Executive Investigations

When Allegations point to the C-Suite or Board 

March 29th, 2012 

Institute of Internal Auditors 

Presenter: 

Mike Fahlman 

Partner 

© Grant Thornton

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 LLP 

Michael.Fahlman@us.gt.com 

(213) 596-6739 

© Grant Thornton 2

Agenda 

• Fraud Background, Trends & Executives 

• Investigation Response & Reporting 

• Remediation & Restatements 

© Grant Thornton 3

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 

© Grant Thornton 4


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. 

© Grant Thornton 5


Fraud Triangle 

Fraud 

Triangle 

Rationalization 

© Grant Thornton 6


Why do people commit corporate fraud? 

© Grant Thornton 7 

* 2007 Oversight Systems Report on Corporate Fraud


Position of Perpetrator in the United States — 968 Cases 

ACFE 2010 Report to the Nations on Occupational Fraud and Abuse 

© Grant Thornton 8


Position of Perpetrator — Median Loss Based on Gender 


© Grant Thornton 9


Age of Perpetrator – Median Loss 


© Grant Thornton 10


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? 



Acommon 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 

– Disadvantages 

o 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 

– Disadvantages 

o 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 Fahlman 

Partner 

Forensic and Valuation Services 

515 South Flower Street 

7 th Floor 

Los Angeles, CA 90071 

Michael.Fahlman@us.gt.com 

(213) 596-6739 

Grant Thornton: www.grantthornton.com

Executive Investigations

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