CHAPTER

Legal Follow-Up

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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.

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} 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.
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} 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

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} 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

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} 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

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} Although state court organizations differ from state to
state, Figure 18.1 shows how most state courts are
generally organized.

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 CHAPTER 18
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} 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.

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 CHAPTER 18
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} 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.

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} 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.

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} Initial pleading or complaint
} Motion
} Remedy
} Answer
} Counterclaim

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} 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

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} 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.

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} 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.

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} 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.

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} Filing criminal charges
} Arresting and charging the defendant
} Preliminary hearings
} Grand jury
} Arraignment
} Discovery
} Pretrial motions
} Trial and appeal

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} 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.

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} 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)

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} 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

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} Used to determine whether “probable cause” exists to
charge the defendant with a crime
} Not used to establish his or her guilt or innocence

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} A grand jury is a body of 16 to 23 people, selected 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.

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} 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

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} 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.

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} 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

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} 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

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} 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.

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} 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.

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} The 10 GAAS standards are broken into three General
Standards, three Field Work Standards, and four
Reporting Standards.

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} 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.

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} 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.
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} 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.

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 CHAPTER 18
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 CHAPTER 18
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 CHAPTER 18
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