Forensic Investigation Techniques

1 Forensics Investigation Techniques / (PROJECT 1) The Case, Laws & Pictorial Presentation The case under consideration, in this case, is the Enron scandal. The case entails a series of events, which led to the bankruptcy of the commodities, energy, and Services Company, the Enron Corporation. The collapse of the giant, which held over $60 billion in assets, led to one of the biggest bankruptcy filings in US history. This laid some precedence on the need to improve accounting standards and practices and repercussions in the financial world.

The problems for the company started when the boom years came to an end, and the company faced increased competition in the business of energy trading. This led to the rapid shrink of the profits of the business. When the pressure from the shareholders intensified, the company's executives started to depend on dubious Accounting practices. They started to embrace a mark-to-market accounting practice, which was only meant to hide the company's troubles (Rossy, 2011).

Buy this excellently written paper or order a fresh one from ace-myhomework.com

2 This type of accounting allowed the company to depict unrealized future gains from other trading contracts into the current income statements, hence giving the illusion of the current higher profits. In addition, some of the company's troubled operations were transferred to the unique purpose entities (SPEs), which have to do with the essentially limited partnerships created with outside parties. Even though many companies distributed the assets to SPEs, Enron abused this practice by using this as a dumpsite for its troubled assets. Transferring the assets to SPEs meant that they were kept off the accounting books of Enron, and therefore its losses were portrayed as less severe than they were. The rich diagram below gives a snapshot of some of the things that transpired.

3

Therefore, the company was accused of not being transparent about its profits. It also stood to be accused of a range of shady dealings, which entailed concealing debts so that they could not show up in the company's accounts. As the depth of the deception became apparent, the creditors and investors retreated, which compelled the firm into chapter 11 bankruptcy (Geis, 2018).

The Enron scandal could further be looked at from both the individual angle and the corporation’s angle. As the corporate act originates in the actions and choices of the human individuals, such individuals are the ones who are supposed to be seen as the primary bearers of moral responsibility and moral duties. The CEO of the company, Jeffery Skilling, and the chairman of the boards, Kenneth Lay, have allowed the CFO, Andrew Fastow, to secretly build a private corporate institution and illegally transfer the property. As such, he violated professional ethics and took the crime of malfeasance. The chairman of the board and the CEO ordered the conspiratorial employees to carry out an act that both of them knew was wrong, and therefore they were also morally responsible for the act. Courts are supposed to determine the facts, but the management has to perform irrespective of the legal outcome as they have failed on truth and disclosure. The damage to the company's reputation through a negative perception of corporate ethics has already been done (Duska, Duska, & Kury, 2018). Employees such as Arthur Andersen violated the industry specifications as certified public accountants. At the center of it all, conflicts of interest played a major role in escalating the offenses committed at Enron, as depicted in the diagram below.

4

From the corporate perspective, the acts of corporation’s managers tend to be attributed to the corporations as long as the managers act within their authority. However, the company's shareholders did not realize this matter from the superficial high stock price, and the whole corporation was not responsible for this scandal (Duska, Duska & Kury, 2018). Enron's share price then rapidly declined, triggering repayment clauses in the financing vehicles which Enron could not handle. Its credit rating went to junk status, which caused the share price to collapse and further crystallized debt obligations. Banks refused further finance, suppliers refused to supply, and customers stopped buying. The graphic below shows the dwindling stock prices of Enron.

5

The various misdeeds and crimes that the Enron officers and employees committed were extensive and ongoing. The damaging misrepresentations produced inflated earnings reports for the shareholders, many of whom suffered losses when the company failed (Duska, Duska & Kury, 2018). In addition, there were many other instances of fraud and dishonesty, including the embezzlement of the corporate funds by the executives and the illegal manipulations of the energy market. The timeline below gives a summary of some key events leading to the scandal.

6

The involved stakeholders were susceptible to multiple federal offenses. In this case, the victims are likely to be rendered to charges of conspiracy, securities fraud, and wire fraud. At all times, the public deserves honesty and integrity by public companies, and Enron Company misled investors and analysts. Some of the transactions fell below the threshold of materiality.

Therefore, the auditors had no real power over those items. There were others within reach of the auditors, and the CFO’s inactions on these issues led to the faulty financial statements presented by the executives (Yosifon, 2018). More so, the Failure on the part of the auditors to maintain their independence and advocate for the correct accounting treatment was crucial to honest financial statements. The executives had too much control over the accounting firm, and the firm confirmed that Enron was one of its major clients, and there was a need for good client relations to retain the fees and the business. The company stakeholders such as Lay were to be answerable to the law for violating, aiding, and abetting violations of the antifraud, periodic reporting, records and books, and the internal controls provisions of the federal securities laws, Exchange Act Rule 10b-5; and for aiding and abetting the violation of Sections 13(a), and 13(b)(2)(A) and

7 (B) of the Exchange Act, and Exchange Act Rules 12b-20 and 13a-11 (Ruiz, Martinez, Rodrigo & Diaz, 2015). The ethics law was also violated. Enron worked to make their losses appear less than they were and changed the figures to make them appear higher. After the news got out, the stock of the company plummeted. The mark-market accounting to fake their profits posed an ethical dilemma and had far-reaching implications on most company stakeholders. There were ethical breaches and misconduct, and even the violation of the Generally Accepted Accounting Principles (GAAP). The following timeline gives a snapshot of some of the important issues leading to the investigations of the Enron scandal. The major stakeholders admitted that many things had been going wrong in the company.

The ethical model used above pinpoints ways of balancing the interests of all the related parties, so they can help you make the right decisions when you face ethical dilemmas. The ethical gap in the company has led to numerous breaches that led to serious litigations. The investors have been negatively implicated.

Considering the models that have been used above, i.e., timelines and rich pictures, they are likely to aid the investigations to a very great extent. Starting with the rich picture, it will

8 help to explore, acknowledge and express the various details about the case through diagrams to create a preliminary mental model. It will aid in opening the discussion and come to a broad as well as a shared understanding of the situation. Many details are supposed to be taken into perspective to understand what transpired, i.e., the leaders involved, the impact on the stock prices, the role of the employees in the Enron saga, among many other things. The timeline has helped in organizing details pertaining to the Enron scandal. It will help in giving a chronological account of events on how they have been building on each other, breaking down the complex Enron saga to be understood better.

Methodology and Framework The investigation will embrace the EDRM model, which is expected to follow a certain sequence outlined below.

Information Management The first step will be the information governance, whereby data from the various sources, e.g., audit reports and accounting records, will be well secured. The information is supposed to be within the required timeline. For the case of Enron, the most vital information should be gathered from 2000, even though the events leading to this scandal could have started building momentum a bit earlier. As such, vital information will be obtained from 1995. There is a need to consider data management practices such as archive/delete policies that may alleviate document volume and overall burden in a subpoena or electronic discovery request. The supporting documents and annexures will also be attached. This will entail the supporting documents that have been gathered during the investigation. The report should provide a basis for further investigation and execution of the case to a logical conclusion.

Identification

9 Identifying the key pieces of information will be the next step, which will be done by interviewing and doing a case reviewal. All relevant documents must be disclosed and ultimately produced to the opposing party to fully meet obligations. The focus will therefore be on the irregularities, exceptions, and patterns of conduct. There will be the need to investigate the specific situation and ascertain the true financial position where the transactions may have happened, and the figures cannot be adequately ascertained (Markham, 2015). The possible areas of material misstatement should be highlighted, e.g., the asset overstatement, understatement of the liabilities, improper disclosure, and the variance in inventory. Pinpointing the specific incidences and interviewing the relevant stakeholders in Enron will be the best way to approach this stage.

Preservation The information will then be preserved by forbidding the IT department from deleting it.

There is a need to prevent spoliation of potentially relevant information. Preserving data means ensuring that all documents and metadata are stored appropriately.

Collection The investigator will strive to collect all potentially relevant documents in a forensically sound manner, thereby preserving all the metadata. The incorporation should be relevant and should be able to give important insights into the case. Before data is collected and incorporated, the investigator should evaluate and determine the strength of evidence, forensic and transaction accounting. Here, professional accounting skills were to be used in matters involving potential or criminal litigation.

Processing It will then be processed or cleaned up by removing irrelevant data. The investigator will upload documents and data into an eDiscovery tool. All plain text within your documents will be indexed, and all metadata will be extracted for filtering. Data that may be of interest, in this case,

10 include the minutes for board meetings, the books of accounts, internal and external audit reports, among others. The forensic process will include walking through the company business cycle and trying to observe controls. There will be a keen interest in red flags and cultural factors. Finally, there will be a thorough review and collection of documents or electronic evidence. This may be followed by the staff interviews and report preparations (de Fontenay, 2018).

Review Stakeholders such as attorneys, paralegals, and litigation support professionals will review all documents and apply a mark to each document in order to determine relevance once again.

Analysis The analysis will then be done, and this will involve identifying “key patterns, topics, people, and discussion. Next, the Enron case's major stakeholders will be scrutinized, and the emerging discussions and issues examined. In report structuring, there will be the outlining of the background. This will include why the fraud investigation was conducted, i.e., the anomalies discovered during the audits, the occurrence of loss of assets, and whistleblower complaints. The actions performed during the fraud investigations will be stated, i.e., reviewing documents, interviewing witnesses, and conducting tests or analyses. The outcome of the investigation should also be clearly stated, and this should include the extent of fraud, how it happened, and the perpetrators or stakeholders responsible for the loss. The findings will then be given. This will consider the details of what occurred, cases that had anomalies, the people who were involved, how they did it or perpetrated the anomalies, and the proof that is there to confirm that

11 indeed these people played a role in the current anomalies that have amounted to breaching of the law.

Presentation Presentation of the evidence will then be the last stage. The impact of their breaches on the organization should be ascertained to rationalize the level of damage that has been caused.

Recommendations will then be made as part of the report (Kamyabi, Haghshenas, & Noushabadi, 2015). This will outline the necessary or recommended follow-up and include the remedial measures such as the review of the internal controls and the update of the operating guidelines.

Overly, the investigation will have to adhere to the law. This implies that the investigators should not continue with the examination without proper predication. This entails the totality of the circumstances, which would lead to reasonable and prudent individuals seeing that some fraud has taken place, is taking place, or will take place. Predication is a basis upon which an examination and every step taken during the examination is commenced. The investigators will act on predication when there is sufficient basis and legitimate reason to take every strep during the examination (Kamyabi, Haghshenas, & Noushabadi, 2015).

Analytical Tools The main analysis tools will include encase, x-ways, and autopsy. Encase will be helpful as it has a user-friendly "Review Package" that can be sent to Requestor for reviewing the evidence. It will help the investigator conduct in-depth analysis of user files to collect evidence such as documents, pictures, internet history, and Windows Registry information-ways is another ideal tool for this case. It was designed for investigators specializing in accounting, building

12 laws, money laundering, corruption, homicide, child pornography, etc. It will be very useful in the analysis of facts here.

X-ways will help the investigator to successfully seize all RAM, Files, and Hard disks.

The investigator will utilize it for the evidence collection phase of a forensic investigation that captures Windows and Linux live systems. X-Ways will make it possible for the investigator to capture and gather all data from the running computers, e.g., on an external USB hard disk, such that during the analysis, even encrypted or otherwise protected data can be examined that was unlocked at the point of time when the system was acquired. As such, X-Ways will save the investigator from returning empty-handed after pulling the plug and imaging hard disks the conventional way when they discover that the relevant files are encrypted. Again, the investigator may be able to find passwords in the main memory that X-Ways capture dumps for them (Listokin & Mun, 2018). This will definitely be an instrumental tool that will lead to a credible analysis of the Enron case evidence spread across multiple storage devices.

An autopsy has a huge capability and will greatly boost the other tools. Cases can be opened by multiple users at the same time. It allows for "Auto Ingest" mode where new media is automatically analyzed 24×7 by multiple modes. It provides faster analysis because the database is often faster. The graphical user interface will display the results from the forensic search of the underlying volume of sources and data, hence making it easier for the investigators to flag the pertinent sections of data. The tool will also make it easier for it to be used by multiple investigators, and therefore it will be used by a single investigator to coordinate the work of a team (Ailon, 2015). Investigators working with multiple machines or file systems will be able to build a central repository of data hence allowing them to flag phone numbers, email addresses, files, or other pertinent data that might be found in multiple places (Gordon & Ringe, 2018).

13 The success of the investigation will largely depend on the ability of the investigators to set up systems for faster and easier collection of data and making sense out of the collected data.

The first step will be to understand the landscape of the available data sources and have a system that organizes formats and stores data accessibility. Next, the data ought to be combined into a structured output. The data in question here is the financial data used to show the severity of the offenses committed. By using automated data analysis in an attempt to find links among the various suspects, the investigators will be able to develop the network of actors and understand the activities and behaviors across a group. A tool such as Encase can increase the accuracy of the investigations and help the investigators reach the right conclusions faster. Rather than spending weeks and months developing detailed link charts, there will be the need to leverage both stored data and the data that is coming in as the accused persons try to bring their evidence forth to develop an advanced starting point for their analysis (Bruner, 2018).

There is a need to integrate the access to data, considering the scope of the investigation, which has to look into data and information for an extended period, running into years. A tool such as X-ways should enable the investigators to combine and access all the internal data sources, text files, spreadsheets, public records data, and anything else. Thus, it is possible to have a holistic view of the investigation data. Furthermore, such a tool will enable the investigators to import the data without much preparation and organize the data around the business objects under consideration, e.g., the assets, liabilities, stocks, and any other new data to be used in investigations. This will greatly be facilitated by Encase, Autopsy, and X-ways (Lawry, 2015).

Pre-Trial Hearing

14 As an expert witness, there will be the need to give some form of evidence. In this case, the evidence pertains to the data anomalies and scrutiny of unscrupulous practices evident from the case. There is also compelling evidence that the company cheated the investors and enriched themselves through complex accounting gimmicks such as overvaluing assets to boost the cash flow and the earnings statements, making the company more appealing. Just part of what will be presented during the trials, over 1800 interviews have been collected, more than 3000 boxes of evidence, and more than three terabytes of digitized data. This should be treated as a landmark and most complex white-collar crime investigation.

The testing process has also been thoroughly done, courtesy of the internal and external audit reports. This provides precedence for examining the validity of the evidence tabled before the court during the trial. After though screening, it can be said that what has happened here is historic. The revenue of the company was able to grow over seven times within four years. The revenues increased by 750%. Enron's revenues increased by more than 750%, rising from $13.3 billion to $100.7 billion, a fact that raises many questions regarding the magnitude of the crime that has been committed (Dinovitzer, Gunz, & Gunz, 2015). This expansion of 65% per year has been extraordinary in any industry, including the energy industry, which typically considered the growth of 2 to 3% per year to be respectable. Instead, the growth has been exponential to such an extent that the company took the sixth position among the Fortune global 500. This irks the need for the investigators to dig deeper and ascertain the motivation behind such an economic crime from the company's executives. The external audit report has captured some breaches of the accounting principles that the internal auditor deliberately committed. The company has become the first non-financial company to use mark-to-market accounting for its complex long-term contracts. From an expert point of view, the method requires that the moment a long-term

15 contract has been signed, the income should be estimated as the present value of the net future cash flow (Dinovitzer, Gunz, & Gunz, 2015). Due to the large discrepancies between the reported profits and the cash generated, it suffices to say that the investors were typically given false or misleading reports.

Another shocking revelation is that the company has been able to use special purpose entities for malicious gain. After scrutinizing the registration certificates for these companies, it is easy to conclude that these were limited partnerships or companies created to fulfill a temporary or specific purpose to fund or manage risks associated with some assets from a specific category (Raz, 2018).

As an expert witness, one would not hesitate to ascertain to the court that the company's corporate governance is one of the best yet very unethical. The company has a model of directors, which comprises outsiders with a significant ownership stake and an expert audit committee. Even with a kits network of intermediaries and complex corporate governance, the company has attracted large sums of capital to fund a very questionable business model. The company has been able to conceal its performance through a series of financing and accounting maneuvers and exaggerate its stock levels to the point that they are quite unstainable. These deliberate errors can clearly be ascertained from the documents.

16 References Ailon, G. (2015). From superstars to devils: The ethical discourse on managerial figures involved in a corporate scandal. Organization, 22(1), 78-99.

Bruner, C.M. (2018). What is the domain of corporate law? University of Georgia School of Law Legal Studies Research Paper, (2019-04). de Fontenay, E. (2018). Individual Autonomy in Corporate Law. Harv. Bus. L. Rev., 8, 183.

Dinovitzer, R., Gunz, H., & Gunz, S. (2015). Origins, Applications, and Developments. The Oxford handbook of professional service firms, 113.

Duska, R.F., Duska, B.S., & Kury, K.W. (2018). Accounting ethics. John Wiley & Sons.

Geis, G.S. (2018). Traceable Shares and Corporate Law. Nw. UL Rev., 113, 227.

Gordon, J.N., & Ringe, W.G. (Eds.). (2018). The Oxford handbook of corporate law and governance. Oxford University Press.

Kamyabi, Y., Haghshenas, H., & Noushabadi, S. Z. (2015). A study of professional ethics in accounting and auditing: Evidence from an Asian country. International Research Journal of Applied and Basic Sciences, 6(1), 24-28.

Lawry, R. P. (2015, April). Lawyers' ethics in a post-Enron world. In Phi Kappa Phi Forum (Vol. 95, No. 1, p. 26). National Forum: Phi Kappa Phi Journal.

Listokin, Y.J., & Mun, I.A. (2018). Rethinking corporate law during a financial crisis. Harv. Bus. L. Rev., 8, 349.

Markham, J. W. (2015). A financial history of modern US corporate scandals: From Enron to reform. Routledge.

Raz, A. (2018). Share law: Toward a new understanding of corporate law. U. Pa. J. Int'l L., 40, 255.

17 Rossy, G. L. (2011). Five questions for addressing ethical dilemmas. Strategy & Leadership.

Ruiz, P., Martinez, R., Rodrigo, J., & Diaz, C. (2015). Level of coherence among ethics program components and its impact on ethical intent. Journal of Business Ethics, 128(4), 725-742.

Yosifon, D. (2018). Corporate friction: How corporate law impedes American progress and what to do about it. Cambridge University Press.