Forensic Accountants And Global Compliance, Fraud, And Corruption

Editor: Walter, tell us about your background.

Pagano: Prior to joining Eisner LLP in 2005, I spent almost 20 years in public accounting where my position was Director of Litigation Consulting and Forensic Accounting. Prior to that time, I served for ten years as an IRS revenue agent covering the state of New Jersey. In this position, I not only conducted forensic and tax audits of corporations and individuals, but also trained revenue agents and special agents in the applicable provisions of income tax law. In addition, I was an appeals officer and assisted federal prosecutors as a forensic accountant in prosecuting various tax crimes.

Editor: Please describe the functions of your group at Eisner.

Pagano: Our Litigation Consulting & Forensic Accounting Group at Eisner provides litigation consulting and forensic accounting services to practicing attorneys as well as to corporate counsel. Attorneys turn to Eisner when they need an unimpeachable, objective source to ascertain the financial facts. We are engaged in SEC investigations and by independent monitors. We serve as independent forensic accountants in internal investigations. We handle tax and securities fraud matters. We provide forensic accounting and investigative services and are called upon to reconstruct books and records and calculate damages. We serve in matters involving the Foreign Corrupt Practices Act, the Bank Secrecy Act, and anti-money laundering laws and regulations including the Office of Foreign Asset Control. Our group includes experts in generally accepted accounting principles, generally accepted auditing standards, IRS practice and procedure, tax controversy, not-for-profit, real estate, insurance, bankruptcy, matrimonial and business valuation.

Eisner provides a wide range of international tax, audit, accounting and advisory services to both individuals and corporations. In addition, Eisner is an independent member of Baker Tilly International, which is a global network of leading accounting and advisory firms. It is the eighth largest accounting network in the world, and, after the Big Four, is the largest accounting network in the United States, represented by 138 firms in 104 countries and 24,000 staff worldwide.

Our Forensic Accounting Group is composed of 22 individuals having diverse experience and expertise. It includes partners and principals, directors, managers, and senior forensic accountants who are not only CPAs but also certified fraud examiners, business valuation analysts and certified anti-money laundering specialists. It also includes an attorney.

Editor: What are the challenges of globalization?

Pagano: One challenge is managing its rapid pace. Constant change is characteristic of the global scene. A second is understanding global markets, particularly emerging markets throughout the world. Third is understanding and adapting to local cultures. A fourth is coping with fraud and corruption that is endemic in many emerging markets. Another is putting in place internal controls that are specifically designed to detect, deter, prevent and remediate inadequate controls or misconduct. Lastly, we believe that a challenge of globalization is to conduct in-depth foreign corrupt practices due diligence in connection with M&A, JVs and other transactions involving relationships with foreign companies or nationals.

Editor: Are the risks greater in some countries?

Pagano: Absolutely. There has to be a risk assessment as to whether a company wants to do business in that market. For example, financial institutions are subject to bank secrecy and anti-money laundering legislation and need to be sure that they have adequate compliance programs in their international and domestic locations. The Bank Secrecy Act defines financial institutions very broadly and includes not only banks but also insurance companies and broker/dealers. Surprisingly, the Act's definition extends to businesses like auto dealerships and jewelers.

Editor: What factors contribute to corporate fraud?

Pagano: In our experience, we found that corporate fraud is generally committed by management or employees. Third parties sometimes contribute as well.

There are many factors that contribute to corporate fraud, such as pressure to value profits over integrity and inadequate internal controls (including inadequately staffed internal audit departments).

Fraud can also arise where there is inadequate accountability of decentralized business units located throughout the world. The question is, "Are those business units properly reporting to either regional and/or corporate headquarters?" Failure to take account of the local culture and employee attitudes can create a breeding ground for fraud.

Fraud is sometimes triggered by the personal circumstances of a particular individual. The individual may be under stress. Financial pressure, substance abuse and gambling can trigger corporate fraud.

Based on my experiences as an IRS agent and now as a forensic accountant, I can tell you that there are individuals who believe that, even if their fraud is detected by internal audit or an outside auditor, they will not be prosecuted. This attitude sometimes motivates individuals to commit corporate fraud. The person says: "Well, even if I get caught, maybe I'll have my wrist slapped. I don't have to worry about going to jail because generally people are not prosecuted."

Editor: Are companies adequately prepared to investigate fraud?

Pagano: Most companies have access to the tools to investigate fraud. These include audit and special committees of the board, outside counsel, forensic accountants, technology and internal auditors.

Any approach to combating internal fraud depends on the will of the company. And what do I mean by the will of the company? By that I mean the will of the company to detect, to voluntarily and timely disclose the fraud to the appropriate regulatory authorities, and to remediate the failed control environment.

Some companies mistakenly believe that they do not risk bribery or corrupt behavior by their executives and other personnel. So they're under the false impression that they don't have to worry about potential misconduct. Some may also be under the mistaken belief that their anti-bribery and anti-corruption programs are adequate.

We have substantial expertise to conduct due diligence and anti-money laundering independent testing and are experts in advising companies about the adequacy of their anti-money laundering compliance programs.

Editor: How important is internal audit in the detection of fraud?

Pagano: An internal audit department is staffed with personnel who have audit, accounting and technology backgrounds. Yet, they also need to be well-versed in, and continuously monitor, their companies' compliance programs and the areas of risk to which they are exposed and take steps to remediate any problems that come to light. A number of our clients outsource their internal audit function to us. We have also been retained by a global company to handle its Sarbanes-Oxley work - not as the auditor, but as an extension of management.

Editor: Many larger companies have a security department manned by personnel with investigative or law enforcement backgrounds. Where there is such a function, how do you relate to it?

Pagano : Typically, as forensic accounting consultants, we collaborate with a client's internal security personnel. If regulators have a comfort level with a company's internal audit, technology and security personnel in an area such as anti-money laundering, that goes a long way toward establishing a stellar reputation and credibility with regulators.

Editor: In addition to sanctions under U.S. law, are foreign countries stepping up enforcement of their laws with respect to fraud and corruption? What is the risk to U.S. companies?

Pagano : Yes to your first question. In addition, it's very important to point out that the SEC, the DOJ and the IRS are receiving assistance from their counterparts in foreign jurisdictions. International cooperation among law enforcement officials and prosecutors is increasing.

In terms of the risk to U.S. companies, there can be multiple investigations and prosecutions, involving different jurisdictions, both domestic and foreign. So it's very possible that a company can not only be facing parallel criminal and civil proceedings within the United States, but can also be facing investigations and criminal and civil proceedings in other countries.

Editor: What other harms may befall an organization besides financial loss?

Pagano : In addition to the imposition of penalties - and some of these penalties are very substantial - we have seen an increase in disgorging or forfeiting ill-gotten gains. The risk to the company's reputation is an immense concern. Injunctions and business restrictions (such as on sales to the government) can be imposed. And, a company may become subject to a deferred prosecution agreement and an independent monitor may be appointed who could play a major role in the way you run your business and even play a role in the retention or selection of the officers and directors.

Editor: What is your role in litigation? To what extent are your activities protected by the attorney-client privilege?

Pagano : We have two potential roles in litigation. Typically, we are retained as expert consultants or as expert witnesses to provide testimony. In either role, we assist attorneys in providing legal advice to their clients. When outside attorneys retain us as consultants, we enter into an agreement which is referred to as a Kovel letter. That letter actually makes us agents of the law firm and therefore cloaks us with the attorney-client and work-product privileges. On the other hand, when attorneys retain us to testify as witnesses, generally our work is discoverable and not protected by the privilege.

Editor: What risk management tools should a global company have in place?

Pagano: The most important tool is to establish an integrity-first tone at the top and culture that permeates the organization.

In many companies, and consistent with their policies and the provisions of Sarbanes-Oxley, corporate counsel and senior management play the most critical role in uncovering actual and potential compliance violations and assuring that they are appropriately reported up the line and remediated.

Another tool is an internal audit department that is well-trained in traditional detection and prevention of misconduct and reports any misbehavior or any misconduct directly to the audit committee.

A very important consideration in terms of risk management is the use of outside consultants like Eisner. Our services include providing consultants specifically trained to independently test a company's anti-money laundering compliance program. This practice area at Eisner is headed by Robert Goecks, a senior member of our department. Rob will describe that function in greater detail with our Baker Tilly International member firm Rachlin LLP in an interview in the June issue of The Metropolitan Corporate Counsel .

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