Red flags to watch for in forensic corporate investigations

© Andrea De Martin – 123RF.com

The latest was scandal-hit retail group Steinhoff whose CEO, Markus Jooste, resigned on the back of “accounting irregularities”.

In most instances a company will instigate a forensic corporate investigation to get to grips with what happened to the money, who were involved, and who can be dismissed or held accountable.

David Loxton, partner at law firm Dentons, says this investigation is different from the police investigation which will look at criminal issues such as fraud or corruption.

He says in an investigation such as the one at Steinhoff the team must include forensic accountants. “You need someone who has a nose for how accounting irregularities are perpetrated. You need someone who will recognise the warning signs as to where the money may be hidden.”

Once the team is up and running it is critical to make a list of the allegations that has already been unearthed, the witnesses and the potential suspects.

Terms of reference

David Loxton, partner at law firm Dentons

Loxton warns against the pitfall of accepting terms of reference which is aimed at engineering a result in favour of the company or organisation requesting the investigation.

His firm has turned down instructions worth millions of rand because they will not be hired guns.

There has been examples in the recent past where accounting and law firms have fallen into the trap of accepting to do investigations with their hands tied behind their backs.

“It is quite easy to identify when the terms of reference has been written for the purpose of engineering a favourable result for the entity which requests the investigation,” says Loxton.

It could simply be on the basis of the organisation stating in the terms of reference what the investigators can do, but also what they cannot do. It is the list of “cannot do’s” that is the give-away.

Loxton says he has experienced instances where the entity, more often in the private sector, insists that one of their senior representatives is present during interviews.

“The team cannot allow that. People must be able to speak freely, and if a senior manager is present they will feel constrained.”

If the company prevents investigators from speaking to employees without one of the senior people present, it is a sure sign that the results are being engineered.

Never compromise your integrity

“You can never compromise your reputation or your integrity by taking on instructions which can taint your reputation or which is dodgy. Your reputation is really all you have.”

The temptation to accept a too narrow terms of reference may be due to the temptation by some firms to earn fees for the sake of earning fees.

Be well prepared

Another common pitfall is a lack of preparation. Loxton says forensic investigators should be wary when an investigation needs to be done as a matter of “extreme urgency”.

“I have seen teams leaping in and starting to interview people without doing the ground work properly. It is a common mistake.”

There is only one bite of the cherry, especially with suspects. If you do not have all the facts together to confront them it is pretty much a waste of time.

Loxton says he has also noticed that some investigating teams do not even interview the suspects. They gather the evidence, but leave the suspects to be interviewed by the police, because of fear that they may be interfering in the police investigation.

“Your investigation is utterly incomplete if you have not confronted the suspects during interviews,” says Loxton.

He warns against accepting too much assistance from the company itself. Many accept the offer from the company to let their IT-team assist with some of the evidence gathering.

Internal IT employees can manipulate information. They are also not forensically trained to obtain evidence that can be presented to a court of law.

Loxton says once the investigation is complete it is critical to look at the evidence and consider whether you will get a conviction if the case was prosecuted in court.

This will focus the attention to what is lacking in the investigation.