Fraud Research and Litigation

Some groups and businesses have no desire for their members or employees to complete surveys on fraud in their industries and will sue to keep things quiet. All fraud researchers in the public and private sectors should prepare themselves for possible litigation. Here's how to do it. 

Completed surveys began arriving after a week. The response rate was better than anticipated but then the surveys abruptly stopped coming. At the same time, the researchers received a copy of a memo that had been sent to the members of their sample population by a trade group that represented these medical facilities. In the memo, the trade association warned its members not to participate in the study, citing among other things that:

• the implication that fraud could occur among their members was libelous;
• they suspected the sponsors of the research were politically motivated and seeking to cause damage to the member organizations (a particularly ironic touch because the researchers had applied to the same trade association for funding and hadn't received any reply);
• none of the members had experienced fraud in any case; and
• if members responded that they had experienced fraud they could leave themselves open to legal action by local enforcement officials who could trace the anonymous surveys through the postmarks on the return envelopes. (Apparently, the group assumed that their members didn't report fraud when it occurred.)

The researchers quickly drafted a letter that clarified their aims and refuted the charges and sent it to the entire sample population along with a second survey. A second round of completed surveys began arriving, but the researchers' difficulties with the trade group continued.

Subsequently, a letter from the trade association arrived at the office of the legal counsel for the researchers' university that threatened legal action for defamation if the research continued. The university counsel's office responded with a rebuttal explaining the university's right to carry out research; the result was months of legal threats and counter-claims.

LITIGATION AND FRAUD RESEARCH
The rights of free speech and academic freedom should, in theory, protect researchers from litigation. In practical terms, however, even the threat of litigation can have potentially chilling repercussions on fraud research. If the researchers in the example had been compelled to hire their own attorney to represent them, even in the comparatively simple exchange, the costs could potentially have run to thousands of dollars. Had the case gone to trial, the costs could easily have increased tenfold.

It's not news that Americans live in an increasingly litigious society. Moreover, fraud research by its nature is a sensitive subject that's capable of inciting strong feelings among its victims. What follows is a brief primer discussing the basic steps fraud researchers in business, government, and academia can take to minimize the threat of litigation arising from their research and protect themselves if they're the subject of a suit.

BE SURE YOU'RE USING THE IRB
Almost any fraud research that involves human subjects, - whether in the form of surveys, interviews, observations, etc. - is required by U.S. federal regulation to be reviewed first by an institutional review board (IRB). In general, the federal regulations cover any institution that receives federal funding for research including universities, military, and civilians working for governmental agencies. IRBs are responsible for reviewing any proposed research to ensure that the rights and welfare of the participants are protected.

Submitting fraud research to your entity's IRB is important for several reasons. The first and most obvious is that compliance is required by law. A second reason is that an IRB review produces studies that really do a better job of protecting the rights of the participants. This latter point becomes particularly important not only in dealing fairly with research subjects but also when discussing if an employer will defend its employees who are conducting research on its behalf. The IRB's approval provides proof that the employees were acting within the scope of their employment - an important consideration that will be discussed later in greater detail.

An important caveat about IRBs is that they provide evidence only of protections to human subjects in the design of research. The individual researchers must still follow the protocols they set up in their research proposals and conduct their work in a professional and humane manner.

WILL YOUR EMPLOYER DEFEND YOU?
Even if the research is conducted properly, the real threat of most litigation is in the cost of obtaining legal defense, not whether the suit is ultimately successful. The researcher might be justified in doing the research and ultimately prevail in court but at what cost? Most researchers in the public or private sector simply cannot afford the necessary legal fees during prolonged litigation. The good news in these situations is that researchers frequently aren't required to defend their work personally against litigation. Many employers provide legal protection against personal liability for employees who become defendants as the result of performing their job duties. Such protections vary widely depending on whether the employer is public or private. And even when they do apply, they have a number of requirements of which researchers should be aware.

GOVERNMENT EMPLOYERS
Most state, local and federal government employees in the United States are protected by what are known as "immunity laws." These laws shield individual employees from personal liability for actions "within the scope of the employee's employment." In such cases, the employer is obligated to defend the employee and the burden is on the plaintiff to demonstrate that the employee wasn't acting within the scope of his or her employment.

The scope of immunity laws varies by jurisdiction, but generally there are a number of restrictions and caveats:

• Employees must provide timely notice to the employer. As soon as there's any indication that litigation is planned, researchers should immediately notify their immediate supervisors. Additional notification, usually in writing, is often required of the entity's legal representatives (such as university counsel).
• Employees must cooperate in their defense. It may be necessary to turn over notes and results as well as be deposed concerning the nature and conduct of the research. That may sound obvious, but many researchers jealously guard their ideas especially before they're published.
• Federal and state laws might offer different protections. Depending on the plaintiff, the suit may be brought in a jurisdiction different from the one in which the researchers reside. The provided law and protection might differ in such cases. In particular, it's worth noting that states can't immunize state employees against federal law.
• Employees must follow established procedures. This restriction hearkens back to the requirement that work be within the scope of the employee's employment. IRB approval becomes critical at this point as a means of demonstrating that the study was in compliance with the law and the norms of human subject research. Apart from the IRB documentation, researchers might be compelled to demonstrate that they followed their protocols and generally acted within the norms of competent research. As recent cases have demonstrated, proof that results of the research haven't been fabricated might also be necessary.
• Immunity laws don't usually reimburse individuals for their attorneys. Defendants in research litigation are certainly within their rights to retain independent counsel to defend them. However, the costs of retaining a private attorney aren't normally paid as part of the employer's defense of the employee. In some cases, the providers of professional liability insurance might provide legal counsel as part of the process of defending the researcher against claims. In most cases, however, the choice of whether to defend against the litigation and which attorney to retain is at the discretion of the policy underwriters. (For more detail, see the later section on professional liability insurance.)
• Immunity laws usually don't pay punitive damages. If a researcher is found guilty of causing damages as the result of his or her actions, immunity laws don't generally pay for costs assessed as punishment for this kind of negligence. This is a fairly standard exclusion for many immunity laws that generally don't cover situations of gross negligence or criminal liability. In practice, if the IRB has properly vetted the research and the researchers have carried it out in the manner they proposed, gross or criminal negligence is highly unlikely in fraud research.

PRIVATE EMPLOYERS
Although IRB oversight is still required for private employers who receive federal funds (such as private universities), immunity laws are usually limited to government employees. It's less clear if a private employer is still obligated to defend its employees who face personal litigation for carrying out their jobs. Many employers maintain liability insurance policies that cover their employees and/or have contractual obligations to defend them through collective bargaining agreements. These liability protections are by no means guaranteed. Researchers in the private sector should verify that such coverage exists and should consider obtaining individual liability coverage if it doesn't. (All researchers, in fact, may wish to consider obtaining supplemental liability coverage. This is discussed in greater detail in the next section.)

ANOTHER LINE OF DEFENSE: PROFESSIONAL LIABILITY INSURANCE
As noted earlier, private employees might or might not be covered by their employers for litigation that arises out of their job duties. Even in the cases of public employees, there might be considerable ambiguity surrounding the scope of their employment that could force them to lose the protection of immunity laws. As a result, researchers in all sectors of employment might wish to consider purchasing supplemental occupational liability coverage.

Although such coverage can be obtained from private carriers, many professional organizations offer such liability coverage to members as part of their membership fees or at a significantly reduced rate. Although the ACFE doesn't offer coverage, many other organizations to which CFEs commonly belong do. These include the American Institute of Certified Public Accountants, the American Federation of Teachers, and the American Association of University Professors.

The coverage varies as does the cost, but a typical policy provides liability coverage of up to $1 million and pays for legal costs in the case. The policies have requirements similar to those of immunity laws that include timely notice and cooperation with the defense. Like immunity laws, professional liability policies frequently exclude payment for punitive damages. However, many of them still provide payment for legal expenses in criminal cases that arise out of an employee's job duties.

INCLUDING THE LITIGATION IN THE RESEARCH
In addition to using the IRB and ensuring legal representation, researchers can deal with the threat of litigation by including it in the research write-up. There are actually several good reasons for including the information about litigation. Here are two:

• Litigation materially affects the research results. It can affect the volume of responses and how accurate they represent the desired target group. In the case example, the number of replies dropped sharply even after the second letter of explanation. Moreover, the second round of responses might no longer be representative of the population. It's reasonable to expect that an organization that responds to a survey, after being warned not to, could be very different than one that would respond without the threat.
• The litigation itself is a significant research result. Litigation isn't the conventional response to surveys. In the case of fraud, a common response is to ignore or deny that a problem exists. The threat of a lawsuit provides useful information concerning if the industry or population would respond in that way.

An interesting aspect of including the threatened litigation concerns publication of papers about the case. Summons, complaints, and similar legal papers are normally part of the public record and can be reprinted. As a result, the research may reference portions of the letters but not reprint them in their entirety without the permission of the sender. Given the rancor of such confrontations, it's usually unlikely that they'll grant this.

EPILOGUE: RESEARCH IS ULTIMATELY PUBLISHED
After many months of correspondence, the trade association quietly dropped their threatened litigation and the research was subsequently published, albeit with a somewhat smaller sample size. The final form of the paper required several additional months of negotiation with nervous editors and eventually included the removal of some attorneys' letters that were included in an appendix.

Although the threat of litigation surrounding fraud research remains relatively uncommon, we can expect that its frequency will grow given the litigiousness of society and natural desire of fraud victims to cover up crimes. As a result, fraud researchers will need to become better informed about protecting themselves from lawsuits and better at implementing protections in their research. Without such knowledge and protection, the investigation of fraud and, ultimately, the profession's ability to fight fraud, will be compromised.

Herbert Snyder, Ph.D., CFE, is an associate professor of accounting at North Dakota State University in Fargo, N.D.

Donna Dietz, Ph.D., CPA, CMA, is an assistant professor of accounting at North Dakota State University in Fargo, N.D.