The attorney as fraud investigator

When management suspected a corporate officer of embezzling company funds a few years ago, the board had to quickly scramble to address years of fraudulent activity that could damage the company’s reputation and stock price.

The case was complex. The perpetrator had been handing out lucrative but unnecessary contracts that required very little work. In return, he received substantial kickbacks. Perhaps most damaging of all, the executive’s actions had caused the company to file financial reports containing material misstatements with government regulators for the previous two years. The board quickly determined that those contracts violated company policy and terminated the suspect. But then it had to decide on whether to hire an investigator or an attorney to conduct the internal investigation. The board eventually settled on an investigator who was also an attorney.

Here was the board’s thinking. A corporate attorney or even an investigator without legal training were both capable of completing many of the standard steps in this probe, including collecting and analyzing documentary and electronic evidence, interviewing witnesses and reviewing financial records to establish if the executive’s conduct met the legal elements of embezzlement, theft and fraud, as well as violations of regulations and company policy. But this case also involved numerous legal issues that spread like tentacles into myriad areas of the law. And their nuanced nature required extensive legal expertise.

The attorney the board chose to investigate could identify relevant legal issues and additional violations of financial reporting and corporate governance, plus contract, fiduciary and agency laws. They also had the skills to assess the company’s potential liability from government regulators and other organizations, such as the companies whose contracts had been terminated. Would regulators sanction the company for filing falsified financial reports? Could the company potentially face lawsuits from shareholders or the fraudster’s accomplices for breach of contract? These questions were better addressed by an attorney.

This is a fictional case drawn from some real-life examples, but it illustrates some of the dilemmas faced by management when having to choose an investigator following the sudden discovery of fraud. An investigation, of course, is a vital part of resolving fraud allegations. Ensuring that investigators have the correct skills for specific cases often makes the difference between success or failure — and ultimately the extent of costs from frauds.