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Chapter 6 Legal, Regulatory and Professional Environment.

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Presentation on theme: "Chapter 6 Legal, Regulatory and Professional Environment."— Presentation transcript:

1 Chapter 6 Legal, Regulatory and Professional Environment

2 Critical Thinking Exercise A scientist has two buckets, one holds 4 gallons and the other holds 5 gallons as well as an unlimited water supply. By using nothing but the buckets and water, how can you accurately measure 3 gallons of water?

3 Introduction Fraud may be prosecuted criminally or civilly Fear of getting caught Fear of punishment Most people are law abiding citizens “Criminal justice funnel” Regulatory agencies Public Company Accounting Oversight Board

4 The Rights of Individuals Amendment Protects Fourth Against unreasonable searches & seizures Fifth Against self-incrimination Sixth Right to an attorney Fourteenth Due process and equal protections NOTE: Employees have less protections

5 The Rights of Individuals Interviews Searches Surveillance Discharging a Suspected Wrongdoer from Employment Privileges

6 Interviews Miranda warnings –Right to remain silent –Answers can be used against him –Right to an attorney –If interviewee can’t afford an attorney, one will be provided at no cost Legal counsel Private employers don’t have to offer due process of law Common law protections Confessions

7 Searches Unreasonable searches and seizures are forbidden When is a workplace search reasonable? –Likely to reveal evidence of work-related misconduct –Search is necessary to further investigation Search limitations –“Exclusive control” –“Fruit from the forbidden tree”

8 Surveillance Types of surveillance –Fixed point surveillance –Mobile surveillance –Videography –Audio or electronic surveillance Audio surveillance laws and regulations are more complicated –“One-party consent” Video surveillance generally permissible

9 Discharging a Suspected Wrongdoer from Employment Employment considered “at will” Employer should document “good cause” –Conduct against written policy –Conduct made for unsafe or inefficient operations –“Punishment fits the crime” –Evidence supports questionable act by employee Actions should be well documented Nothing prevents employee from suing employer in civil court

10 Privileges Protections against certain types of testimony Attorney-client privilege Attorney work-product privilege Physician-patient privilege Marital privileges Miscellaneous privileges

11 Attorney-Client Privilege The right to not disclose confidential communication relating to professional relationship Client has right to compel nondisclosure Applies only to communications intended to be confidential Does not permit attorney to conceal physical evidence Does not apply to future acts of crime or fraud

12 Attorney Work-Product Privilege Protects all materials prepared by an attorney in anticipation of litigation Shield materials that would disclose attorney’s theory of the case Any written materials directed toward preparation of a case Must be prepared in anticipation of litigation

13 Physician-Patient Privilege Confidential when obtaining treatment or being diagnosed When involved in litigation, privilege is waived –Court appointed physicians –Expert witnesses

14 Marital Privileges Spousal immunity –Protection from testifying against own spouse Spousal defendant –Protection from adverse testimony –Allowed in both civil and criminal cases –Covers statements made during marriage Neither applies to crimes or torts within family

15 Miscellaneous Privileges Confidential communications made to clergy Government has privileges that protect the disclosure of sensitive information Trade secrets for businesses No privilege for accountant-client relationships

16 Probable Cause Standard used: To make an arrest To conduct a search To obtain a warrant By grand juries Culpability scale –Witness –Subject –Target

17 Probable Cause 4 th Amendment Terry v. Ohio –“Terry Stop” (reasonable suspicion) United States v. Matlock –“Co-occupant consent rule” Illinois v. Gates –“Fair probability”

18 Probable Cause Documentary evidence –Voluntary consent –Subpoena –Search warrant Advantages of warrant over subpoena –Allows holder to decide which documents are relevant – Avoids, but does not eliminate, possible destruction of evidence –Interview key witnesses without opportunity to prepare

19 Rules of Evidence Evidence must be relevant and trustworthy Must be admissible May be testimonial Real Demonstrative Circumstantial Direct “Facts at issue”

20 Rules of Evidence Real evidence “speaks for itself” –Must be authenticated Demonstrative evidence purports to educate, summarize or amplify real evidence –Tells a story or complements other evidence –Must not create prejudice –Heart of most fraud and forensic accounting investigations

21 Rules of Evidence 5 considerations must be given to any piece of documentary evidence –Document must not have been forged –Original documents are preferable “Best evidence rule” –Document must not be hearsay or objectionable “Statements against interest” –Document needs to be authenticated –Document must be reliable

22 Criminal Justice System Most cases never end up in the criminal justice system 3 routes that a target may enter criminal justice system –Warrantless arrest by police based on probable cause –Investigation that leads to the filing of an “Information” –Grand jury proceeding that leads to an indictment and subsequent arrest warrant by a judge “Without unnecessary delay”

23 Criminal Justice System Sufficient evidence exists to bring case to trial Indictment stage –Defendant is officially charged Arraignment hearing –Defendant is informed of the crime and charges against him –Advised of rights –Asked to enter plea Guilty Not guilty Nolo Contendere

24 Criminal Justice System Bench trial Trial by jury –Judge decides matters of law –Jury decides if evidence is sufficient “Mitigating circumstances” After verdict, convicted person may appeal verdict, sentence, or both Prison system –Community-based –Minimum security –Medium security –Maximum security

25 Criminal Justice System Parole –Reward for good behavior Probation –Alternative to prison Recidivism Discretion Businesses and other organizations may be prosecuted

26 Civil Justice System Right a wrong or resolve a dispute Recover losses and reap punitive damages Cease and Desist Orders How can fraud examiners and forensic accountants be utilized?

27 Complaints and Pre-Trial Activity Civil lawsuits begin with complaint Fraud civil complaints must be specific –Fraud misrepresentations –The impacted victim –How misrepresentations were false Discovery –Interrogatories –“Requests to produce documents” –Depositions –“Requests for admission”

28 Negotiated Remedies Out-of-court settlements –Both sides come to settlement position –Attorneys negotiate Mediation –Independent 3 rd party with no authority to decide case –Assists both sides –Work for mutually agreeable resolution Arbitration –Independent 3 rd party acts as judge and jury –Authority to determine outcome of case –Binding or non-binding verdict

29 Pre-Trial Motions and the Civil Trial If attempts to settle case fail, pre-trial motions follow Differences between civil and criminal trials –Jury 6 persons –If opposing attorneys agree, unanimous verdict not required –Requires preponderance of evidence rather than “beyond a reasonable doubt” Post-judgment discovery

30 Regulatory System Basic Accounting Principles – a Survivor’s Guide to Accounting The AICPA and Statement on Auditing Standards No. 99 The Sarbanes-Oxley Act of 2002 The Public Company Accounting Oversight Board (PCAOB) COSO’s Enterprise Risk Management Framework (ERM) PCAOB’s Auditing Standards Nos. 3 and 5 IIA Practice Advisories 1210.A2-1 and 1210.A2-2

31 Basic Accounting Principles – A Survivor’s Guide to Accounting Balance Sheet Income Statement Statement of Cash Flows Accrual Accounting

32 The AICPA and Statement on Auditing Standards No. 99 Auditing standards for non-public companies –Reasonable assurance –Professional skepticism Compilation and review standards Other attestation standards Consulting standards Code of professional conduct

33 Fraudster’s Perspective Criminals exploit your humanity “Trust, but verify” White collar crime is a crime of deceit White collar criminals are artful liars

34 The Sarbanes-Oxley Act of 2002 Higher standards for corporate governance and accountability Independent regulatory framework Enhance quality and transparency of financial reports Severe civil and criminal penalties for corporate wrongdoers New protections for corporate whistleblowers

35 Public Company Accounting Oversight Board (PCAOB) Registration with the board Auditing, quality control, and independence standards and rules Inspections of registered public accounting firms Investigations and disciplinary proceedings

36 COCO’s Enterprise Risk Management Framework (ERM) Principles and components of effective risk management processes How risks should be identified, assessed and addressed Create anti-fraud environment Help entities achieve operational and financial objectives and goals

37 PCAOB’s Auditing Standards Nos. 3 and 5 AS3 – Audit documentation AS5 – Integrated Audit Anti-fraud controls –Control activities –Risk assessment –Control activities –Information and communication –Monitoring

38 The Role of Corporate Governance Protect investors Create long-term shareholder value Restore investor confidence Support strong and efficient capital markets Committee must ensure its independence “Tone at the top”


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