Chapter 12 THE LAWYER'S ROLE IN THE FORENSIC ACCOUNTANT'S WORK

• Jurisdiction: United States

Chapter 12 THE LAWYER'S ROLE IN THE FORENSIC ACCOUNTANT'S WORK

Linda L. Northrup

It may be tempting to view the forensic accountant as a professional with a scope of work independent of and parallel to that of the case attorney. However, interaction and teamwork between counsel and the forensic accounting expert early in a potential fraud case, whether representing the claimant or the alleged perpetrator of the fraud, leads to more efficient and effective case handling throughout the representation and sets the case up for thorough exploration of early settlement.

This chapter will explore the interaction between the lawyer and the forensic accountant in each phase of the litigated case and how a lawyer can best use a forensic accountant.

I. Choose the Best Accountant/Accounting Firm

A. Understanding Designations/Certifications

When looking for a forensic accounting consultant, it is important to understand the many certifications and designations that are used in the accounting industry. The most common designation is that of a CPA, or Certified Public Accountant. Each state has different educational requirements to obtain a CPA license, but all states require CPA candidates to pass the Uniform CPA Examination, which is administered by the American Institute of Certified Public Accountants.³⁸⁵

A Certified Management Accountant, or CMA, is another common certification. In order to be certified as a CMA, each candidate must not only possess a bachelor's degree, but must also pass the CMA Examination, which is administered by the Institute of Management Accountants.³⁸⁶ Those with a CMA certification tend to focus on financial analysis and planning more than those with a CPA.³⁸⁷

The Certified Fraud Examiner credential, or CFE, indicates an expertise in fraud prevention, detection and deterrence.³⁸⁸ Those professionals seeking certification as a CFE must not only fulfill educational requirements, but must also pass the CFE Exam, administered by the Association of Certified Fraud Examiners.³⁸⁹

B. Researching Through the Internet and Social Media

In today's electronic age, one of the simplest ways to learn about an accounting expert is to do an Internet search, which is likely to produce reviews, ratings and comments on the accountant. One especially helpful website is LinkedIn,³⁹⁰ which allows a person to connect with accountants who are already connected to friends, colleagues and peers. In this way, LinkedIn can operate much like a word-of-mouth referral alerting you to connections and commentary, which may bear (positively or negatively) on the matter for which assistance is sought. It is also worth searching on other popular social media sites and, as part of the vetting process, it is not out of line to request a potential expert to advise you of any social media in which they actively participate, and which postings may be available for public review.

C. Obtaining and Reviewing Reported and Unpublished Cases

Although an Internet search may reveal reviews about potential expert accountants, a legal database search can prove even more useful. By running a name-based word search in the legal database used by the firm for legal research, practitioners can download court documents for cases in which the potential expert was involved. These documents may include published and nonpublished cases and, in certain instances where court files are maintained electronically, may also include the underlying legal briefs and expert declarations filed in support of or in opposition to law and motion proceedings in those cases.

Through this tool, attorneys can evaluate the types of cases in which an accountant has been involved, positions taken that may be relevant to the matters at issue, the outcomes of those cases, and other valuable information about the accountant. As discussed below, this tool may have even greater relevance and value when evaluating opposing experts.

II. The Pre-Litigation Phase

A. Use Accountant to Help Define the Claims

It is never too early to consider whether and how to use a forensic accounting expert and, if case finances permit, to retain a consultant to assist in the pre-litigation analysis and strategic phases. As discussed below, there are many ways in which counsel can effectively utilize a forensic accounting expert and help assure that the expert is able to give the best strategic assistance possible. A forensic accountant can help during the pre-litigation stage by reviewing records, preparing databases and assisting lawyers with claims. The expert will also have an intimate knowledge of the rules and regulations impacting the transactions at issue and will be able to assist the attorney in defining areas of potential claims and liability.

1. Accountant's Industry Knowledge

At the inception of a fraud investigation or any investigation of financial issues where fraud is suspected, counsel should attempt to determine whether any forensic accountant retained in the pre-litigation investigative stage has experience in the type of industry or enterprise that is the subject of the investigation. Such experience can be invaluable in advising counsel regarding the presence or absence of indicators for fraud. The forensic accountant can look for irregularities in the records normally kept for such businesses, financial transactions that simply 'don't add up,' and evidence that might indicate transactions that do not normally appear in the ordinary course of such businesses. The accounting professional can also advise counsel on preservation-of-evidence issues in terms of data created or retained electronically that could be overwritten or deleted if the business continues to operate without adequate preservation protocols in place.

2. "Big Picture" Analysis

The accounting professional is usually in a better position to point the attorney to red flags that may relate more to the overall operation of a fraudulent scheme than to any particular transaction. This is particularly true at the outset of a fraud investigation. In some of the more sophisticated fraud schemes in recent history, rather elaborate entity and transaction models were built for the purpose of complicating any investigation and making it harder to trace the funds used for the ultimately fraudulent enterprise. In such instances, the very complexity and difficulties in tracing may lead the accountant to suspect that the enterprise as a whole is part of a fraudulent scheme, even though there is not an irregularity readily apparent in any particular transaction.

3. Information Acquisition

In the period prior to any formal litigation or arbitration, attorneys can effectively utilize accountants in the information-gathering process in many different ways. First, accounting experts may be the best persons to conduct initial witness interviews, particularly of the employees and professionals involved in the financial transactions under scrutiny. They speak the language of finance and are less likely to be led astray by fraud participants who attempt to use fancy jargon to throw the interviewer off-track and are also less likely to inadvertently miss important areas of inquiry by a lack of understanding of the underlying transactions.

It is important, however, to consider the ultimate discoverability of any such interviews (whether conducted by counsel or accounting professional). Laws on discoverability may vary from jurisdiction to jurisdiction depending on how the interview is ultimately documented and whether, if conducted by counsel, the documentation consists largely of counsel's thoughts, impressions and opinions of the witness, which may be protected by work product. Interviews conducted by accounting professionals are much less likely to be afforded such protections; however, the benefits of getting early information before memories have faded and accuracy in terms of the information obtained may well outweigh the risks of discoverability in ultimate litigation proceedings.

Accountants are also invaluable in outlining the universe of data and documentary information that is or should be available in connection with the matters under investigation. As early as possible in any financial fraud investigation, even if the budget does not permit retention of an accounting professional for more than a brief consultation, counsel should consider consulting with an accounting professional on the issue of data and document preservation and acquisition to determine the scope of anticipated available information and any means of preservation that requires immediate action.

If the budget permits, the accountant should also be consulted regarding data analysis and input so that from the inception of the investigation, database parameters are agreed upon between counsel and consultant to assure that the time and money spent organizing the documents and data obtained in the pre-litigation phase results in usable product for data/document access in any later depositions, discovery or trial proceedings.

B. Consideration of Accountant's Pre-Lawyer Relationships

Accountants and financial consultants are often brought into fraud investigations directly by a business and prior to the retention of counsel, or even before it is known that any fraud has been perpetrated. Often, it is the financial professional who brings the fraud to light in the normal course of audits or other routine financial assessments. In those instances, it may be up to the accounting professional to recommend the early involvement of counsel to preserve privileges and protect information as the fraud investigation proceeds.

For example, the accounting professional may uncover sensitive and potentially inflammatory information during the early stages of a fraud investigation. The import of information obtained may not be fully understood at that time. At the beginning of an investigation, particularly before all of the facts are fully developed and analyzed, concerns might...