An internal investigation entails “the development and analysis of facts by an organization that will form the basis for a decision by the organization.”1 Federal enforcement agencies regard the existence of a comprehensive internal investigation process as a vital component of an effective compliance program.2 As such, properly scoped investigations conducted by qualified personnel can assist organizations with minimizing the risk of adverse enforcement actions, monetary penalties, and compliance obligations contained in any corporate criminal resolution.3 In addition, effective internal investigations help organizations identify the required course of action with respect to the underlying conditions that gave rise to the need to undertake such an investigation (e.g., financial statement restatement, disclosure to regulatory authorities, disciplinary action, remediation of internal control deficiencies). The nature of those underlying conditions together with the possible implications for the organization will dictate the scope of an investigation as well as the need for specialized skills, such as those that financial forensic specialists provide.
Financial forensics (also commonly referred to as forensic accounting, forensic auditing, forensic investigation, or investigative auditing) refers to specialty accounting services used to identify and examine underlying facts in the context of internal investigations as well as dispute resolution (e.g., performing an economic damages calculation in a shareholder litigation).
The term “forensic” means “belonging to, used in, or suitable to courts of judicature or to public discussion and debate … [and] relating to or dealing with the application of scientific knowledge to legal problems.”4 Financial forensic services “generally involve the application of special skills in accounting, auditing, finance, quantitative methods, certain areas of the law and research, and investigative skills to collect, analyze and evaluate evidential matter and to interpret and communicate findings.”5 As a general rule, financial forensic services represent a form of financial fact and evidence gathering, which is designed, prepared, and presented in a manner that will ultimately be deemed acceptable for use in the legal process.
With this in mind, the discussion throughout this chapter recognizes broad categorizations that typically necessitate forensic investigations: (a) corporate internal purposes; (b) criminal investigation; and (c) civil litigation against an organization (e.g., shareholder or derivative suits). These are considered the three primary purposes of such work (“three purposes”). To undertake an effective investigation that efficiently meets investigation objectives, it is important to recognize the applicable purpose from the outset, so that the investigation work plan is inclusive of the expected procedures based upon the needs of the stakeholders (e.g., size and scope of the testing populations). This process is iterative in nature and will change as facts and circumstances change. Investigation procedures may be iterative due to uncertainty, unknown facts, or the identification of new information. The various conditions of uncertainty cannot be readily captured in a single chapter of a handbook. An engagement may start as an internal corporate investigation but may expand into a criminal investigation involving federal authorities. Given the possibility of such variability, this chapter integrates the discussion on the three purposes, focusing primarily on the commonality of approach between them that can be pursued, and occasionally highlighting items of peak interest that are specific to one of the three purposes.
Several commonalities of the three purposes of an investigation are addressed in this chapter. The first entails the identification, production, and safeguarding of relevant documents and data. The second is assembling an investigation team with professionals who have the requisite skill sets, training, discipline, knowledge, experience, independence, and integrity. The third commonality of the three purposes is striving to conduct a forensic investigation that follows the approach of inquiry, observation, and testing. Following such an approach should enable a forensic specialist to generate a work product that is verifiable, reproducible, and accurate, as well as serve as the basis for confirming or refuting any theories of events that were formed before the outset of the investigation.6 Financial forensic professionals who perform internal investigations often, among other things, have specialized knowledge about: (1) business information and financial reporting systems; (2) generally accepted accounting principles (GAAP); (3) evidence gathering, handling, and admissibility; (4) investigative methods and techniques; and (5) litigation processes and associated protocols. In the pages that follow, each of these areas will be explained and discussed more completely. Within this chapter, we will provide an overview of:
- White-collar crimes and associated financial forensic services;
- The differences between a financial audit and forensic services;
- Indicators of fraud (discussed in further detail in Chapter 16);
- How to perform financial forensic internal investigation services (from engagement acceptance through conclusion);
- Specific considerations applicable to each financial forensic internal investigation;
- Considerations when performing asset tracing procedures including digital assets (i.e., cryptocurrencies and nonfungible tokens (NFTs), etc.); and
- Common mistakes to avoid when performing financial forensic internal investigation services.