Corporate Investigations: How Did It Come to This and Ways to Respond ACFE / ISACA Joint Meeting

1. Corporate Investigations: How Did It Come to This and Ways to Respond ACFE / ISACA Joint Meeting February 19, 2009 Virginia A. Davidson, Esq. (216) 622-8588 vdavidson@calfee.com www.calfee.com Rachel D. Hoy, CFE, CPA (216) 373-2994 rhoy@srr.com www.srr.com

2. Presentation Topics • The “Knock” • Operational Red Flags • Financial Red Flags • The Decision Whether to Investigate • Who Should Investigate • First Steps • The Heart of the Investigation • Concluding the Investigation • Questions

3. The “Knock” • External Event • Governmental Agency / Law Enforcement • Lawsuit • Internal • Tip / Hotline • Auditors • By Accident • Presence of a “Red Flag”

4. Operational Red Flags – General / Culture • Tone at the top • Management override • Lack of corporate formalities • Disrespect for regulatory agencies • Reluctance to provide information • Operating in crisis mode • No clear lines of authority • No or lack of segregation of duties • No compliance programs • Inadequate physical security • “Loyalty” to sole-source vendors • Frequent change in attorneys • High Turnover

5. Operational Red Flags – Individual / Employee • “Too” close of a relationship with customers / vendors • Individual skill set does not match job requirements / lack of training • Behavioral changes • Not taking vacations • Rewriting records in the guise of “neatness in presentation” • Living beyond means • Borrowing money from co-workers • Creditors or collectors showing up at workplace • Carrying unusually large sums of money • Excessive overtime • Duplicate social security numbers, names and addresses

6. Financial Red Flags • Excessive checking accounts • Frequent changes in bank accounts • Frequent changes in external auditors • Continuous rollover of loans • Excessive number of period end transactions • Excessive number of adjusting entries • Unexpected overdrafts or declines in cash balances • Refusal to use serial numbered forms • Compensation program that is out of proportion • Excessive number of voids, returns and discounts • Discrepancies between bank deposits and posting • Abnormal number of payments to employees

7. Financial Red Flags • Large number of write-offs • Unreconciled bank statements • Abnormal inventory shrinkage • Increase in purchasing inventory but no increase in sales • Purchasing agents that pick up vendor payments rather than having it mailed • Abnormal cash transactions • Vendor addresses that match employee addresses • Vendor addresses to PO Boxes • Significantly outpacing competitors • Outstanding results in a down economy • Unusual financial ratios • Persistent cash flow problems in the presence of regularly reported profits

8. The Decision Whether to Investigate • Not every circumstance warrants investigation. Consider the following: • Law or company policy • Individual health or safety • Potential trigger for reporting to authorities? • Voluntary disclosure and advantage (or not) • Existing or likely government investigation

9. Who Should Investigate • Business matters v. violation of law or policy • Investigations in response to government inquiry • In-house counsel considerations • Independent counsel considerations • Management versus Board of Directors or Board Committee

10. First Steps • Define scope and purpose • Develop plan • Appointment of one employee to act as liaison (at the direction of counsel) • Appointment of one person for public speaking (in coordination with counsel) • Limit access to information • Take any appropriate personnel action • Need for employees to engage separate counsel? • Identify and preserve information • Preserve Attorney-Client and Work Product Privileges • Document preservation notice • Issue notice to employees?

11. The Heart of the Investigation • General principals • Re-visit “First Steps” from time to time • Logistics for interviews • Preliminary email review • Communicating to employees represented by counsel • Paper and electronic documents • Interview employees • Follow up • Privileged memorandum documenting all investigative steps

12. Concluding the Investigation • Communication with management and/or directors • Written report of investigation? • Take or recommend appropriate action • Sharing of investigation results

13. Questions

14. Corporate Investigations: How Did It Come to This and Ways to Respond ACFE / ISACA Joint Meeting February 19, 2009 Virginia A. Davidson, Esq. (216) 622-8588 vdavidson@calfee.com www.calfee.com Rachel D. Hoy, CFE, CPA (216) 373-2994 rhoy@srr.com www.srr.com