Transcript Slide 1

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12
The Fraud Report, Litigation,
and the Recovery Process
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Fraud Investigation Reports
 The
fraud report plus expert opinions and testimony are
then used as needed to support the resolution of any
issues that may relate to taxes, employment, regulatory
reporting, litigation (civil and criminal), and insurance
claims.
 Because the report is used for such important purposes, it
must be constructed under the assumption that it will be
challenged in court.
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Uses of Fraud Reports
 Taxes
A
fraud report may be useful in defending against a trust fund
recovery penalty.
 A fraud report may help estimate losses for tax deductibility.
 Employment
 Incomplete
investigations may face unemployment
compensation issues.
 Regulatory
Reporting of Fraud
 Litigation
 May
be helpful in litigation, but police might not investigate.
 Insurance
A
claims
business could run out of funds during the investigation.
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Elements of a Fraud Report
Address section - whom the report is addressed to.
 Background information - what triggered the investigation.
 Executive summary - briefly summarizes the investigation.
 Scope and objectives - what the investigation sought to
accomplish.
 Approach - the fraud investigation team, the procedures and
methods used, the tests performed, and the evidence collected.
 Findings - details regarding the methods used ,tests performed,
and the evidence collected, and a one- or two-sentence
summary of the findings of the investigation.
 Recommendations – e.g., suggestions to improve controls
 Exhibits - copies of documents, interview transcripts, a brief
résumé of the fraud investigator, and so on.

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The Investigator’s Liability in
Writing a Fraud Report
 There
is some risk that a suspect may sue the investigator.
 Avoid any inferences relating to a suspect’s guilt.
 State facts, and opinions on things other than guilt.
 Use the word “consistent” but very carefully.
 Ask your professional liability insurer to check the wording
in your report.
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Fraud Loss Recovery
 The
fraud loss recovery process includes the actions taken
to make the victim whole again to the extent possible.
 Fraud loss recovery options include the following:
 Accept

Sometimes this is the best business decision.
 Collect


the loss
insurance
Business policies can include coverage for proof of loss,
embezzlement losses, loss of income due to embezzlement, and
loss of valuable papers and records.
Proof of loss and cooperation are required. Payment can come
too late.
 Litigate

Fraudsters can be judgment proof, and the police may not help.
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Expert Witnesses
 Expert
witnesses are granted a privileged status in court
trials: They are permitted to render opinions or conclusions
based on facts admitted into evidence and other
information on which they choose to reasonably rely.
 The expert’s privilege is a major exception to the “personal
knowledge rule.” which normally limits witness testimony to
matters of personal knowledge.
 Being able to testify on anything on which they can
reasonably rely permits experts to base their conclusions
on their own experience, their technical knowledge, and
sometimes even hearsay evidence that would not directly
be admitted into evidence. This makes experts a powerful
force in the courtroom.
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Admission of Expert Testimony
into Evidence
 Before
experts can testify in trials as experts, they must first
demonstrate their expert qualifications.
 Education,
including degrees, specialized training, and
professional certifications.
 Experience in the subject area of testimony.
 Publication of books, proceedings, technical papers, etc.
 Special awards and recognition in the field of expertise.
 Memberships in professional organizations.
 Professional speaking engagements.
 Professional certifications are especially important.
 Before someone is permitted to testify as an expert, the
opposing side is permitted to examine and challenge that
expert’s background and credentials.
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Rule 702 (Testimony by Experts)
The federal court system is governed by Rule 702
(Testimony by Experts), which states the following:
 If
scientific, technical, or other specialized knowledge will
assist the trier of fact to understand the evidence or to
determine a fact in issue, a witness qualified as an expert by
knowledge, skill, experience, training, or education, may
testify thereto in the form of an opinion or otherwise, if
 the testimony is based upon sufficient facts or data,
 the testimony is the product of reliable principles and
methods, and
 the witness has applied the principles and methods reliably to
the facts of the case.
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The Daubert Test
 The
key phrase in Rule 702 rule is “reliable principles and
methods,” which sets the general standard for what is admitted
as expert testimony. In the Daubert case, the U.S. Supreme
Court interpreted this to mean that the following conditions hold:
 The technique or theory has been subjected to scientific
testing.
 The technique or theory has been published in peer-reviewed
scientific journals.
 The error rate for the technique is reasonably estimated or
known.
 The technique or theory is accepted in the relevant scientific
community.
 The
Supreme Court intended that these requirements be
applied as relevant on a case-by-case basis.
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The Frye Test
 The
Frye test preceded the Daubert test and is still
applicable in some state courts.
 The Frye test merely requires that the expert testimony be
based on principles and methods that are generally
accepted in the scientific community.
 The application of the Daubert and Frye tests varies from
one jurisdiction to the next. All federal courts and some
state courts use the Daubert test, but other state courts use
the Frye test, a combination of the Daubert and Frye tests,
or some other test. Furthermore, the way the particular test
is applied can vary from one court to the next, even within
the same jurisdiction.
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Daubert Versus Frye Test
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The Kumho Tire Co. v. Carmichael
Case
 Although
the Daubert conditions are defined in scientific
terms, the Supreme Court in the Kumho Tire Co. v.
Carmichael case ruled that the four Daubert conditions were
merely illustrative and applied to nonscientific expert
testimony as well.
 Although the high court did not give illustrative conditions for
nonscientific expert testimony, the general import of the
decision is that all types of expert testimony are subject to
Daubert-type testing.
 The two Supreme Court decisions suggest that the forensic
accounting expert witness must be prepared do more than
simply defend her methods based on their being generally
accepted in the academic and professional area of testimony.
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Pretrial Reports for Expert
Witnesses
 The
forensic accountant expert witnesses could be asked
to prepare written pretrial reports. The following are
relevant components of the report:
 The
scope of the report, including the matters covered.
 Any conclusions drawn by the forensic expert.
 The information, observations, and rationale used by the
forensic accountant to support any conclusions made in the
report.
 The report should not include any extra information or
comments. Extra information unnecessarily increases the
“target area” that can be used to attack the report.
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Depositions
 Expert
witnesses are generally subject to depositions.
 It is generally best for expert witnesses to testify in a
deposition or at trial only if ordered to do so by a court or a
subpoena.
 As a general rule, the expert forensic accountant should
bring to the deposition or trial only documents or files that
are specifically named in the subpoena or court order.
 In most jurisdictions, the two opposing sides must give
each other lists of anticipated witnesses.
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Expert Witness Preparation for
Testimony
 The
expert witness should review the credentials of any
opposing witnesses.
 An expert witness must be well prepared for testimony.
Mistakes or omissions can damage the expert’s credibility
in the negotiations or trial. That in turn can do major
damage to the client’s case and the forensic accountant’s
future as an expert witness.
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Trial Strategy and Expert Testimony
 As
mentioned, expert witnesses are generally subject to
pretrial depositions. For this reason, attorneys often use both
non-testifying experts and testifying experts so that only the
testifying experts are subject to discovery.
 Depositions can serve multiple purposes.
 It is generally not in the best interest of the opposing counsel
to attack the expert witness during depositions.
 Attorneys often shy away from hiring more than one expert
witness in the same area.
 In some cases, courts may permit opposing counsel to put an
expert on the stand without prior notice to the side the expert
witness represents. When this happens, counsel should insist
on very carefully and slowly qualifying the surprise expert.
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Trial Tactics and Principles
Concerning Experts
 The
most important considerations at trial for experts are
credibility, demeanor, understandability, and accuracy.
Experts should follow these guidelines:
 Answer
questions in plain language
 Answer only what is asked
 Maintain a steady demeanor
 Be friendly and smile at appropriate times
 Remain silent when there is an objection by one of the
attorneys.
 Tell the truth
 Control the pace