Common pitfalls of forensic corporate investigations

Online since 22.03.2018 • Filed under Legal • From Issue 7 - March to August 2018 page(s) 56-57
Common pitfalls of forensic corporate investigations

In 2017, South Africa experienced a flurry of forensic corporate investigations that aimed to address allegations of misconduct, accounting irregularities and even fraud within companies or government institutions.

The latest investigation in South Africa pertained to the 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 was 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 that looks 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, and who recognises 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 already unearthed, the witnesses and the potential suspects.

Terms of reference

David warns against the pitfall of accepting terms of reference that are aimed at engineering a result in favour of the company or organisation requesting the investigation.

There are recent examples of accounting and law firms falling into the trap of accepting to undertake investigations with their hands tied behind their backs. ‘It is quite easy to identify when the terms of reference have been written to engineer a favourable result,’ says David.

It could be that the organisation states 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 gives it away.

David 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. Also, 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 that can taint your reputation or are dodgy. Your reputation is really all you have.’ The temptation to accept terms with too narrow a reference may be because of 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. David 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 at the cherry, especially with suspects. If you don’t have all the facts together to confront them, it is pretty much a waste of time.

David adds that 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 David.

He also 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.

David maintains that once the investigation is complete, it is critical to look at the evidence and consider whether you will get a conviction if the case is prosecuted in court. This will focus attention on what is lacking in the investigation.

Dentons is the world’s largest law firm, delivering quality and value to clients around the globe. Across South Africa, the Dentons team advises on all aspects of banking and finance, corporate and M&A, energy and natural resources, government, healthcare, hotels and leisure, infrastructure and transport (and PPP), and telecommunications. For more information, visit www.dentons.com/en/global-presence/africa/south-africa.aspx

Issue 7 - March to August 2018

Issue 7 - March to August 2018

This article was featured on page 56-57 of SABI Magazine Issue 7 - March to August 2018 .

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