Accounting and Financial Fraud Investigations

An accounting investigation is unusual because the clock is not set by the company. It is set by the audit and reporting calendar. Once auditors are aware of a potential irregularity, the sequence of investigation, remediation and disclosure has to work against deadlines the board does not control. That is why scope and staffing decisions are made in the first days, not after a preliminary look.

Waxman Litigation conducts and advises on investigations for companies and their boards. Seth B. Waxman spent 13 years as an Assistant United States Attorney in the District of Columbia, roughly eight of them on fraud and public corruption.

The sequence problem

Three processes run at once and each constrains the others: the investigation establishing what happened; the audit, which cannot conclude while a material question is open; and disclosure, which turns on what is known and when. Getting the order wrong is the usual source of difficulty, not the underlying accounting.

Preservation, immediately

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both. (Added Pub. L. 107–204, title VIII, § 802(a) , July 30, 2002 , 116 Stat. 800 .) U.S. Code Toolbox Law about… Articles from Wex Table of Popular Names Parallel Table of Authorities How current is this? Accessibility About LII Contact us Advertise here Help Terms of use Privacy

18 U.S.C. § 1519

Financial systems and email are the record here. Automated deletion continuing after a concern is raised is exposure under § 1519, which reaches conduct in contemplation of a federal matter.

What tends to follow

Accounting matters at public companies attract SEC attention, and the criminal analogue is securities fraud under 18 U.S.C. § 1348. Where federal program funds or government contracts are involved, False Claims Act exposure may run alongside. Managing them together is the subject of parallel proceedings.

Which provisions are in play in an accounting or financial fraud investigation?

Accounting fraud matters usually run on two tracks at once, a securities-fraud theory and a records theory, and the records theory carries the longer term. Section 1519 reaches the handling of documents during the investigation, separately from the underlying conduct.

Provision	Official heading	Maximum term
18 U.S.C. § 1348	Securities and commodities fraud	25 years
18 U.S.C. § 1519	Destruction, alteration, or falsification of records in Federal investigations	20 years
18 U.S.C. § 1001	Statements or entries generally	5 years (8 if terrorism-related)
31 U.S.C. § 3729	False claims (civil)	Treble damages plus a per-claim civil penalty, as adjusted for inflation

Sources: 18 U.S.C. §§ 1001, 1348, 1519 and 31 U.S.C. § 3729, as published by the Cornell Legal Information Institute. Penalty provisions are summarized — read the sections.

Frequently asked questions

Who should commission the investigation?

Where management may be implicated, the audit committee or the board — otherwise independence is the first thing challenged.

Can we wait for the audit to finish?

Waiting for the audit is usually not an option. The audit generally cannot conclude while a material question is open, which is what creates the pressure.

Does finding a problem mean we must restate?

That is an accounting and disclosure judgment informed by the investigation, not decided by it.

Will regulators find out?

Regulators may learn of it through several routes. What matters is that decisions about disclosure and self-reporting are taken deliberately once facts are established.

Why do these investigations run on two tracks from the first day?

The same working papers end up serving both a civil case and a criminal one. Civil exposure for a false record material to a false claim builds alongside criminal exposure for securities and commodities fraud and for false statements. An investigation designed only to satisfy the auditors will not have asked the questions the other track asks. See 31 U.S.C. § 3729(a)(1) and 18 U.S.C. §§ 1348 and 1001.

When does the 25-year maximum apply rather than ordinary wire fraud?

It applies when securities or commodities are involved. The heavier provision reaches a scheme connected to a commodity for future delivery, or to a security of an issuer registered under section 12 of the Securities Exchange Act or required to file reports under section 15(d). Outside that, the general 20-year wire fraud provision is what applies. See 18 U.S.C. §§ 1348 and 1343.

Where can remedies be obtained that a criminal court cannot reach?

In a parallel action brought by the Securities and Exchange Commission. In any action the Commission brings under the securities laws, a federal court may grant any equitable relief that is appropriate or necessary for the benefit of investors — which is a broader toolkit than a sentencing court has. See 15 U.S.C. § 78u(d)(5).

How does the preservation hold need to be scoped?

It has to cover far more than email. The obstruction statute reaches any record, document or tangible object, so the hold should extend to accounting systems, working papers, models, reconciliations and the devices they sit on — not only the mailboxes of the people currently suspected. See 18 U.S.C. § 1519.

Who pays for the investigation when the auditors want one as well?

The company funds both, and the two are not interchangeable. Work commissioned to satisfy an auditor answers a different question from work commissioned by the board or its counsel, and treating one as a substitute for the other usually means paying for the exercise twice.

Sources and legal authorities

General information, not legal advice. Scope, conduct and privilege decisions turn on the specific facts and should be taken with counsel before the first interview.