when allegations point to the c-suite or board · when allegations point to the c-suite or board...

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When Allegations point to the C-Suite or Board

March 29th, 2012Institute of Internal Auditors

Presenter:Mike FahlmanPartner

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Michael A. Fahlman, CPA/CFF, CIRA

Mike is a Partner in the Forensic and Valuation Services group of Grant Thornton LLP. He has focused his career on assisting clients, including legal counsel, boards of directors and executive management, with complex commercial litigation, dispute resolution, investigations, and distressed businesses. He has served in the testifying expert and consulting expert roles in litigation, arbitration and mediation, and as an independent third party in alternative dispute resolutions.

Grant Thornton [email protected](213) 596-6739

mailto:[email protected]

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Agenda

• Fraud Background, Trends & Executives

• Investigation Response & Reporting

• Remediation & Restatements

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Fraud Background, Trends & Executives

What is fraud? (Black's Law definition)

• Wrongful or criminal deception intended to result in financial or personal gain.

• A person or thing intended to deceive others, typically by unjustifiably claiming or being credited with accomplishments or qualities

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What is occupational fraud? (ACFE's definition)

• The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

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Fraud Triangle

Rationalization

Fraud Triangle

© Grant Thornton 7* 2007 Oversight Systems Report on Corporate Fraud


Why do people commit corporate fraud?

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Position of Perpetrator in the United States — 968 Cases

ACFE 2010 Report to the Nations on Occupational Fraud and Abuse

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Position of Perpetrator — Median Loss Based on Gender


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Age of Perpetrator – Median Loss




Tenure of Perpetrator – Median Loss




Perpetrator's Criminal Background Perpetrator's Employment Background




Schemes Committed by Perpetrators in Executive/Upper Management Positions – 224 Cases




FCPA & Dodd-Frank

• Recent reemergence of the Foreign Corrupt Practices Act– SEC reports receiving an average of one FCPA allegation per day

• Dodd-Frank Whistleblower Program effective August 2011– Incentivizes reporting of fraud to SEC

• Two acts are linked– Whistleblower allegations under the Dodd-Frank Act will relate to

FCPA violations

• Internal Audit's Role



Dodd-Frank Whistleblower Program

• Background– July 21, 2010: Dodd-Frank Act signed

– May 25, 2011: Final Whistleblower Program approved

– August 12, 2011: Whistleblower Program became effective

• Rule– An award is given to a whistleblower who voluntarily provides

the SEC with "original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million."


"Whistleblower Improvement Act"

• Recently introduced House Bill to modify Whistleblower Program

• Would require whistleblowers to report violations to employer first– Allows for the following exceptions:

o When wrongdoing is conducted by:§ compliance officers

§ highest level of management

o When company does not have a robust internal reporting mechanism

• Changes payout range from 10-30% to 0-30%


Agenda





Investigation Response & Reporting

A whistle is blown regarding the C-Suite or Board…now what?



A common process, unique facts and circumstances:

1. Assess the situation

2. Consider internal vs. external investigation

3. Assemble the team

4. Evidence & analysis

5. Reporting



Step 1 - Assess the situation

• React immediately upon discovering allegation• Evaluate nature of allegation – who, what, when, where, why, how

– Source of allegation

– Parties involved – how high up the organization & how pervasive

– Location of incident

– Implications for ongoing operations

• Evaluate stakeholders & reporting– Management

– Board of Directors / Audit Committee / Special Committee

– External auditors

– Regulators & enforcement bodies

– Shareholders

– Employees / third parties / customers / vendors



Step 2 - Internal vs. External

• Internal– Advantages

o Your organization – know the players

o Access to information

o Less cost

o Less disruptive to normal operations

– Disadvantageso Independence in fact and appearance

o Senior Management override

o May lack experience/expertise



Step 2 - Internal vs. External (con't)

• External– Advantages

o Expertise, experience, resources

o Credibility (Board, Regulators & External auditors)

o Independent

o Attorney privilege

– Disadvantageso More costly

o Disrupts normal business operations



Step 3 - Assemble The Team

• Multi-disciplinary– General Counsel vs. Outside Counsel vs. Independent Counsel

– Forensic Accountants

– Computer Data / Electronic Discovery Specialists

– Subject Experts

• Team should have experience in:– Conducting investigations

– Evidence gathering and preservation

– Reviewing large amounts of data

– Conducting interviews

– Dealing with various stakeholders & reporting/presentations



Step 4 - Evidence & Analysis

• Electronic evidence preservation & computer forensics• Hard copy evidence preservation• Interviews [Initial round(s)]

• Accounting data [system, network, user share, desktop]

• Source documents• Pressures, incentives and scenario development• External environment & information/research• Interviews [Follow-up round(s)]

• Corroboration



Step 5 - Reporting

• Stakeholders• Regulators• Plaintiffs & law suits

• Report vs. Presentation vs. Verbal• Attorney work product & distribution• External auditors and the "shadow investigation"• Remediation


Agenda





Remediation & Restatements

Common remediation points

• Policies and procedures

• Internal controls

• Personnel actions & leadership changes

• Documentation & retention

• Training

• Fraud "tools" & "programs"

• Internal compliance/audit



Remediation considerations

• Non-disclosed remediation

• Timing of remediation

• External auditor involvement

• Management buy-in

• Who performs the remediation

• Resources to get it done

• Oversight and subsequent period follow-up



Restatement considerations

• Public vs. Private company

• Stakeholders beyond shareholders, including bank and related covenants

• Who prepares the restatement

• Starting point for restatement

• # of years of presentation



Restatement considerations

• Time table and pending deadlines– SEC Filings

– Bank covenants

– Capital raises

– Product release

• Legal privileges re: investigators' work papers

• Representation & certification – departed employees

• Potential lawsuits and other legal liabilities, and related disclosures / accruals


Closing and Questions

Mike FahlmanPartnerForensic and Valuation Services

515 South Flower Street7th FloorLos Angeles, CA [email protected](213) 596-6739

Grant Thornton: www.grantthornton.com

mailto:[email protected]

http://www.grantthornton.com

when allegations point to the c-suite or board · when allegations point to the c-suite or board...

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