counsel and the organization guidance and assistance towards timely designing and implementing effective and reasonable remedial measures.

Though it is an intangible, counsel is also keenly aware of the importance of counsel’s credibility with the relevant government agencies with whom it interacts during the course of representing an organization in an internal investigation or self-disclosure of misconduct.  The more credible counsel is in the eyes of the government, the greater the likelihood for smooth exchanges of information, less operational disruption on the organization, and even a more favorable outcome for the organization.

Though there are many other factors that contribute to government credibility, most of which must be earned, counsel who once served in government enforcement roles (i.e. AUSAs) often have a “credibility advantage” at the outset of interactions with the government.   Though this is certainly not always the case, current government enforcement persons may tend to initially more trust former government enforcement persons than those with no such experience.

Those in government enforcement roles swear an oath to support and defend the constitution of the United States upon taking office and, during their government tenure, share a sense of purpose, duty, and justice that goes beyond mere job duties and responsibilities.  In the FBI, we liked to say that our profession was more akin to a “calling” than a “career,” more similar in nature to that of a Priest than an employee.

It has been my experience and I like to believe that most who take this oath take it not only seriously, but also carry its values beyond their government service.  Right or wrong and however much one may attempt to justify and/or condemn it, this is a reality – it is human nature.   The bonds formed through a shared oath tend to go beyond that of a contract, employment or otherwise.

This credibility is not only important for counsel, but for the forensic accountants and other litigation support professionals who work with and for counsel in internal corporate investigations.  Forensic accountants with prior law enforcement experience may have a higher degree of initial credibility with government enforcement personnel, particularly those in law enforcement, than those without such experience.  This intangible may play a significant role in bolstering the credibility of counsel with former government experience or even help create credibility for counsel who may not have yet earned it.

One example of this intangible benefit is when counsel meets with the government in the early stages of government interactions, whether through a voluntary disclosure or, in matters where the organization was not yet aware of the issue, at the request of the government.   In many instances, the organization’s counsel will not only meet with government attorneys, but also with government investigators.  The presence of a team of persons (counsel and forensic accountant) with credibility in the eyes of both the government attorneys and investigators can set a more positive and “friendly” tone that may carry throughout the entire matter.  This can save not only extensive “heartache” for the organization, but costs.

Whether it is a government investigation or an independent internal corporate investigation, the primary investigative tool is interviews.  As an FBI Agent, I would estimate that of the various tools and techniques available to me in investigating white-collar crime (i.e. “fraud”), interviews accounted for between eighty and ninety percent (80% – 90%) of my time in each matter.  Because of the reliance on interviews in any investigation, it is of utmost importance that interviews be conducted thoroughly, fairly, and competently.

Investigative interviewing is as much an art as it is a science.  The science can be learned through training, reading, and study, but the art is only learned through mentorship, combined with extensive and relevant application.  Forensic accountants with a law enforcement background will have had significant opportunities to learn and develop both the science and art of investigative interviewing.

For those forensic accountants without the benefit of law enforcement experience, interview training can be gained through a variety of reputable companies and/or organizations, including the ACFE.  Such training covers relevant areas such as, but not limited to, legal requirements/pitfalls, rapport building, witness calibration, detecting deception (i.e. cluster changes, non-verbal cues of anxiety, reading body language, etc), evidence taking, and report writing.  The best investigative interview training incorporates adult-based learning theories, including hypothetical situations, videos of actual interviews, and role-playing, so as to be most effective.  While such training is invaluable and a must for accountants seeking to move into forensic accounting, it remains very difficult for accountants in general to find sufficient opportunities to apply this training in practice outside of law enforcement – that is to develop and hone the “art” of investigative interviewing.

Many attorneys have developed highly effective investigative interviewing styles, but such effectiveness could be enhanced dramatically by utilizing in their internal investigations forensic accountants with significant training and experience in investigative interviewing.  Though there are attorneys who, over many years and a variety of practice experience, have become highly skilled interviewers, there are many more whose skills are still in development.

A deposition is a form of interview, but it is greatly different in purpose, strategy, and form than investigative interviews used in most internal corporate investigations.  Deposition skills may provide a good beginning foundation for investigative interviewing, but must be supplemented with additional and specific investigative interviewing training and significant non-deposition, investigative interviewing experience to be most effective in the context of internal investigations.

Because interviews play such a significant, central, and key role in government investigations, forensic accountants with prior law enforcement experience are highly likely to have mastered investigative interviewing.  FBI Agents, for example, go through exhaustive training on the science of interviewing, which they begin to see applied when paired with a mentor (“training Agent”) as they begin their career.   Throughout an FBI Agent’s career, they may conduct thousands of investigative interviews, through which they are afforded the opportunity to perfect and hone their styles and investigative interviewing effectiveness.  An Agent’s investigative interviewing training also continues throughout their career, with innumerable “in-services” and other opportunities to learn about the latest science and legal issues relevant to investigative interviews.

Accountants desiring to most effectively and successfully move into forensic accounting may consider devoting some part of their early career to law enforcement or try to obtain a part-time role whereby they gain some relevant law enforcement experience (i.e. reserve status with local law enforcement).  After leaving the FBI for the private sector, I have on many occasions experienced situations where, when working with highly experienced counsel or forensic accountants without law enforcement experience, the investigative interviewing experience and abilities that I gained as an FBI Agent far exceeded their expectations, resulting in more effective and efficient client service and outcomes.

In one such instance, on an internal corruption investigation, I was working with a forensic accountant with no law enforcement experience, but about twenty (20) years of private sector experience.  In my preparation for an interview, I found information that led me to believe that the person to be interviewed was highly likely to have key information.  As the other forensic accountant and I prepared for the interview, I shared with him my thoughts and devised an interview strategy that I believed might garner the cooperation of the interviewee, if he were not so inclined.

As the interview unfolded and the interviewee’s lack of cooperation and lying was apparent to me, I began to apply my strategy, which was utterly foreign (outside of reading about it) to my career forensic accounting partner.  The strategy worked and the information provided helped make our internal investigation continue more effectively – and efficiently.  Without this cooperation, we could have expended hundreds of more hours to otherwise independently develop the same information, if at all.

Counsel for an organization, particularly those without significant investigative interviewing training and experience, will not only directly benefit in the conduct of the investigation at hand by utilizing such an experienced interviewer, but will also receive mentoring in that process that may greatly benefit their own investigative interviewing style and effectiveness in future matters.

The role(s) of a forensic accountant have changed dramatically over the last fifteen years and it remains a rewarding and growing litigation support practice area.

From its origins as a testifying “expert” witness on technical accounting matters to consulting expert assisting counsel in a variety of key areas, many not accounting related, in internal corporate investigations, forensic accountants have become among the best kept secrets of the most effective and successful white collar defense attorneys.

Though many other forensic accountants have likely had the same experience, it is illustrative and relevant to summarize by sharing comments from an attorney with a relatively small regional law firm whom I worked with a couple of years ago on a civil litigation matter.  She had worked with local “forensic accountants” for most of her over twenty years as a lawyer, but never had she worked with one who had such an impact on so many “non-accounting” areas relevant to her case, including her entire case strategy.

Beginning during our first meeting, we shared ideas that immediately impacted her litigation strategy.  Over the course of the matter, from among nearly a hundred thousand un-indexed data files and accounting records, we pieced together compelling circumstantial evidence of a significant and deeply hidden fraud and put it into not only what she called a “bullet-proof” report, but into the context of her legal arguments and strategy.  She believed that our work effectively forced the opposing party to settle favorably for her client.  Simply put, she didn’t know forensic accountants could do that.
We can and we do.

Compliance Based Investing

Usually when one thinks about investing in compliance, it is in the context of an organization investing its efforts and resources into its Compliance and Ethics Program (hereafter “Program”).  But that’s not what I’m talking about.

For a long time now, some investors have considered religious, social and/or political stances or actions of organizations when making investment decisions.  It should come as no surprise that the next evolution of “responsible investing” may well be focused on an organization’s Program.

As an expert who routinely assesses such Programs, often due to potentially catastrophic compliance or ethics failings, I greatly appreciate the degree to which a robust and effective Program reduces corporate liability/risk.  In my mind, less risk of corporate liability/penalty (i.e. suspension/debarment, prosecution, de-listing, etc.) = less investment risk.

In 2012, I began incorporating Program design assessments into my personal investment considerations.  It is not without its challenges, as many publicly traded organizations do not make a great deal of information about their Program publicly available.  Moreover, even when a fair amount of information is publicly available, it may only be sufficient to assess the design of the Program and not whether or not the Program has been effectively implemented within an organization.

For those not familiar with such assessment, a “design” assessment is intended to determine the degree to which a Program’s design comports with compliance & ethics industry standards and the United States Sentencing Guidelines (Section §8B2.1 – “Effective Compliance and Ethics Program”).  An “implementation” assessment is intended to determine how effectively the Program is, among other things, overseen, managed, communicated and implemented within an organization.

When I am not able to find any information about a publicly traded organization’s Program on an organization’s website, I immediately disqualify that organization for any further investment consideration.  In my mind, such a glaring lack of regard for compliance and ethics speaks volumes as to ethical tone and risk management, among other things.

For those publicly traded companies that make available some information about its Program, the next hurdle relates to whether or not it is sufficient to allow even a rudimentary Program design assessment.  Where the amount of and type of information falls just short of that necessary to piece together some idea as to how well the Program is designed, I have found that an email to the investor relations contact and/or General Counsel may result in more information.  The response to such a request alone tells me much about the organization’s regard for a Program’s importance.

Where a company makes a great deal of information about its Program publicly available, regardless of the results of my design assessment, I at least take some comfort in seeing that the organization appears to take compliance and ethics seriously.  For a few of these companies where I felt the Programs fell a little short in terms of design, I nonetheless elected to invest in those organizations as they appeared to be on the right compliance and ethics path.

It will be interesting to see if this becomes a more commonly applied piece of analysis for other investors.  There is no data that I am aware of that has been compiled to reflect any correlation between stock price and compliance & ethics programs, but it sure would be interesting to see!

One thing is certain.  If your company has a good compliance program, let people know about it.