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Chapter 6. Legal, Regulatory and Professional Environment. Critical Thinking Exercise.

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chapter 6

Chapter 6

Legal, Regulatory and Professional Environment

critical thinking exercise
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?

  • 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
the rights of individuals
The Rights of Individuals


  • 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

the rights of individuals1
The Rights of Individuals
  • Interviews
  • Searches
  • Surveillance
  • Discharging a Suspected Wrongdoer from Employment
  • Privileges
  • 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
  • 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”
  • 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
discharging a suspected wrongdoer from employment
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
  • Protections against certain types of testimony
  • Attorney-client privilege
  • Attorney work-product privilege
  • Physician-patient privilege
  • Marital privileges
  • Miscellaneous privileges
attorney client privilege
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
attorney work product privilege
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
physician patient privilege
Physician-Patient Privilege
  • Confidential when obtaining treatment or being diagnosed
  • When involved in litigation, privilege is waived
    • Court appointed physicians
    • Expert witnesses
marital privileges
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
miscellaneous privileges
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
probable cause
Probable Cause

Standard used:

  • To make an arrest
  • To conduct a search
  • To obtain a warrant
  • By grand juries
  • Culpability scale
    • Witness
    • Subject
    • Target
probable cause1
Probable Cause
  • 4th Amendment
  • Terry v. Ohio
    • “Terry Stop” (reasonable suspicion)
  • United States v. Matlock
    • “Co-occupant consent rule”
  • Illinois v. Gates
    • “Fair probability”
probable cause2
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
rules of evidence
Rules of Evidence

The truth shall set you free

  • Evidence must be relevant and trustworthy
  • Must be admissible
  • May be testimonial
  • Real
  • Demonstrative
  • Circumstantial
  • Direct
  • “Facts at issue”
rules of evidence1
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
rules of evidence2
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
criminal justice system
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”
criminal justice system1
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
criminal justice system2
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
criminal justice system3
Criminal Justice System
  • Parole
    • Reward for good behavior
  • Probation
    • Alternative to prison
  • Recidivism
  • Discretion
  • Businesses and other organizations may be prosecuted
civil justice system
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?
complaints and pre trial activity
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”
negotiated remedies
Negotiated Remedies
  • Out-of-court settlements
    • Both sides come to settlement position
    • Attorneys negotiate
  • Mediation
    • Independent 3rd party with no authority to decide case
    • Assists both sides
    • Work for mutually agreeable resolution
  • Arbitration
    • Independent 3rd party acts as judge and jury
    • Authority to determine outcome of case
    • Binding or non-binding verdict
pre trial motions and the civil trial
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
regulatory system
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
basic accounting principles a survivor s guide to accounting
Basic Accounting Principles – A Survivor’s Guide to Accounting
  • Balance Sheet
  • Income Statement
  • Statement of Cash Flows
  • Accrual Accounting
the aicpa and statement on auditing standards no 99
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
fraudster s perspective
Fraudster’s Perspective
  • Criminals exploit your humanity
  • “Trust, but verify”
  • White collar crime is a crime of deceit
  • White collar criminals are artful liars
the sarbanes oxley act of 2002
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
public company accounting oversight board pcaob
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
coco s enterprise risk management framework erm
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
pcaob s auditing standards nos 3 and 5
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
the role of corporate governance
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”