Editor: Please tell our readers about your experience as Dispute Advisory Services Leader for KPMG Forensic SM.
Jones: I maintain a broad understanding of the marketplace, especially general counsel and attorneys in private practice, to identify trends in litigation and disputes in order to help clients and their litigation counsel meet their needs in resolving disputes. While long in the business of providing Forensic Technology Services, KPMG in the United States also is in the business of Dispute Advisory Services. Since re-entering that service, we have had significant interest from clients, especially when international disputes, complex data or accounting issues are involved. I've had 20 years of experience in forensic and litigation services - as an expert witness testifying in federal court, as an arbitrator in the U.S. Court of Federal Claims, particularly on accounting matters, and as a neutral data repository when parties need to share and compare confidential information.
Editor: You have long been a proponent of early dispute resolution. How much of your practice involves conducting investigations to explore potential nascent problems?
Jones: Early Dispute Resolution is a significant part of our practice. Often KPMG is involved with investigating an alleged financial reporting fraud, almost as soon as a report of misconduct has been received by a company. What is important in making that early-on investigation effective is to know what information is important up-front and then to get early results. For example, if there's been an employee defalcation, is there fidelity bond coverage? If so, what are the necessary elements of the fidelity bond claim?
We work to design the investigation to put together the elements of the claim and not wait until the client actually has to file the claim before we gather that information. The same procedure follows if a company has a casualty, a fire, or a natural disaster - what elements should we investigate for a business interruption claim? Similarly, what if there is a fraud that affected a customer? What do you need to do to make things right with your customer? What information are you going to need early on?
Editor: When there is a formal dispute, what types of relationships between adverse parties are most likely to lead to settlement through mediation or arbitration?
Jones: It is necessary to analyze the relationships between the parties. The most promising situation is one where there are two companies that want to preserve their relationship and both companies have a lot to lose, or gain, depending on how the dispute is handled. If they destroy their relationship, they might lose a key supplier or a key customer or their prestige in the industry. That's a situation where business people, especially in the C-suite, are going to be interested in working with the general counsel to do what is right and get the relationship back on track. Where professionals like KPMG can be helpful is by having an objective approach to the problem, give the business people the tools they need to assess the relationship and come up with a solution that both sides can live with.
The second category of relationships that also has some opportunity for settlement is where there's no relationship. For example, in class action litigation one side has no ongoing business relationship with the other party - it's really going to be all about the money, with maybe some corrective action. What the professionals like KPMG can do there is to help quantify the exposure so that both sides can make an honest evaluation of their cases. Those kinds of cases often end in settlement.
The third category is more problematic and may lead to litigation. This is the instance where there is a lost relationship with no hope of resuscitation - one side or both sides have nothing to lose by the litigation process, and one side wants justice. This situation is the most challenging for reaching early dispute resolution.
Editor: In reviewing your own experience, please describe the types and situations that most frequently lead to disputes.
Jones: The kinds of things we're seeing include post-acquisition disputes, intellectual property disputes, class-actions, and infrastructure or energy-project disputes, especially internationally, as well as actions brought by a regulatory agency or by an attorney general on behalf of the citizens of a state.
One of the things that we do to keep a dispute from arising, particularly in a post-acquisition scenario, is to identify the root causes of a potential dispute and try to build in protections in the relationship early on. Often we see post-acquisition disputes arising because the parties did not get financial advice from accounting professionals in defining terms in the purchase-and-sale agreement. In other situations, maybe the buyer did not have all the facts during due diligence and finds out something unfavorable about the acquisition after the transaction is closed. Some things we do to help clients avoid those pitfalls is clearly defining the terminology in the purchase-and-sale agreement and using generally understood accounting terms. Another is assisting with effective due diligence so areas of risk are explored to give the buyer a clear understanding of what he is getting. Both steps can help to avoid the need for dispute resolution later.
Editor: Describe the kinds of forensic work where your auditors and advisors can be of greatest value when working with corporate counsel or outside counsel.
Jones: When asked to assist in a dispute, our role is to help attorneys and parties to the dispute understand the business issues, and in particular, business practices, accounting systems and policies, and information technology systems, so that they can understand what information is available, where to look, realistically how long it is going to take to extract the information and how much it is going to cost. With those first two sets of skills - understanding the business issues and understanding the business practices - we're able to help clients prioritize in rendering a more effective response to a dispute and a cost-effective discovery plan.
A second area where we help is electronic discovery and data management. Key to conducting that successfully is to put in place measures to help assess the completeness of the discovery and the understanding of business practices in information technology systems. Next, we impress counsel with the need for protecting and documenting the chain of custody so that the data may be admissible in court, and finally, we can support the organization's information technology professionals so that the e-discovery process is least burdensome to the company.
Another area is complex data analysis, and that means a methodical approach to cracking hard problems, especially when there's a lot of transaction-driven data. Testing the feasibility of an approach before making a huge commitment is typically an effective way to make those projects work. In this capacity, we have people who have spent their careers as auditors, people with a deep knowledge of accounting principles, information technology specialists, industry background specialists, and others.
Finally, when we are asked by counsel to bring the resources of our international credit and forensic network to bear, our team, through our network of global firms, can respond quickly when an investigation has to take place simultaneously in several countries.
Editor: You and members of your group may be called upon to serve as neutrals in ADR proceedings. Please describe a typical situation that might dictate someone of your qualifications be on the panel.
Jones: There are three situations that come to mind. First is a post-acquisition dispute, which often revolves around accounting matters related to the purchase-and-sale agreement. KPMG member firms are particularly active throughout the world serving as arbitrators or as experts in an international arbitration, which is the preferred method of resolving disputes relating to cross-border infrastructure projects and investments in energy projects. Finally, I have had the opportunity to serve as a neutral data repository in disputes involving confidential information where the discovery process itself would violate the confidentiality of the information, such as a customer non-competition agreement. Serving as the neutral, we take and compare confidential information from both parties, and determine whether there have been any violations.
Editor: When you are asked to assume the role of investigator for a mediation or arbitration proceeding, do you approach the gathering of evidence in the same way as for a trial?
Jones: The completeness of the process, the chain of custody, and the need for reliability remain the same. But mediation and arbitration differ somewhat from a trial. In mediation, it is important to stick to the critical issues. Most important is to prioritize the issues to get to the most critical items that are going to make a difference to the parties. It is also important to stay objective to maintain credibility. In arbitration the practice of gathering of evidence is similar to that for a trial. What is different is that the presentation can presume more business knowledge by the trier of fact. I have found that the arbitrator knows less about the issues than the parties do. An effective advocate is going to help the arbitrator understand tough issues and get to the right answer. This includes admitting where your argument is weak but being as objective, straightforward and helpful as possible. My experience has been that pure advocacy doesn't sell very well, and it clouds the effective points that a party wants to draw to the arbitrator's attention.
Editor: Part of the evidence that needs to be scrutinized is often electronic data. What measures do you take to narrow the search for key documents?
Jones: KPMG has a process for gathering key documents and organizing them - Prepare, Plan, Preserve, Pair, Process, Peruse and Produce. Preparation means bringing in people who have experience in large engagements, understand the issues that will make a difference, understand how the information is stored, and use an organized process to do the work. Second is to use the search tools to home in on the most significant documents and group them appropriately. A third element, often overlooked, is to bring in subject matter professionals with a strong knowledge of the issues. For example, if there's an investigation with a challenging accounting issue, you need to have experienced accountants reading documents to look for clues as to a company's accounting processes.
Editor: Is electronic discovery as prevalent in ADR cases as it is in litigation? Have the number of instances calling for e-discovery in such cases greatly increased?
Jones: Especially in arbitration proceedings, electronic discovery is just as demanding as it might be in litigation. In mediation, parties are more focused on finding the key documents that will be most compelling in showing the other side the strength of the case, and so there might be less volume but a much more intense focus on getting to the most critical documents. The parties are often apprehensive about the cost and time for discovery.
Editor: How can professionals like your forensic group often mitigate the penalties that might otherwise be inflicted on a client who is the subject of a government investigation?
Jones: Our team comprises experienced former law enforcement officers, regulators and investigators in order to understand what drives a government investigation and what resolution is sought. Some of the things that we are doing to help organizations mitigate the effects of an alleged violation and a subsequent regulatory investigation are to build a fraud risk management program and a corporate compliance program. It's important in doing that to help management and the board understand and prioritize their unique risks. It's also important for us to help organizations conduct effective auditing and monitoring to see that the corporate compliance program is operating effectively and to identify areas of risk. This is particularly useful if there is risk of violation of a government mandate, such as in a Foreign Corrupt Practices Act investigation. We know this is an area of interest to the government. And we have plenty of information about the kinds of violations and settlements that have occurred. This gives our organization strong indicators of what risks to look for.
We also help organizations build a plan for response to an issue. If an organization is subject to regulatory scrutiny, it needs to have a plan in place. We find it effective to offer to help the government with fact-gathering and to share findings, since we usually know the business systems, the information technology and the record-keeping better than the investigators do. If we show some understanding of what they're looking for and offer constructive ideas about how to get that information reliably and efficiently, that will help complete their investigation quickly. Since the investigators have to have something to show for their work, the organization needs to develop a set of guidelines. How far are we willing to go to settle this and what are the things that we can't do?
Finally, the organization needs to be prepared to take corrective action, and we help organizations in putting together corrective action plans, executing the auditing and monitoring and helping to report in a way that shows that the corrective action plan is effective.
* KPMG ForensicSM is a service mark of KPMG LLP. Forensic advisory and expert witness services may be subject to legal and regulatory restrictions.