This U.S. federal prosecutor will help you review the courtroom requirements for presenting evidence and testimony, attorney-client privilege and how it affects fraud examiners, the work product doctrine, and other necessary law topics.  

From the first day of an examination, a fraud examiner must be thinking of one destination: the courtroom. And while you are meticulously cataloging every scrap of evidence, you would do well to review the legal issues and practical considerations of your fraud examination.

Portions of this article are based on a chapter in the yet-to-be-published textbook “Scientific Evidence in Civil and Criminal Cases,” 5th Ed., by Moenssens, Starrs, Henderson and Inba, The Foundation Press Inc., Westbury, New York. 

Expert Testimony

As a fraud examiner, forensic accountant, or financial investigator, you probably will spend hours sitting next to a judge providing testimony on cases you have examined. However, the courts also may spend hours determining whether you are suitable to testify or be an expert witness who is asked hypothetical questions based on the facts to prove a case.¹ According to the well-known Daubert test, financial expert testimony is admissible when it is based on sufficient facts, the testimony is the product of reliable principles and methods, and the witness has applied the principles and methods reliably to the facts of the case.² A review of Daubert, and its progeny, indicates that the courts’ rejection of expert testimony is the exception not the rule. In practice, a ruling that one expert’s testimony is reliable does not make contradictory expert testimony unreliable, because the courts’ focuses are on principles and methodology and not the ultimate opinions of the experts. For example, proponents of forensic accounting expert testimony do not have to show their experts are correct, just that they are reliable.³

While there are many legal issues surrounding the collection and preservation of evidence,⁴ two issues are preeminent: chain of custody and best evidence. Chain of custody requires that documentary and physical evidence obtained during the course of an investigation should be marked, identified, inventoried, and preserved to maintain its original condition and to establish a clear, distinct list of those who have handled it until it is introduced at trial.⁵ This is normally required when the exhibit is not readily identifiable, unique characteristics of the exhibit are not noted, and/or its condition is critical to an issue in dispute. For example, chain of custody may be important in a dispute in which a prosecutor claims that the parent corporation of a subsidiary has electronically altered the subsidiary’s records. Chain-of-custody authentication of documents or business ledgers can be tricky but not insurmountable. For example, in a criminal case, the defendant may not be available to authenticate his or her own records but they could be authenticated through circumstantial evidence, including the documents’ distinctive characteristics and the circumstances surrounding the discovery of the document.⁶

The best evidence rule, which applies to documentary evidence,⁷ says that the best proofs of documents’ contents are the documents themselves. However, if an original has been destroyed or is in the hands of another party and it is not subject to legal process by search warrant or subpoena, an authenticated copy of that original may be substituted as evidence.⁸ Duplicates are generally admissible as originals in all cases except when there is a genuine issue about the authenticity of the original or when admission of the duplicate instead of the original would be unfair.⁹ For example, when a casino card dealer underreported his income from tips, the tax court did not violate the best evidence rule by admitting a photocopy of another card dealer’s diary containing his financial records, including income from tips. This was proper because there was no dispute that the duplicated diary was in fact the diary of the second card dealer.¹⁰

Use (and Misuse) of Attorney-client Privilege

The attorney-client relationship, the oldest privilege recognized in common law,¹¹ is designed to promote and facilitate an individual’s ability to seek legal advice so that all matters can be discussed candidly and completely with counsel. The privilege is balanced against the truth-seeking function of the courts, and therefore, must not be expansively construed.¹² Although the privilege is designed to provide confidentiality, its purposes are subverted when the assertion of the privilege provides a cloak of secrecy around the illicit business affairs of an individual or corporation.¹³

The courts have long recognized that modern legal practice requires lawyers to rely upon the services of non-lawyers. This may include secretarial personnel, interpreters, investigators, law clerks, and accountants acting as fraud examiners.¹⁴ So lawyers have an ethical duty to maintain the privilege that is shared by the agents of either the lawyers or clients who come into possession of such information. While U.S. federal courts have refused to recognize a pure accountant-client privilege,¹⁵ communications from a client to an accountant or fraud examiner assisting the client’s attorney, for the purpose of obtaining legal advice from the attorney, may be privileged. In such a situation, the accountant may be the attorney’s agent and communications with that accountant may be covered under the umbrella of the attorney-client privilege.¹⁶ Investigative reports submitted by a forensic accountant or fraud examiner prior to commencement of a government investigation, may not be considered privileged merely by their transmission to counsel.¹⁷ However, if the investigation was conducted at the direction of counsel either to obtain legal advice or to assist in the preparation for potential litigation, the attorney-client privilege may apply to the investigative report.¹⁸

But does the advice create a defense for individuals seeking legal advice? That is, once a client seeks, acquires, and follows the advice of a lawyer does that indicate the client should not be convicted of a criminal offense? Maybe. To be sure, advice of counsel is not a defense to a crime; rather, it is only a circumstance that may be considered in determining whether the defendant acted in good faith and lacked the culpable mental state required by statute – for example, intent or willfulness to defraud. To be entitled to the advice of counsel, the defendant must have disclosed all relevant facts to his or her attorney.¹⁹

As part of the good faith defense, there are three questions that translate into elements: 1) Did the defendant make full and complete disclosures to his or her attorney? 2) Did the defendant closely follow the advice of the attorney? 3) Were the defendant’s actions taken in good faith? In the 1992 United States v. Levin case, the courts said:
[I]f a person acts strictly according to the attorney’s advice relying upon it and believing it to be correct, only intending his or her acts to be lawful, then that person cannot be convicted.²⁰ 

The attorney-client privilege and the work-product doctrine can protect financial investigation communications and materials, including results of internal corporate investigations from disclosure to the government or to third parties.²¹ Assertions of the attorney-client privilege are often accompanied by an assertion of the work product “privilege.” Both may be asserted as a bar against disclosure of documents, but each are distinct concepts. The precepts of the work product doctrine are based in English law but first gained prominence in America with the decision in Hickman v. Taylor, 329 U.S. 495 (1947). Hickman established that the doctrine regulates what information may be discovered by an opponent in litigation about the theories of an attorney on the case. Under the work product doctrine, a lawyer generally may not be required to disclose those memoranda or notes that would reveal counsel’s “mental impressions” about a matter in litigation.

Forensic accounting results are protected only if the courts find that the rules of the privilege and doctrine have been satisfied. For example, outside counsel conducting internal fraud examinations works closely with in-house counsel so the results are protected under the attorney-client privilege. In this situation, outside counsel should be authorized to conduct an investigation, which amounts to a legal examination rather than a fact-finding mission. The entity must give sufficient autonomy to outside counsel, including retaining outside experts like fraud examiners and forensic accountants with disclosure agreements. General or in-house counsel may be included in such privileges if they are directed by outside counsel and corporate officials to assist in investigations and give legal, not business, advice to the entity. Similarly, the work-product doctrine may apply to materials produced by in-house counsel if he or she prepares materials with outside counsel to aid in potential litigation preparation. Additionally, both the attorney-client privilege and the work product doctrine²² can protect employee statements regarding the internal investigation. Some jurisdictions recognize the self-evaluation privilege, which protects information gathered by a “critical self-analysis” of an entity and may protect materials prepared during an entity’s internal investigation.²³

The mental state element says that an entity is criminally liable for the act of its agents when the agent(s) acted within the course and scope of employment and authority, and with the requisite culpable mental state.²⁴ The mental state element is usually satisfied if there is adequate proof that the agent acted with the intent to benefit the corporation.²⁵

Electronic Organization

Organizing voluminous case materials that may become evidence in a court of law, requires a comprehensive document management plan. Because much written documentation never becomes printed documents, computer specialists who can reliably copy hard drives are important members of an examination team. Document management specialists affix bar codes on boxes of case papers so they can keep track of them throughout the changing classifications of a fraud examination case. They also scan documents for electronic storage and easy retrieval. Once downloaded, a fraud examiner can work from a convenient office rather than at the document storage site. The downside to the electronic courtroom is that some judges and lawyers resist the notion of facing a jury in a document-intensive case with nothing but a laptop computer, a printer, and a projection device. Even though any document projected and presented to a jury can be printed and labeled for identification as evidence, issues surrounding the marking and authentication of electronic evidence abound. For example, data integrity from copied or “mirrored” computers is often a foundational question to the admission of evidence and may be the subject of extensive cross-examination.

Admissible Evidence from Computers

Though you can glean important evidence from sent and received email messages, they can easily be misrepresented. A moderately trained fraudster can use a computer to assist his or her schemes. Information from the Internet has been called “inherently untrustworthy.”²⁶ But, under the right circumstances, courts have ruled that circumstantial evidence can authenticate emails for admission into evidence.²⁷

The Fourth Amendment to the U.S. Constitution requires law enforcement to obtain search warrants to obtain certain evidence.²⁸ The search warrant may authorize a limited intrusion into an area, in which there is reasonable expectation of privacy, to search and seize certain specified evidence of crime based on probable cause. The courts have commonly relied on fraud examiners, forensic accountants, and financial investigators as reliable sources of information for probable cause.

The Electronic Communications Privacy Act (ECPA) regulates how the U.S. government can obtain stored account information from network service providers.²⁹ This law prohibits access to stored communications, such as saved emails and transactional records and clears up questions of Fourth Amendment protections to cyberspace. For example, while the Fourth Amendment clearly protects homes in the physical world, computer networks, like the Internet, do not have a physical “home.” Instead, information is stored in network accounts in computer storage owned by network service providers. Because the providers are not the targets of investigations, and are not afforded Fourth Amendment protections, courts generally permit the subpoena process to order the provider to divulge the contents of accounts. The EPCA does provide network account holders a range of statutory privacy rights limiting access to stored account information held by network service providers. For example, law enforcement may seek a valid search warrant to obtain electronic data files but if an administrative subpoena or summons is used, the subscriber or customer must be notified beforehand. A judge must approve and issue a nondisclosure order to avoid subscriber or customer notification.³⁰ Government operatives who violate the EPCA may receive civil damages and disciplinary actions.³¹

Many courts have deemed that computer records contain hearsay. Most often, the business records exception to the hearsay rule is used to admit such evidence in court.³² Authenticity of the record only needs to be established when computer records contain computer-generated data that is untouched by human hands because a “statement,” subject to hearsay rules, is an assertion of a person and a declarant is a person who makes a statement.³³ Automated records can be admitted on non-hearsay grounds.³⁴ However, before a computer record, or any other evidence, can be admitted into evidence, it must be authenticated. Authenticity may be challenged in three ways: 1) if the records were altered after created,³⁵ 2) if the reliability of the computer program that generated the records is at issue,³⁶ and 3) if the identity of the author is at issue.³⁷

Usable Fruits of Hard Work

Recent cases, such as Enron and WorldCom, have raised serious concerns about the integrity and reliability of the financial reporting process, particularly revenue reporting and asset reporting. Fraud examiners and forensic accountants around the world are called upon to probe beyond the numbers to determine the reality of financial situations. Ultimately, fraud examinations will end up as significant evidence in courtrooms and other legal forums. Fraud examiners should be familiar with the legal issues and practical considerations of their field so that the fruits of their hard work are usable and effective in litigation.

The contents of this article are the views of the author and may not necessarily reflect the views of the U.S. Department of Justice. 

Douglas W. Squires, J.D., a federal prosecutor in Columbus, Ohio, is an adjunct faculty member of Capital University Law School in Columbus.

1. For example, hearsay issues discussed in United States v. Ordonez, 722 F.2d 530, 536 (9th Cir. 1983).
2. Fed. R. Evid. 901 (2002).
3. Fed. R. Evid. 1001and 1002 (2002).
4. For example see, Fed. R. Evid. 1004 (2002).
5. Fed. R. Evid. 1003 (2002).
6. Keogh v. Commissioner, 713 F.2d 496, 500 (9th Cir. 1983).
7. See United States v. Oshatz, 912 F.2d 534 (2d Cir. 1990).
8. Fed. R. Evid. 702.
9. Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579, 588 (1993).
10. See In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 744-45 (3d Cir. 1994).
11. Fed. R. Evid. 501 (2002) (common law principals govern any privilege of a witness, person or other entity as they may be interpreted by the courts of the United States in the light of reason and experience).
12. Upjohn v. United States, 449 U.S. 383 (1985).
13. United States v. Nixon, 481 U.S. 683, 710 (1974).
14. In re Grand Jury Subpoenas, 803 F.2d 493, 496 (9th Cir. 1986).
15. United States v. Cote, 456 F.2d 142 (8th Cir. 1982).
16. United States v. Arthur Young & Co., 465 U.S. 805, 815 (1984); See also Couch v. United States, 409 U.S. 322, 335 (1973).
17. See United States v. Kovel, 296 F.2d 918, 921-22 (2d. Cir. 1961).
18. See Fisher v. U.S., 425 U.S. 391, 403-04 (1976); McGuire v. Sigma Coatings, 48 F.3d 902 (5th Cir. 1995).
19. In re Grand Jury Subpoena, 599 F.2d 504, 506-08 (2d Cir. 1979).
20. United States v. Hecht, 705 F.2d 976 (8th Cir. 1983).
21. United States v. Levin, 970 F.2d 681 (10th Cir. 1992).
22. Upjohn Co. v. United States, 449 U.S. 383, 386-88 (1981); Hickman v. Taylor, 329 U.S. 495, 510-11 (1947).
23. In re Grand Jury Subpoena, 478 F.Supp. 368, 374 (E.D. Wis. 1979).
24. Bredice v. Doctors Hospital Inc., 50 F.R.D. 249 (D.D.C. 170), aff’d, 479 F.2d 920 (D.C. Cir. 1973). For a complete discussion of these doctrines see, Mark D. Seltzer and Erik O. Skramstad, “How to Protect the Results of an Internal Investigation,” Health Care Fraud and Abuse Newsletter, Oct. 1999.
25. New York Central & H.R.R.R. Co. v. United States, 212 U.S. 481 (1909).
26. United States v. Gold, 743 F.2d 800, 822 (11th Cir. 1984).
27. St. Clair v. Johnny’s Oyster and Shrimp, Inc., 76 F. Supp. 2d 773, 774-75 (S.D. Tex. 1999).
28. See United States v. Tank, 200 F.3d 627, 630-31 (9th Cir. 2000).
29. Adopted in 1791, states, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”
30. 18 U.S.C. Sec. 2702 (2002).
31. 18 U.S.C. Sec. 2703 (2002) (provides five methods a government entity may use to compel certain kinds of information: subpoena, subpoena with prior notice to subscriber or customer, court order, court order with prior notice to subscriber or customer, and search warrant).
32. See 18 U.S.C. Sec. 2712 (2002).
33. See Fed. R. Evid. 803(6) (2002).
34. See Fed. R. Evid. 801(a)&(b) (2002).
35. United States v. Fernandez-Roque, 703 F.2d 808, 812 n.2 (5th Cir. 1983).
36. United States v. Whitaker, 127 F.3d 595, 602 (7th Cir. 1997).
37. United States v. Salgado, 250 F.3d 438, 452-53 (6th Cir. 2001).
38. See generally United States v. Simpson, 152 F.3d 1241 (10th Cir. 1998).