At many small businesses, it’s not uncommon to still find a mass of paper records, yellowing with age and haphazardly tossed in boxes, as well as old-school computers and dot-matrix printers with tractor feeds and green bar paper.
Yet even the most unorganized and technologically unsophisticated small business may contain a trove of useful electronically stored information (ESI) that can prove crucial in determining economic damages in a case or in providing evidence in a financial fraud investigation.
The first and most basic step is to determine whether such data exists at a business. If in doubt, consider this question: Does the business have documents that look as if they’ve been printed from a computer? If those documents have telltale headers and footers that indicate they are generated from a computer system, then the business likely uses computers regularly and probably possesses valuable ESI.
Many small business owners and employees, as well as their attorneys are unaware of the types of ESI available that could be the key to their case. Persistence, creativity, and knowledge are necessary to unlock the potential of a small business’ electronically stored information.
Three primary challenges are often encountered with small business ESI:
- The information may be stored on archaic hardware and/or software.
- The business owner and employees lack technological savvy and may be unaware of the type and extent of data that is present on their system. They are often adamant that no useful ESI is available from their system because they have had difficulty or even failed in trying to extract information.
- Small businesses generally have limited resources, and their personnel usually do not have the expertise to extract relevant useful data from an outdated system.
A FIGHT OVER GAS
Consider this example concerning identifying and obtaining forensic evidence from a small business to help determine economic damages. Green Fuel was a small gasoline distributor that provided fuel to local gas stations. The owner, a gentleman in his late 70s, did not own a computer, and he had a limited office staff that included an accounting clerk and a manager.
Green was a defendant in a state court case where numerous claims were made by Morris, a gas station owner. Morris alleged that Green overcharged him for fuel delivered to Morris’ two small-town gas stations during an eight-year period. Morris claimed that Green failed to transact business pursuant to their contract, and as result, Morris suffered economic damages of $1 million dollars arising from overcharges and a failure to share profits as specified by their contract.
At first glance, both parties appeared to have inadequate documentation of fuel deliveries and payments. The only documentation maintained by the gas station owner, Morris, was a sparse set of paper receipts and logs regarding fuel delivery.
Moreover, Morris’ stations used unsophisticated point-of-sale cash registers and did not utilize a computer system to maintain accounting records or other records of fuel deliveries. Morris said in his deposition that he relied on Green to keep detailed records of fuel orders and deliveries and that this allowed Green to overcharge him.
Green’s documentation of fuel deliveries was only slightly better than those of Morris. Although Green used an antiquated DOS-based computer system to maintain limited accounting records, Green’s management vehemently maintained that no electronic record existed of fuel delivery or receipt of payment.
The Green case epitomizes not only the challenges faced in extracting useful forensic evidence in small businesses, but also the need for persistence in seeking ESI. Left with such sparse information to determine losses, the attorneys for both parties were highly doubtful that any meaningful analysis of the transactions could be conducted.
A deeper review of the parties’ sparse documents revealed Green electronically produced invoices for fuel sales to Morris. This was a telltale sign that Green more than likely did have ESI available despite its claims to the contrary.
The issue became not only convincing Green that the information existed, but also helping Green and its attorneys understand how it could be retrieved. An ESI challenge like this is rarely accomplished through force or the use of highly technical jargon; rather, success comes through understanding and observing key personnel’s daily routines and processes.
Information-seeking interviews with personnel that regularly use the computer system—such as the accounting clerk or administrator in this case—are a good place to start. Interview questions should seek to understand the daily routine, including the functions regularly performed, and the tools used to accomplish those functions.
Observation of the performance of key functions will also aid in gaining an understanding of the computer system and the software programs used.
In the case of Green, the interview required a few hours with its accounting clerk to observe her daily routine, including the data processing of fuel deliveries, creation of computer-generated invoices and subsequent processing of payment receipts.
Related reading: Detecting Deception: Gathering Evidence And Seeking Admission
AN EXTRACTION PLAN
At the completion of the interview, a plan was developed to extract the data from Green’s archaic system, which required a multi-step process including the use of more advanced technology.
A detailed discussion of the process is beyond the scope of this blog post, but let’s just say that Green’s system was able to provide electronic records of the gallons of fuel delivered to Morris, the date, and the amount charged – for all eight years.
With the ESI extracted from Green’s database, Morris’ economic loss claims were analyzed using two methods:
- Contract Method. The analysis of the ESI focused on the terms as specified by the contract. This analysis revealed Morris was not economically damaged, and that, in fact, he had underpaid Green in excess of $1 million.
- Actual Performance Method. The analysis of the ESI focused on the way business was actually transacted revealed that Morris underpaid Green in excess of $700,000.
Related reading: Calculating Economic Damages: It’s Far More than the Math
A LETHAL BLOW
The analysis of relevant ESI dealt a lethal blow to Morris’ claims. Initially, Morris’ claims seemed somewhat feasible due to the lack of data, and Morris’ made a bet that Green would never be able to organize and analyze the data to disprove his claims.
Morris also had no way to prove his claims with reasonable certainty, but by using electronic data analysis, Green was able to disprove the claims — and actually determine that he was owed money. The end result: Morris dismissed his claims against Green just two weeks after the findings were revealed to his attorneys.
It’s an example that, even in the most technologically backward of businesses, it pays to find the electronic record and dig into it as deeply as possible to prove or disprove economic damages or to aid a financial fraud investigation.
Related reading: The Power (And Variety) Of Data In Forensic Investigations
Forensic Strategic Solutions has substantial experience working with attorneys and clients in extracting critical Electronically Stored Information. To learn more about our work, Contact us for a consultation, or visit our practice area page, Fraud Examination.
This blog was updated on 3/18/2022.