CHAPTER 18

Legal Follow-Up
LEARNING OBJECTIVES

After studying this chapter, you should be able to:

 Identify important aspects of the court system.

 Understand the civil litigation process.

 Understand the criminal litigation process.

 Describe the nature of an expert witness.

THE COURT SYSTEM

 The judicial system in the United States involves a

combination of state and federal courts.
 State courts
 State courts throughout the United States handle cases
involving laws that are at the state level but not the federal
level.
 The state courts handle most legal cases in the United
States, including most fraud cases.
 Federal courts
 Federal courts handle those cases over which the U.S.
Constitution or federal laws give them authority including
cases that involve several states and cases that involve
violation of federal statutes.
STATE COURTS—LOWER-LEVEL TRIAL
COURTS
 Often called trial courts of limited jurisdiction.
 Handle misdemeanors (small crimes) and
preliminaries (pretrial issues) for felony and civil
cases that are below some dollar amount, such as
$10,000.

 Some types include:

 Housing courts
 Small claims courts
 Probate courts
STATE COURTS—HIGHER-LEVEL TRIAL
COURTS

 Often called trial courts of general

jurisdiction, circuit courts, or superior courts.
 Hear initial actions.
 Try felony and civil cases that are above the
lower-level dollar amount.
 Usually sit in panels of two or three judges.
STATE COURTS—APPELLATE COURTS

 Plaintiffs or defendants who are not satisfied with

the outcomes of trial courts can appeal court
decisions to appellate or reviewing courts.
 Have low- and high-level appellate courts.
 Decision made at the highest-level appellate
courts are final.
 STATE COURTS—ORGANIZATION

 Although state court organizations differ from

state to state, Figure 18.1 shows how most state
courts are generally organized.
FIGURE 18.1 ORGANIZATION OF
STATE COURTS
FEDERAL COURTS

 The federal courts are established to enforce federal laws

and statutes.

 These courts try criminal and civil cases under federal

laws.

 If defendants or plaintiffs are not satisfied with

judgments rendered in district courts, they can appeal the
findings in one of the 13 circuit courts of appeal.

 The final court of appeal is the U.S. Supreme Court,

which reviews decisions made by the appellate courts.
FIGURE 18.2 ORGANIZATION OF
FEDERAL COURTS
CIVIL AND CRIMINAL FRAUD TRIALS

 When individuals commit fraud, they can be subject

to criminal prosecution, civil actions, or both.
 Criminal law involves laws that deal with offenses of
a public nature and are generally considered to be
offenses against society.
 Civil law is the body of law that provides remedies
for violations of private rights.
OVERVIEW OF THE CIVIL LITIGATION PROCESS

 Every civil case involves the following four basic

stages:
1. Investigation and pleadings
2. Discovery
3. Motion practice and negotiation
4. Trial and appeal

 Most fraud cases follow these four stages, although

in some cases, the stages may overlap.
 INVESTIGATION AND PLEADINGS

 Initial pleading or complaint

 Motion

 Remedy

 Answer

 Counterclaim
DISCOVERY

 Legal process by which each party’s attorneys try to

gain information about the other side’s case before
the trial begins,

 Methods used to obtain information:

 Production Requests
 Interrogatories
 Requests for Admission
 Subpoenas
 Depositions
 Motion Practice and Negotiation
SETTLEMENT NEGOTIATIONS

 Either of the parties may negotiate a

settlement at any time during the litigation.
 If a settlement is reached, the case is
usually resolved.
 Settlement discussions and negotiations
cannot usually be introduced at trial.
 Fraud investigators can be useful during
settlement negotiations in resolving
differences between the two parties.
 Most large civil cases are ultimately settled
before going to trial.
 TRIAL AND APPEAL

 Trial
 Attorneys
 Judge
 Litigating parties
 Jury
 Appeal
 Request to a higher court to overturn the verdict or order
a retrial due to some legal defect during the trial.
 Usually relates to matters of law and not to facts of the
case.
OVERVIEW OF THE CRIMINAL LITIGATION PROCESS

 The litigation process in criminal cases differs significantly from

civil cases because the criminal justice system includes more
protections for the rights of the defendant.
 These protections arise primarily from three amendments to the
U.S. Constitution—the Fourth, Fifth, and Sixth Amendments.
 Each stage of criminal litigation is also governed by rules
established by the jurisdiction in which the case is tried.
 The Federal Rules of Evidence and Federal Rules of Criminal
Procedures are applicable in providing testimony in federal
courts.
 Many state courts follow the federal rules with little
modification.
COMPONENTS OF CRIMINAL LITIGATION
PROCESS
 Filing criminal charges
 Arresting and charging the defendant
 Preliminary hearings
 Grand jury
 Arraignment
 Discovery
 Pretrial motions
 Trial and appeal
 FILING CRIMINAL CHARGES

 The victim of the fraud contacts the district attorney

for the county in which the fraud was perpetrated.

 The district attorney coordinates with the local police

in the preparation of an arrest warrant or summons.

 If the case involves a federal crime, notice is also sent

to the U.S. Attorney’s Office.
ARRESTING AND CHARGING THE DEFENDANT

 Arresting for a crime occurs in the following

three ways:
 Arrest without a warrant by a private citizen or
police officer who observes a crime being
committed.
 Arrest after a warrant has been issued (obtaining a
warrant requires a preliminary showing of probable
cause).
 Arrest after an indictment by the grand jury (the
purpose of the grand jury is to determine whether
probable cause exists; grand jury indictments are
generally used in fraud cases).
CONSTITUTIONAL PROTECTION

 Fourth Amendment
 Requires that probable cause exist before a defendant is
arrested or searched.
 Fifth Amendment
 Requires an indictment of a grand jury before a
defendant is held for a capital crime.
 Precludes a person from being tried twice for the same
crime.
 Gives the defendant the right to refuse to incriminate
himself or herself.
 Requires the state to apply due process of law.
 Forbids the state from taking a private party’s property
without just compensation.
 PRELIMINARY HEARINGS

 Used to determine whether “probable

cause” exists to charge the defendant with a
crime.

 Not used to establish his or her guilt or

innocence.
  A grand jury is a body of 16 to 23 people, selected
GRAND JURY
from the community, who are sworn as jurors and
deliberate in secret.
 Grand jurors listen to evidence presented by witnesses
and prosecutors.
 Because a preliminary hearing is an opportunity for
the defendant to obtain discovery of the prosecution’s
case without disclosing its evidence, the prosecution
generally prefers to obtain a grand jury indictment.
 Defendants do not have a right to be notified that a
grand jury is considering evidence against them.
 At trial, the defendant will have the Sixth Amendment
protections denied during the grand jury process.
SIXTH AMENDMENT PROTECTIONS

 The Sixth Amendment protections relate only to trials.

 This amendment provides the defendant with the

following rights:
 Receive a speedy and public trial
 Be heard by an impartial jury
 Have a trial held in the state and district in which the
crime was committed
 Be informed of the accusation
 Confront witnesses against him or her
 Compel witnesses to attend the trial
 Be represented by legal counsel
ARRAIGNMENT

 Generally, in a fraud trial, the grand jury will hear

evidence of wrongdoing before the defendant is in
custody.
 Once the defendant is indicted, he or she will receive
summons to attend an arraignment that includes the
time and place to appear.
 Alternatively, the defendant may be arrested and
brought to the arraignment.
 At arraignment, charges against the defendant are
read.
 Defendant may plead guilty, not guilty, or nolo
contendere.
DISCOVERY

 According to Rule 16 of the Federal Rules of

Criminal Procedure, upon request, the defendant
may obtain the following:
 Copies of all relevant statements made by the
defendant that are in the government’s possession.
 A copy of the defendant’s prior criminal record.
 All documents, items, test results, written reports of
expert witnesses, or other evidence the government
intends to introduce at trial or that are necessary to the
defense.
 Copies of all prior statements made by witnesses
relevant to the information about which they have
testified.
 PRETRIAL MOTIONS

 Before a criminal trial, the defendant can file

motions with the court.

 Two motions that are frequently made

include the following:

 A request that the charges be dismissed as a

matter of law.
 A request to suppress certain evidence because
it was illegally obtained.
TRIAL AND APPEAL

 Timing
 Civil fraud trials in state courts are sometimes held
before criminal trials.
 Federal criminal trials are generally held first.
 Burden of Proof
 Civil actions require that there is a “preponderance of
the evidence” supporting one side of the allegation.
 Appeal
 An appeal is a request to a higher court to overturn the
verdict or order a retrial due to some legal defect in
the trial proceedings.
EXPERT WITNESSING

 An expert witness is a person whose opinion, by

virtue of education, training, certification, skills,
or experience, is accepted by the judge as an
expert in a court case or tribunal.

 An expert witness is the only witness who can

render an opinion (as opposed to stating facts) in
a legal case.

 Experts are qualified by the judge to render an

expert opinion through a process called voir
dire.
 GENERALLY ACCEPTED AUDITING
STANDARDS

 The 10 GAAS standards are broken into three

General Standards, three Field Work Standards, and
four Reporting Standards.
 GENERAL STANDARDS

 The auditor must have adequate technical training

and proficiency to perform the audit.

 The auditor must maintain independence in mental

attitude in all matters relating to the audit.

 The auditor must exercise due professional care in

the performance of the audit and the preparation of
the report.
STANDARDS OF FIELD WORK

 The auditor must adequately plan the work and must

properly supervise any assistants.
 The auditor must obtain a sufficient understanding of
the entity and its environment, including its internal
control, to assess the risk of material misstatement of
the financial statements, whether due to error or
fraud, and to design the nature, timing, and extent of
further audit procedures.
 The auditor must obtain sufficient appropriate audit
evidence by performing audit procedures to afford a
reasonable basis for an opinion regarding the
financial statements under audit.
STANDARDS OF REPORTING

 The auditor must state in the auditor’s report whether the

financial statements are presented in accordance with
generally accepted accounting principles.
 The auditor must identify in the auditor’s report those
circumstances in which such principles have not been
consistently observed in the current period in relation to
the preceding period.
 When the auditor determines that informative disclosures
are not reasonably adequate, the auditor must so state in
the auditor’s report.
 In the auditor’s report, the auditor must either express an
opinion regarding the financial statements taken as a
whole or state that an opinion cannot be expressed.