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Legal Aspects of Forensic Investigation in Malaysia

Introduction

Forensics is crucial to assist in proving a crime. However, it is more than a crime scene investigation, as forensics itself branches out to various types of forensics, each for their respective purposes or different crimes. Forensics is an intercept of science and law, providing the new tools and methodologies to discover the truth of a case.1 Ultimately, the goal of forensics is to prove or disprove the offence and to find the real perpetrator of the crime.2

The most common forensics are DNA analysis, forensic pathology, trace evidence analysis, forensic toxicology3 and so on. Considering the broad variety of forensics that can be used for different types of crime, this article focuses on legal forensics. Legal forensics are used in investigation involving, inter alia, corruption, asset misappropriation, financial statement fraud and many more.4

This article is in the view that legal forensics is recommendable even if there is an existing service of forensic accounting and/or auditing. The focus is on the examination of a company’s financial documents to derive evidence that can be used in a court of law or legal proceeding. This article further discuss on the shortcomings of forensic audit and how legal forensics are able to overcome these shortcomings for a better investigative report.

 

Forensic Auditing for Financial Crime in Malaysia

Forensic accounting and/or auditing are often used for cases of financial crime. Financial crime is an umbrella term referring to any illicit activity involving the illegal acquiring of other’s property.5 It is widely defined as an intentional act of deception involving financial transactions for personal gain.6 It encompasses fraud, bribery, money laundering and so on. Most cases of financial fraud involve intricate financial transactions.7 The major financial crime case in Malaysia is the 1Malaysia Development Berhad Scandal (“1MDB scandal”).

The government is in need to achieve asset recovery, however, with the large sum and high volume of money transactions, being made, it is not easy to keep track of the transaction, let alone to trace it back to the very start of the crime to determine the true perpetrator. This is where forensic audit comes into play to assist in seeking to derive evidence that can be used in court.8 Forensic investigation of such is usually carried out by audit firms, such as Deloitte, where they provide forensic investigations including data analytics and computer forensic.9 They will strategically plan the investigation, collect the evidence, understand internal controls and interview the suspects.10 To collect evidence, different techniques can be used such as substantive techniques, analytical procedures, and computer-assisted audit techniques.11 Apart from audit, accounting is also an important expertise required in a financial crime investigation.

 

Shortcomings of the Forensic Auditing and Accounting

Generally, it would be difficult for accounting and audit professionals, who have knowledge of a single specialty, to identify and to find out such crimes. Forensic accounting requires fact-finding exercise from different perspectives including accounting and law.12 However, forensic auditing is mostly done by audit firms. Investigation done by the audit or accounting firm is often insufficient.13

The main reason is that, unlike legal firms, accounting and audit firms have insufficient, if any, legal knowledge. While investigative auditors and accountants have their requisite skills and expertise in finance, lawyers have the skills and expertise in providing a more comprehensive analytical assessment with regards to the legal implications.14 Lawyers are able to assist in determining the law infringements, the relevant remedies available to the client, the ultimate recovery process, and further actions to be taken against the wrongdoer.15

Another shortcoming of forensic auditing is the lack of control over the dissemination of information.16 In this event, there is no guarantee of confidentiality. The scrutiny of the company’s financial records will be done by an external forensic auditor or accountant, and confidential information can potentially be leaked.17 Contrastingly, confidentiality can be guaranteed in a law firm. Legal forensics, like any other services provided by lawyers, are subject to lawyer-client privilege.18

 

The Legal Aspect and the Duty of the Law Firm in Forensic Investigation

In general, there are a few legal aspects of forensic investigation that the legal forensics are able to ensure compliance of it. The legal aspect of forensic investigation, in general, is the rules on disclosure of expert evidence or reports and evidentiary admissibility rules.19

Naturally, lawyers have the relevant expertise to ensure the compliance of these legal aspects. Besides, law firms play an important role in forensic investigations mainly because of the type of service that can be provided by the lawyers. 20

They are able to provide an independent dispute advisory relating to the outcomes of the investigation.21 From thereon, they can support clients in preparing for high-stakes litigation, arbitration, fraud, and compliance investigations22 If the client wishes to take further actions after the investigation, law firms can also assist in the preparation and drafting of the necessary documents, such as affidavits and case reports, and advise on the suitable settlement options.

Ultimately, the evidence obtained from forensic accounting, along with well-grounded corporate expertise and knowledge on corporate laws, would provide clear and detailed analysis to the clients involved. The analysis would enable the clients to understand the prospects of their case, potential or pending litigation, dispute resolution proceedings, the need to uncover and document fraud, or any necessary next steps to be taken.23 It is a whole investigative process provided by the law firm which is convenient and more systematic considering that the whole process is done only in one place, the law firm. As mentioned above, most importantly, law firms guarantee confidentiality, which is key to client’s trust.24

In Malaysia, there is no specific legislation that governs legal forensic investigation procedure, however, the legal forensic investigation standard can be ensured as the firm would follow the standards in the ‘Uniform Principles and Guidelines for Investigations’.25

This was adopted by the 10th Conference of International Investigators (“Investigation Guidelines”) which is consistent with international conventions such as Article 101, paragraph 3 of the United Nations Charter.26

With that, lawyers are to carry out their duty up to a reasonable standard throughout the investigative process which includes identifying witnesses, collect documents, and analyse and assemble the collection of information into exhibits27 while also able to ensure the admissibility of the evidence collected. Investigation and analysis of evidence is a constant process.28 Hence, it is a continuing duty to ensure reasonable standards in providing the service of legal forensics are met.

 

Conclusion

Financial crime has always been a concern in Malaysia. With the rise of financial scandals, the field of legal forensics has grown into a sector of high demand. Legal forensics itself has various investigative process. However, in a more complex case of financial crime, the combination of skills between lawyers, forensic accountants and forensic auditors could ensure a smooth and thorough investigation. This is important to discover the wrongdoings of one in the company that could lead to negative consequences caused to innocent people.29

As mentioned, lawyers have the expertise in the legal aspect of forensic investigation. Hence, it would be of great convenience to conduct a legal forensic investigation as the lawyers are able to ensure the compliance of any rules or laws with regards to evidence. Most importantly, legal forensics provides confidentiality and reasonable standards of investigation conducted by the lawyers are ensured.

 

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1. US Legal, ‘Forensic Law’, (USLegal, n.d.), <https://forensiclaw.uslegal.com/> accessed 8 July 2022.

2. Sinisa Franjic, ‘Legal aspects of Forensics’, (Peertechz, 26 April 2018), (DOI: http://dx.doi.org/10.17352/fst.000011), <https://www.peertechzpublications.com/articles/FST-4-111.php> accessed 8 July 2022.

3. Incognito Forensic Foundation, ‘All you need to know about the branches of forensic science’, (Incognito Forensic Foundation, n.d.), <https://ifflab.org/branches-of-forensic-science/> accessed 8 July 2022.

4. https://corporatefinanceinstitute.com/resources/knowledge/accounting/what-is-aforensic-audit/.

5. Napier, ‘What is financial crime?’, (Napier, n.d.), <https://www.napier.ai/knowledgehub/what-isfinancial-crime> accessed 8 July 2022.

6. Bank Negara Malaysia, ‘What is financial fraud?’, (Bank Negara Malaysia, n.d.), <https://www.bnm.gov.my/web/financial-fraud-alert/what-isfinancial-fraud #:~:text=Financial%20fraud%20can%20be%20broadly,also%20a%20civil%20law%20violation.> accessed 8 July 2022.

7. Ibid.

8. Carla Tardi, ‘Forensic Audit Definition’, (Investopedia, 1 July 2022), <https://www.investopedia.com/terms/f/forensicaudit.asp#:~:text=A%20forensic%20audit%20is%20an,such%20as%20fraud%20or%20embezzlement.> accessed 13 July 2022.

9. Deloitte, “Deloitte Forensic Malaysia Predict. Detect. Respond.”, (Deloitte), 5.

10. CFI Team, ‘Forensic Audit Guide’, (CFI, 26 February 2022), <https://corporatefinanceinstitute.com/resources/knowledge/accounting/what-isa-forensic-audit/> accessed 13 July 2022.

11. Ibid.

12. Dong Renzhou, ‘Research on Legal Procedural Functions of Forensic Accounting’, (2011), Energy Procedia, 2147-2151, 2149.

13. Lee Kin Hing and Mohammad Ashraf Mohamed Sopiee, ‘Legal Investigative Audit’, (Azmi & Associates, n.d.), <https://www.azmilaw.com/insights/legal-investigative-audit/> accessed 14 July 2022.

14. Ibid.

15. bid.

16. Ellis Roanhorse, ‘The Advantages and Disadvantages of Investigative Auditing Firms’, (Chron., n.d.), <https://smallbusiness.chron.com/auditfirms-responsibility-weaknesses-internal-control-75358.html> accessed 14 July 2022.

17. WealthHow, ‘Merits and Demerits of Forensic Accounting’, (WealthHow, n.d.), https://wealthhow.com/merits-demerits-of-forensic-accounting accessed 14 July 2022.

18. Lee Kin Hing and Mohammad Ashraf Mohamed Sopiee (n 14).

19. What-when-how, ‘Legal Aspects of Forensic Science’, (what-when-how, n.d.), <https://whatwhen-how.com/forensic-sciences/legal-aspectsof-forensic-science/> accessed 15 July 2022.

20. Ibid.

21. Ibid.

22. Ibid.

23. Ibid.

24. Ibid.

25. Lee Kin Hing and Mohammad Ashraf Mohamed Sopiee (n 14).

26. Ibid.

27. Howard Silverstone et al, “Forensic Accounting and Fraud Investigation for Non-experts”, (Wiley, 3rd Edition), 156.

28. Ibid.

29. Foodman CPAs & Advisors, ‘Why Attorneys and Forensic Accountants Need Each Other’ <https://foodmanpa.com/why-attorneys-andforensic-accountants-need-each-other-2/> accessed 15 July 2022.

 

Written by:

Ling Shin Ying (Trainee Solicitor) lingshinying@azmilaw.com

Gabrielle Lim Wai Yee (Trainee Solicitor) gabrielle@azmilaw.com