One of the most frequent topics our Chapter receives questions about from new members and from our on-line guests concerns the documenting and reporting of investigative results. What types of reports do fraud examiners and forensic accountants typically produce based on what types of documentation? What should be included in the various types of documentation and reports and what should be avoided?
The ACFE tells us that documenting an investigation is as important as performing it. A poorly documented case file can lead to a disappointing conclusion, a dissatisfied client, and can even damage the investigator’s reputation. Various means by which the fraud examiner or forensic accounting investigator may report her findings have been established by over two decades of practice. The form of the report, whether oral or written, is always a matter to be discussed with the client and with counsel. While it’s not the responsibility of the fraud examiner to advise on the legal perils associated with various forms of reporting, there are certain issues of which new investigators should be aware as their clients debate the form of reporting that will conclude the investigator’s examination.
The ACFE suggests that practitioners try to determine at the outset whether a written report is expected and, if so, its form and timing. In the usual circumstance that this point can’t be decided at the inception of the engagement, the examiner should conduct the investigation in a manner that will facilitate a comprehensive oral report, including the key documents and any exhibits necessary to illustrate the findings. Many investigations begin small, but there’s no way to know with certainty where they will lead and what will be required at the conclusion. Although the client may not have requested a report at the outset of the investigation, some event during the investigation may change the client’s mind, and the investigator should to be prepared to respond. For example, you may determine during an investigation that an officer of the company violated a law or regulation, thereby requiring the company to consider self-reporting and possibly
bringing a civil action against the officer and other third parties. Alternatively, you may be subpoenaed for your part in an investigation that has captured the attention of regulatory agencies or law enforcement. While you can testify only as to what procedures you recall performing and the attendant findings, your client, and your own reputation, will be better served if you always have through and proper documentation. Try to perform an investigation as if you might be asked later to report formally on your findings and on the exact procedures performed.
Members also ask about the types of reports. The most common reports are:
- Report of investigation. This form of written report is given directly to the client, which may be the company’s management, board, audit committee of the board, in-house counsel or outside counsel. The report should stand on its own; that is, it should identify all the relevant evidence that was used in concluding on the allegations under investigation. This is important because the client may rely on the report for various purposes such as corporate filings, lawsuits, employment actions, or alterations to procedures and controls.
- Expert report filed in a civil court proceeding. The American Institute of Certified Public Accountants (AICPA) publishes an excellent practice aid on the full range of expert reports.
- Affidavits. These are voluntary declarations of facts and are communicated in written form and sworn to by the witness (declarant) before an officer authorized by the court.
- Informal reports. These consist of memos to file, summary outlines used in delivery of an oral report, interview notes, spreadsheets listing transactions along with explanatory annotations, and other less-formal written material prepared by the investigation team.
- Oral reports are usually delivered by the investigation engagement leader to those overseeing an investigation, such as a company’s board, or to those who represent the company’s interests, such as outside counsel.
- Oral reports involve giving a deposition, as a fact witness or expert witness, during which everything that is said, by all parties to the deposition, is transcribed by a court reporter.
Reports documenting an investigation differ considerably from audit opinions issued under generally accepted auditing standards (GAAS). The investigative report writer is not constrained by the required language of a governing standard, and investigative reports differ from one another in organization and content depending on the client’s stated needs. In contrast, financial audit reports adhere to set formula prescribed by GAAS. The uses of written reports also differ. The client could do any of the following things with an investigative report:
- Distribute the report to a select group of individuals associated with the company in various capacities;
- Voluntarily give the report to a prosecutor as a referral for prosecution;
- Enter the report as evidence in a civil fraud proceeding;
- Give the report to outside counsel for use in preparing regulatory findings, entering negotiations, or providing other legal services on behalf of the company.
However the client decides to use the report, its basic elements usually include the following organizaton:
- Identify your client;
- In the case of a lawsuit, identify the parties;
- State in broad terms what you were asked to do;
- Describe your scope, including the period examined;
- Include mention of any restriction as to distribution and use of the report;
- Identify the professional standards under which the work was conducted;
- Identify exclusions in the reliance on your report (the report is not a financial audit, etc.);
- State that your work should not be relied on to detect all fraud;
- Include the procedures you performed, technical pronouncements relied upon, and findings.
Although a summary can be helpful to the reader it may be perilous for the report writer in terms of keeping critical information and perspectives intact. Caution is advised when preparing two types of summary sections: executive summary and conclusion. If you do write a summary, be careful not to offer an opinion on the factual findings unless specifically requested to do so by the client. The facts should speak for themselves.
It may be appropriate to include in a concluding section of the Report of Investigation certain recommendations for additional investigative procedures or a description of control breakdowns you have observed. Also, a carefully written executive summary at the beginning of the report can be extremely helpful to the reader, especially when it precedes a long and complex report. The executive summary should offer in simple, straightforward language an accurate statement of significant findings. Each summarized finding should include a reference to the full description of findings included in the complete Report of Investigation.
Fraud examination reports are powerful tools which can assist client management in a myriad of ways but, like anything else, if ineptly prepared, represent a minefield for the beginning practitioner.