chapter 3 fraud

Chapter 3: Legal, Regulatory, and Professional Environment

BU5510 Forensics & Fraud Examination
Dr. Patrick O'Brien

Module 1: Introduction

  • Prosecution of Fraud:

    • Fraud may be prosecuted in two ways: criminally or civilly.

  • Role of Forensic Accountants:

    • Forensic accountants are involved when legal issues pertain to money or fraudulent activity.

    • They play a crucial role in investigating and resolving claims of fraud.

  • Crime Prevention:

    • The fear of being caught is a major tool for preventing crime.

    • Citizens agree to follow laws as they perceive the system generally works, leading to societal benefits.

  • Criminal Justice System Statistics:

    • A significant number of criminal cases never go to trial or the criminal justice system.

  • Regulatory Bodies:

    • The Securities Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) monitor illegal activities and hold perpetrators accountable.

Module 2: The Rights of Individuals

  • Constitutional Amendments:

    • Individual rights related to due process are enshrined in four key amendments:

    • Fourth Amendment:

      • Prohibits unreasonable searches and seizures.

    • Fifth Amendment:

      • Protects against self-incrimination; individuals cannot be compelled to testify against themselves.

    • Sixth Amendment:

      • Guarantees the right to legal counsel and the ability to confront witnesses.

    • Fourteenth Amendment:

      • Ensures due process and equal protection under the law.

  • Cooperation with Employers:

    • Employees are obliged to cooperate with employers during investigations, failing which they may face termination.

    • Federal and state laws offer protection to employees reporting illegal acts by employers, shielding them from retaliation.

Interviews

  • Employee Interviews & the Fifth Amendment:

    • An employee may be terminated for non-cooperation, even if invoking the Fifth Amendment.

  • Miranda Rights:

    • When in custody, an interviewee must be informed of:

    • Right to remain silent.

    • Statements can be used against them.

    • Right to an attorney, provided for free if not affordable.

    • Option to invoke rights at any time.

  • Private vs. Public Entity Interviews:

    • In private entity interviews, attorneys cannot be present.

    • Public entities must allow an attorney’s presence.

  • Valid Confessions:

    • Must be voluntary and not obtained through threats or coercion.

    • Promises of leniency are often not considered coercive.

Searches

  • Search Warrants:

    • Must be supported by probable cause and specifically outline persons, places, and items involved.

  • Reasonable Expectation of Privacy:

    • Individuals are granted a reasonable expectation of privacy in certain situations, although this is limited in the workplace.

  • Warrantless Searches:

    • Immediate searches may occur if law enforcement suspects a crime has been or will be committed.

  • Arrests and Searches:

    • Arrests can occur based on probable cause, allowing a search of the immediate area for officer safety and evidence protection.

  • Search of Motor Vehicles:

    • Vehicles have a lower expectation of privacy, allowing searches without warrants if contraband is suspected.

Surveillance

  • Surveillance Complexity:

    • More complex than interviews or searches; seldom done by fraud examiners.

  • Types of Surveillance:

    • Fixed-point surveillance (stakeouts)

    • Mobile surveillance

    • Videography

    • Audio or electronic surveillance (wiretapping)

  • Recording Conversations:

    • Any party may record conversations in 37 states.

  • Video Surveillance:

    • Legal in public spaces without violating privacy expectations.

  • Polygraph Testing:

    • Employers may only administer polygraphs if there's economic loss and reasonable suspicion.

    • Non-government employers cannot use polygraphs for employee screening.

Discharging a Suspected Wrongdoer from Employment

  • At-Will Employment:

    • Employment is typically at-will; both parties can terminate for various reasons.

  • Documentation of Termination:

    • Employers must document good cause, including:

    • Violation of written policies

    • Conduct harming business operations

    • Evidence-based investigation proving misconduct

    • Fair and objective investigation

    • Consistent treatment across similar incidents

    • Proportional punishment related to the offense

  • Civil Legal Action:

    • Employees can sue former employers even in cases of seemingly justified terminations.

Attorney-Client Privilege

  • Definition:

    • The attorney-client privilege protects confidential communications within a professional relationship.

  • Ownership of Privilege:

    • Belongs to the client, who can compel the attorney to maintain confidentiality.

  • Limitations:

    • Does not cover concealment of physical evidence or documents, nor future crimes or fraud.

Other Privileges

  • Attorney Work-Product Privilege:

    • Protects materials created by attorneys in anticipation of litigation; it aims to maintain trial integrity.

  • Physician-Patient Privilege:

    • Confidential communications for treatment are protected, but this privilege is waived once a medical condition is in question during litigation.

  • Marital Privileges:

    • Spousal immunity protects from testifying against a spouse regarding certain statements made during marriage, applicable even post-divorce.

  • Miscellaneous Privileges:

    • Confidential communications with clergy are recognized by most states.

    • No established legal privilege exists for accountant-client relationships.

Module 3: Probable Cause

  • Standard for Arrest/Warrant:

    • Probable cause is necessary for arrests, searches, and warrants.

  • Probable Cause Sources:

    • Can arise from affidavits, hearsay, or oral applications, especially in emergencies.

  • Witness vs. Target:

    • A witness is uninvolved, whereas a target is believed to have over a 50% chance of being charged with a crime.

  • Subject Behavior:

    • Subjects may exhibit unethical behavior but may not yet reach the threshold of criminality.

Module 4: Rules of Evidence

  • Importance of Evidence:

    • Essential for proof; without it, no convictions or civil judgments can occur.

  • Definition of Evidence:

    • Anything legally presented at trial to substantiate a claim and persuade a jury.

  • Criteria for Admissibility:

    • Must be relevant, trustworthy, and have a probative value that outweighs prejudicial effects.

  • Types of Evidence:

    • Testimonial

    • Real (documents)

    • Demonstrative

    • Circumstantial

    • Direct (i.e., eyewitness testimony)

Module 5: Criminal Justice System

  • Entry into the Criminal Justice System:

    • Individuals may enter via:

    • Warrantless arrests based on probable cause

    • Investigative filings leading to charges

    • Grand jury proceedings resulting in indictments

  • Grand Jury Function:

    • Decides if there’s sufficient evidence for trial.

  • Arraignment Hearing:

    • Charged individuals must appear before a judge without delay.

    • They are informed about charges and asked to plead (guilty/not guilty).

Module 5: Criminal Justice System (Cont.)

  • Trial Process:

    • If not opting for a bench trial, a jury trial is held.

    • Judges handle legal matters, while juries assess evidence to reach verdicts.

  • Sentencing Determination:

    • Sentences are decided by juries or judges based on jurisdiction.

  • Appeals Post-Conviction:

    • Convicted individuals can appeal verdicts or sentences.

  • Prosecution of Entities:

    • Not only individuals but businesses can be prosecuted to enforce accountability and cultural change.

Module 6: Civil Justice System

  • Civil Actions:

    • Private parties seek redress through civil actions for disputes or grievances.

    • Main goal: recover losses or punitive damages.

  • Role of Forensic Accountants:

    • Essential in civil justice, especially related to fraud claims and loss calculations.

Complaint and Pretrial Activity

  • Initiation of Civil Lawsuits:

    • Begins with the plaintiff filing a complaint in the correct jurisdiction.

    • Plaintiffs must assure the court of its jurisdiction and grounds for relief.

    • Fraud claims need to specify the nature of the fraud, the victim, and detailed misrepresentations.

  • Defendant's Response:

    • Typically, defendants reply denying liability, and may file counterclaims or seek dismissal.

  • Discovery Phase:

    • Each party explores the other's arguments, gathering evidence through various means.

Discovery Methods

  • Four Forms of Discovery:

    1. Interrogatories:

    • Written questions requiring formal responses.

    1. Requests to Produce Documents:

    • Exchange of relevant documents between parties.

    1. Depositions:

    • Sworn testimony taken from parties based on evidence and documents.

    1. Requests for Admission:

    • Parties agree on certain facts to streamline the case.

Negotiated Settlements

  • Settlement Negotiations:

    • Before trial, judges may encourage settlements based on evidence merit.

    • Fewer than 5% of civil cases reach trial.

  • Forms of Settlements:

    • Out-of-Court Settlements

    • Mediation

    • Arbitration

Negotiated Settlements (Cont.)

  • Out-of-Court Settlements:

    • Reach mutually agreeable resolutions after evaluating case merits.

  • Mediation Process:

    • An independent mediator assists both sides to negotiate voluntarily.

  • Arbitration Process:

    • Conducted by a neutral arbitrator resembling a judge, with the outcome decided based on case merits.

    • Arbitration can be binding (final decision) or nonbinding (potential for further negotiations).