Dave Loxton, joint head of the Forensics department at ENSafrica, explains why corporates should be hiring forensic attorneys to lead their investigations and why SA is behind in this trend.

There has been extensive debate in South Africa regarding who is better to conduct forensic investigations, lawyers or accountants. There are a number of compelling reasons why the forensic lawyers should lead forensic investigations, including:

  • lawyers ensure and maintain professional privilege;
  • lawyers are specialists at gathering evidence;
  • Lawyers can protect their clients from the  negative impact of discovery
  • privilege gives corporates the right not to disclose the forensic report to a regulator; and
  • forensic lawyers are loss recovery experts.

In order to unpack the reasons given above, imagine the following scenario:

Frank is the CEO of a successful company, which has been trading for a number of years. Suddenly, and without warning, a number of his employees leave to take up employment with his only opposition. They were not subject to a restraint of trade, and accordingly, they will be starting with Frank’s opposition within a few weeks of leaving his employ.

Whilst Frank is contemplating the damage to his business, the head of his internal audit advises him that she has heard rumours that the departing team has taken with them all of Frank’s marketing plans, pricing lists, customer lists, trade secrets, and a list of his patents. This horrifies Frank, because if it gets into the wrong hands, it could wipe out his business overnight.

Frank’s head of internal audit advises him to engage a forensic accounting firm to do a quick forensic investigation, which he does. Two days into the investigation, Frank is shocked to receive a phone call from his Chief Legal Counsel, advising him that a team of attorneys and one of his erstwhile employees are at his premises to search and gather evidence to preserve for upcoming litigation. Apparently his erstwhile employees approached a judge and brought an Anton Piller1 application. They alleged that they left Frank’s employ because of his unethical manner of conducting business and alleged that it is common practice for him to compete unlawfully against his opposition. They claimed in their application papers that the forensic investigation was an attempt by Frank to cover his tracks. As such, the working papers of the forensic investigation, amongst other things, are taken from Frank.

How does one avoid this happening?

The answer is to ensure that your forensic investigations are conducted under the direction of a law firm. In terms of international best practice, most forensic investigations in the USA and Europe are conducted by lawyers, not accountants. Here is why:

Lawyers lead forensic investigations to ensure and maintain privilege

When heading up a forensic investigation, the law firms receive the instructions, and the lawyers then focus the investigation on what is required at the relevant tribunal, be it a civil court, criminal court or a disciplinary hearing. Where necessary the lawyers will engage the services of forensic accountants. This model is more beneficial to the client than an accountant-led investigation because the fruit of the investigation attracts legal privilege, and the Frank scenario detailed above could simply not happen as the forensic investigation would be protected by legal professional privilege.

Often, in SA, when a client suspects fraud or corruption, he will turn to his auditing firm for assistance. Each of the large accounting firms has a forensic accounting division. Once instructed, the forensic accountants gather evidence, which is then set out in some detail in a report, which almost always, concludes with the recommendation that the client should seek legal advice. Even though accountants are generally very adept at gathering facts, in the ENSafrica Forensics teams’ experience they often gather facts that are simply not necessary for the matter at hand. As such, the client will end up paying for facts set out in a forensic report that legal counsel very often ignores. Even worse, legal counsel will often advise the client that the forensic report needs to be re-worked before being presented to court.

If Frank’s forensic investigation was headed up by a law firm, and the accountants reported into the law firm and acted on the law firms’ instructions, it could be argued that the report was subject to legal professional privilege. As such, Anton Piller or not, the report could not have been seized.

Lawyers are specialists at gathering evidence

Another big benefit for clients in engaging an attorney in a forensic investigation is that the attorney gets to choose his witnesses, as well as to instruct the accountant as to what evidence should be presented at the relevant tribunal. It is not often in litigation that one gets to choose the witness who will testify on a critical issue. If an attorney is instructed from the beginning of a forensic investigation, he can choose which forensic accountants will be best placed to testify in subsequent proceedings, and he can ensure that the accountants are in a position to do so.

The impact of discovery

Another issue which can be critical to a client’s case is the issue of discoverability. In many investigations it is simply not in a client’s best interests to have a written report. Whilst legal professional privilege can generally be claimed, there will often be skirmishes about the claimed privilege. As such, feedback to the client will often be given at a specially convened board meeting, convened specifically to receive legal advice on potential litigation and the outcomes of the investigation. It should be made clear that in subsequent proceedings therefore, there are no documents, reports or minutes to be discovered. Furthermore, the client can claim that the issue is subject to legal professional privilege as the meeting was specifically convened for the purpose of obtaining legal advice for litigation. However, if the client is in possession of a report from a forensic accounting team, then it will most likely end up as part of discovery.

Privilege gives you the right to not disclose the report to a regulator

This assumes immense importance where potential anti-corruption compliance breaches have been investigated and a regulator, seeking to impose multi-million dollar penalties in respect of the breach, requests to see the report.  Without privilege, the regulator will demand the forensic report. Another issue inherent in such reports is the often insensitive use of corruption terminology by non-lawyers or investigators which can land the company in unmerited hot water. An example of this would be where an improper payment is incorrectly labelled as a “bribe”, or an allegation referred to as a “fact”.

In the past year or so, more and more multi-nationals are instructing attorneys in forensic investigations (as opposed to accountants). These multi-nationals are aware of the need to engage with accountants in many instances, but they are looking to attorneys to engage the right team on their behalf, and this team may not include forensic accountants. Also, when a multi-million rand deal takes place, multi-nationals are looking more and more to law firms for proper forensic due diligence to ensure compliance with corruption laws.

Forensic lawyers are loss recovery experts

Another critical aspect from a client’s point of view is that of recovery of assets and / or losses. When attorneys are engaged to do the investigation from inception, they can focus on the recovery aspect from the beginning of the investigation, which is obviously in the client’s best interest.

Conclusion

In conclusion, forensic investigation best practice would be to engage the services of forensic accountants under the umbrella of legal counsel. Recognising the value of skilled forensic accountants (attorneys regularly engage accounting professionals to analyse complex financial data), what is most important is that the forensic accountants have the ability to persuasively communicate their results to a tribunal. This requires direction from an attorney, and as already mentioned, attorneys also ensure legal privilege and ensure that a company’s recovery of assets / loses is a focus of the investigation from inception.

Culled: ensafrica

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