Category Archives: Forensic Accountancy

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Divorce – What has been hidden can often be revealed

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In divorce proceedings it is often the case that one party claims that the other has hidden assets and has failed to declare them on the Form E financial statement. It is in such cases that the expertise of the forensic accountant comes into play.

Forensic accounting is the specialist practice area used to investigate details on financial issues, which can then be used in negotiations or in court. In family cases that regularly valuing business assets and calculating capital gains liabilities or how much income a business generates so that the figures can be used in financial statements.

In addition forensic accounting is used to find ‘hidden’ assets.

The types of assets most commonly hidden are cash, bonds, mutual funds, the cash value of insurance policies and variable annuities, stocks, travellers’ cheques, savings bonds and bearer municipal bonds. Converting cash into assets such as art, jewellery, antiques, vehicles and collectibles is often used by one party in the divorce.

In their attempts to conceal assets, partners may often involve relatives or acquaintances who may or may not be aware that they are party to the concealment. Repayment of non-existent debts to friends or relatives is often used as a smokescreen – as may also expenses for gifts, travel, rent or college tuition.

Where one party owns a business they may use it as a vehicle to conceal assets, by paying salaries to fictitious people or skimming cash from the business – or even undervaluing stocks and writing off as bad debts valid debts collected in cash.

Trying to find such assets or prove unreported income is often one of the most difficult jobs during the divorce process. Being aware of the ways individuals move assets into the hands of their partners or behind false documents, and of the techniques needed to find those hidden assets, can result in their discovery.

If one of the partners to the divorce does not have documents to prove the whereabouts of their assets, however, identifying even ‘easy to find’ assets can prove costly. In those cases one has to ask if the cost of the investigation is worth the potential value of the assets which are assumed, at that point, to be hidden. Remember, they may not actually exist.

However, through diligent and effective preparation it is possible to discover assets no disclosed or acknowledged by the other party.

In a recent case we were advised by the wife of some public company shares she ‘thought’ her husband had owned. We were able to ascertain which shares they were, when they were sold and the fact that sales proceeds were not banked in the UK. As a result, we ultimately found over £6m in hidden assets.

We have also used self-assessment tax returns and company CT600 corporation tax returns to investigate hidden assets and reported our concerns about under-declaration to HMRC. Their subsequent investigations have proved very useful in finding these assets. In our experience, the use of forensic accountants has always proved of benefit when searching for hidden assets in divorce proceedings.

Forensic Accountants: the CSIs of Finance

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What does a forensic accountant do?

As forensic accountants we deploy accounting, auditing and investigative skills when conducting an investigation. Equally critical is our ability to respond immediately and to communicate financial information clearly and concisely in a courtroom setting. Forensic accountants are trained to look beyond the numbers and deal with the business reality of the situation.

A forensic accountant is often retained to analyse, interpret, summarise and present complex financial and business related issues in a manner which is both understandable and properly supported.

Forensic accountants can be engaged in public practice or employed by insurance companies, banks, police forces, government agencies and many other organisations. They can be involved in:

• Investigation and analysis of financial evidence

• Development of computerised applications to assist in the analysis and presentation of financial evidence

• Communication of their findings in the form of reports, exhibits and collections of documents

• Assisting in legal proceedings – including testifying in court as an expert witness and preparing visual aids to support trial evidence.

In order to perform those services a forensic accountant must be familiar with legal concepts and procedures. In addition, the forensic accountant must be able to identify substance over form when dealing with an issue.

What should a legal professional consider when retaining a forensic accountant?

The issues to be considered include the experience and qualifications of the forensic accountant. They should also be retained as early as possible in order to obtain the maximum benefit. The assistance a forensic accountant can provide early in the process can be significant in reducing the overall cost and maximizing the benefit. If retained early, they can assist with the ‘examination for discovery’, identifying additional areas of damages, assisting with settlement negotiations and providing a preliminary assessment of the quantum of damages.

If the forensic accountant is being engaged as an expert witness, then they should be given access to all of the relevant documentation. If restrictions are imposed upon the scope of the investigation, there may be an impact upon the acceptance of the findings.

In situations where counsel is involved, the forensic accountant should be retained by counsel, so the privilege that exists between client and counsel will be extended to the work produced by the forensic accountant.

What are the main areas of litigation involving the work of the forensic accountant? 

Criminal investigations and fraud: A forensic accountant may be retained by local police forces, or by organisations such as the Law Society, in relation to criminal investigations. Their report is prepared with the objective of presenting evidence in a professional and concise manner.

Connected to that area are investigations into business or employee fraud. Business investigations can involve funds tracing, asset identification and recovery, forensic intelligence gathering and due diligence reviews.

Employee fraud investigation often involves procedures to determine the existence, nature and extent of fraud and may concern the identification of a perpetrator. These investigations often entail interviews with personnel who had access to the funds and a detailed review of the documentary evidence.

Employee dishonesty or infidelity can also figure in the investigation of insurance claims, which may also cover business interruption and property losses.

Insurance claims and business losses: Insurance policies differ significantly regarding their policy conditions, so these assignments involve a detailed review of the policy, to investigate cover and the method of calculating the loss. A forensic accountant can be asked to assist from either an insured or insurer’s perspective in the settlement of the case.

Other examples of assignments involving business losses include contract disputes, construction claims, expropriations, product liability claims, trademark and patent infringements and losses stemming from breach of non-competition agreements.

They may also arise from shareholder or partnership disputes. These assignments often involve a detailed analysis of numerous years’ accounting records to quantify the issues in dispute. For example, a common issue that arises is the compensation and benefits to be received by each of the disputing shareholders or partners.

Where claims of professional negligence are involved, the investigations are often approached from two different but complementary perspectives. These are the technical investigation – has a breach of generally accepted accounting practice or auditing standards or other standards of practice occurred – followed by the quantification of loss.

If the professional in question is an accountant, then we are often involved with both perspectives. If the matter involves some other professional the forensic accountant will normally be retained to perform only a loss quantification.

Personal injury and matrimonial claims: A forensic accountant is often asked to quantify the economic losses arising from a motor vehicle accident. They therefore need to be familiar with the legislation in place pertaining to motor vehicle accidents. Cases of medical malpractice and wrongful dismissal also involve similar issues in the calculation of the resulting economic damages.

Matrimonial disputes from a forensic accounting point of view often involve the tracing, locating and evaluation of assets. The assets to be evaluated and valued may be businesses, property or other assets.

Forensic Accounting

What is Forensic Accounting?

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What is Forensic Accounting?

The integration of accounting, auditing and investigative skills yields the specialty known as “forensic accounting” which provides an accounting analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution. Forensic Accounting encompasses both Litigation Support and Investigative Accounting.

As forensic accountants, we utilize accounting, auditing and investigative skills when conducting an investigation. Equally critical is our ability to respond immediately and to communicate financial information clearly and concisely in a courtroom setting. Forensic accountants are trained to look beyond the numbers and deal with the business reality of the situation.

What does a Forensic Accountant do?

A forensic accountant is often retained to analyse, interpret, summarize and present complex financial and business related issues in a manner which is both understandable and properly supported.

Forensic accountants can be engaged in public practice or employed by insurance companies, banks, police forces, government agencies and other organizations.

A forensic accountant is often involved in the following:

·         Investigation and analysis of financial evidence;

·         Development of computerized applications to assist in the analysis and presentation of financial evidence

·         Communication of their findings in the form of reports, exhibits and collections of documents.

·         Assistance in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial evidence.

In order to properly perform these services a forensic accountant must be familiar with legal concepts and procedures. In addition, the forensic accountant must be able to identify substance over form when dealing with an issue.

What should you consider when retaining a Forensic Accountant?

The following issues should be considered on retaining a forensic accountant:

·         The experience and qualifications of the forensic accountant.

·         The forensic accountant should be retained as early as possible in order to obtain the maximum benefit. The assistance that a forensic accountant can provide early in the process can be significant in reducing the overall cost and maximizing the benefit. If retained early, the forensic accountant can assist with the Examination for Discovery, identify additional areas of damages, assist with settlement negotiations and provide a preliminary assessment of the quantum of damages.

·         If the forensic accountant is being engaged as an expert witness then he or she should be given access to all of the relevant documentation. If restrictions are imposed upon the scope of the investigation there may be an impact upon the acceptance of the findings.

·         In situations where counsel is involved, the forensic accountant should be retained by counsel so that the privilege which exists between the client and counsel will be extended to the work product of the forensic accountant.

Criminal Investigations:

Forensic investigations often relate to criminal investigations on behalf of police forces. For example, a forensic accountant may be retained by local police forces and organizations such as the Law Society.

A forensic accountant’s report is prepared with the objective of presenting evidence in a professional and concise manner.

Shareholders’ and Partnership Disputes:

These assignments often involve a detailed analysis of numerous years’ accounting records to quantify the issues in dispute. For example, a common issue that often arises is the compensation and benefits received by each of the disputing shareholders or partners.

Personal Injury Claims / Motor Vehicle Accidents:

A forensic accountant is often asked to quantify the economic losses arising from a motor vehicle accident. The forensic accountant needs to be familiar with the legislation in place which pertains to motor vehicle accidents.

Cases of medical malpractice and wrongful dismissal often involve similar issues in the calculation of the resulting economic damages.

Business Interruption / Other Types of Insurance Claims:

Insurance policies differ significantly as to policy conditions. Accordingly, these assignments involve a detailed review of the policy to investigate coverage issues and the method of calculating the loss.

A forensic accountant is often asked to assist from either an insured or insurer’s perspective in the settlement of the case.

Examples of these types of assignments include; business interruptions, property losses and employee dishonesty (fidelity) claims.

Business/Employee Fraud Investigations:

Business investigations can involve funds tracing, asset identification and recovery, forensic intelligence gathering and due diligence reviews.

Employee fraud investigations often involve procedures to determine the existence, nature and extent of fraud and may concern the identification of a perpetrator. These investigations often entail interviews of personnel who had access to the funds and a detailed review of the documentary evidence.

Matrimonial Disputes:

Matrimonial disputes from a forensic accounting point-of-view often involve the tracing, locating and evaluation of assets. The assets to be evaluated and valued may be businesses, property or other assets.

Business Economic Losses:

Examples of assignments involving business economic losses include; contract disputes, construction claims, expropriations, product liability claims, trademark and patent infringements and losses stemming from breach of non-competition agreements.

Professional Negligence:

These investigations are often approached from two different but complimentary perspectives, these being:

·         Technical – has a breach of Generally Accepted Accounting Principles or Generally Accepted Auditing Standards or other standards of practice occurred;

·         Loss Quantification.

·         If the professional in question is an accountant then we are often involved with both perspectives. If the matter involves some other professional the forensic accountant will normally be retained to perform only a loss quantification.

Loss of Profits vs. Business Value

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Loss of Profits v Business ValuationsIf a business is damaged as a result of wrongdoing, there are two ways in which the plaintiff’s damages can be measured.

The First way is to calculate the plaintiff’s annual loss of profits; and the Second way is to calculate the value of the plaintiffs business at the time of loss; that being the amount that the plaintiff could have sold the business for at the time of loss.

Using the loss of profits route, the Accountant would forecast the annual profits for the damaged business based upon the industry and actual conditions applying at the time, and up until the date of the trial, and on into the future. This valuation should also take account of the fact that the projected profits were by no means “riskless”.

Using the business valuation route, one would calculate as if the defendant were “purchasing” the damaged business from the plaintiff at a “fair market value” at the time of loss. This valuation would be equivalent to the present value of the cash flows that would accrue to the owner of the business over its lifetime. A risk adjusted discount is then applied to convert the projected annual cash flows to a single lump sum.

Where the claim is for personal injury, it should be noted that significantly higher damage claims can be made under the lost profit method than under the business valuation method. This is because the business valuation method imagines that the plaintiff would have sold the damaged business immediately prior to the damage happening; thus attempting to estimate the proceeds the plaintiff could have received at that point in time. To the extent that no sale was actually contemplated; a loss calculation based on the value of the business can in those circumstances lead to an amount far different then would have been achieved by the plaintiff but for the loss had they continued to operate the business.

Indeed relying solely on the business valuation approach can be risky if there is any doubt as to the permanency of the loss. In these circumstances, the preparation of a detailed lost profits calculation on a year by year basis is essential. It should be noted that the business valuation and lost profits approaches often yield similar damages calculations. When they do not, it is usually due to the factors noted above. H.M. Courts may also subjectively prefer one approach to another. Experts should consider calculations under each of the above methods; and adopt the approach that best fits the facts of the case.

Commercial Fraud

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Commercial FraudIt is surprising how rarely people look behind the obvious and ask the awkward questions.

I dealt with a case of fraud where the accounts clerk managed all the finances for a business which operated from four sites. She was such a nice person, visiting every branch daily to collect the cash and bank it. She was so kind and even allowed the staff and the partners to stay for free at her villa in Puerto Banus in Marbella. Everyone, including the partners (and possibly the auditors), were fooled by her apparent willingness to assist and ‘put herself out’. No alarm bells rang over the daily visits to the branches and visits to the bank. No one checked to see if any accounting procedures or controls were missing.

Not surprisingly she defrauded the business of some £2 Million over 10 years. She was found guilty, but unfortunately it did not stop there. HM Revenue & Customs sued for under declarations of VAT on these scams and the senior partner stuffed a fatal heart attack.

In another case, the accounts clerk for a travel agency was accused of fraud and I was asked to defend her. On checking the allegations, I found that the controls over cash had been non-existent. When I asked to visit the travel agency, the finance director fiercely opposed my visit, alleging that the procedures manual that he had supplied was adequate. The judge agreed with me and insisted that I be allowed to visit the firm and carry out tests on the old and new procedures.

When carrying out my tests, I found that not only did the revised procedures still allow for fraud, but more importantly, that fraud was still continuing despite the sacking and prosecution of the accounts clerk. The finance director disappeared on a one way ticket to Rio and the case against the accounts clerk collapsed.

Another case involved a large timber importer whose accounts clerk was allegedly raising false suppliers invoices. The prosecution was being assisted by a major accounting firm who put a couple of university graduates onto the case. They had gone for the obvious apparent frauds, without checking the movement of the timbers from import off ship through the delivery to customers. Unfortunately for them, these were smoke screens and I was able to show the jury that the goods were genuine, had been received and sold to customers who had paid for the goods.

As a result my client was clearly not guilty of the charges laid against him. Had the university graduates delved deeper thy would have found that behind the smoke screen the clerk had ‘robbed’ Peter to paid ‘Paul’ and so was guilty of fraud, but had not been charged with the correct offences.

Loss of Earnings

Business Valuations

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Business Valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. All too often, shareholders, directors and/or partners in a business do not have any formal agreements and so, when they fall out, valuing the business becomes very difficult as there are no pre-agreed terms of reference.

If it is a limited company, should one remove the (very low) directors’ remuneration and replace it with a market value remuneration prior to calculating the buyout value?

What expenses have the parties agreed to put through the company that would not normally be treated as valid business expenses? Do they have spouses on the payroll that do not genuinely earn their salaries? Should these be added back? Do they work from home and would this be necessary for the new owners?

Is their business repeat business or do they suffer from high marketing costs to enable them to find new clients? In the direct marketing business up to 30% of overheads can be marketing. Are they professionals and so liable to keep repeat business and reduce their overhead costs?

The type of business – professional or commercial – will affect the multiplier for the basis of valuation. In the case of accountants, it is the repeat client value that is used to calculate the valuation from 1.00% to 1.25% of client value. Yet for many commercial enterprises it will be the amended net profit with a multiplier of between four and eight.

The most common requirement for a valuation is in a matrimonial dispute where the shareholding partner usually wishes to materially down value the business whilst their spouse is equally keen to over value it. In those circumstances, one would need to look at an open market valuation of the business.

Finally, the business may also have properties which would need to be separately valued and then consolidated into the overall business valuation.

Systemised Fraud

Fraud becomes more systemised

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A recent article in the news showed that the average age of fraudsters is falling – and that they are becoming better educated in software systems and solutions than their employers.

As a result, employers are left unsure that fraud might be being carried out right under their noses. Many solicitors, when defending clients, will be wondering how and why their clients were able to commit these frauds.

With modern technology, it is quite easy to put a trace on an employer’s computer that will enable a fraudster to access all logins and passwords. Unless the employer has loaded key computers with anti-access software, he will be unaware that he could be being hacked by employees – or even be under attack from outsiders who have an ‘innocent’ email which, when opened, accesses data or contains a virus. Modern firewalls, if maintained and updated, usually block all such unwanted emails thus restricting potential fraud to employees.

A popular form of fraud at present requires conspiracy with a supplier who issues inflated invoices which are approved by the relevant employee. Once payment has been made, the supplier then raises an internal credit note and shares the credit with the fraudulent employee. In a recent case, the defendant was found guilty of defrauding in the region of £100,000 of his employer’s money over a number of years.

Another example is where the employee creates his own limited company using a ‘virtual office address’ which sells non-existent goods or services. These are substantiated by purchase orders raised by the employee who then approves the invoice for payment. In larger organisations, the cheque signatory usually relies on the purchase orders and invoice approval as evidence to make payment, thus making it easy for the fraudster.

When material goods are allegedly involved, the fraudster will often ‘mis-post’ a selection of purchase invoices into incorrect categories. This creates errors in the stock balance and an opportunity to slip in invoices for non-existent goods.

Having defended cases like these for over 30 years, I have found that the best form of defence is to highlight the weaknesses in the systems – such as stock write offs due to mis-postings (preferably by others than the defendant) – and also to highlight problems seen continually and not ceased with the prosecution of the employee.

In fact, I have dealt with a number of cases where the problem continued after prosecution. We were able to convince the jury that the client was clearly not guilty of fraud as the problem continued after the client left.

Employee Fraud

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Employee FraudWe were retained by the Defence in a Fraud case for a high profile Travel Firm.

The bookkeeper was alleged to have stolen monies over a number of years from her employers.

As part of my investigation for the defendant, I asked to visit the firm and review their Accounting Records and systems. This was refused; so I complained to the Judge and got an order for me to check the records.

On investigation, I found that the Fraud was such that a number of people could have been responsible.

In addition, on checking the systems; I found that no changes had been made to stop such Fraud.

On investigating further; I found that the fraud had continued after the Defendant had been sacked and prosecuted.

When we arrived in Court, we were informed that the Chief Accountant had gone missing. The case was dropped against our defendant; who subsequently obtained damages for libel and defamation of character.

HMRC Fraud

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HMRC FraudA recent Fraud Case involved a Builder who purchased a house for himself, and a house for his mother; these properties costing approximately £150,000 each.

Both properties were valued at £750,000; and put up for sale.

HMRC could not understand how someone only earning £20,000 per year had managed to turn 2 dilapidated properties into luxury properties. Where did the money come from?

On investigation it was found that the Builder was trading in “cash deals” and not declaring them.

He was found guilty of Revenue Fraud for £240,000 and sent to Prison.

Loss of Earnings

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Your Expert Witness ArticlesWe often hear about people tripping on a grape or other such fruit in a supermarket and then claiming damages. However, many cases are based upon life threating injuries which can leave the victim as a ‘cabbage’ – or worse.

We recently had a case where a 67 year old driver was run over in a customer’s yard. The customer accepted full liability but his insurers argued for a minimal pay out because of the driver’s age. We were able to show that his employers had undertaken to employ him until aged 75 because his wife was crippled and chairbound and, as a result, entirely reliant on his earnings. The insurers eventually paid out £125,000 in compensation.

In another case, an individual was accidently hurt by a block and tackle and rendered a ‘cabbage’. Using his earnings, together with his growth in earnings for the previous 5 years, we were able to convince the courts that a lump sum of £5 million was not reasonable.

When the West Drayton rail crash occurred, most of the passengers were breadwinners and so compensation claims would be based upon their earnings, together with a review of the growth in their earnings and the degree of injury.

It is our experience that all too often, claimants settle for too low a compensation figure – partly because the insurers have no concern for the victim and his or her loss of capacity or earnings, and partly because by ‘holding out’ they can force the claimant into accepting a lower offer because of their financial difficulties.

It is important to not only review a victim’s earning, but also their lifestyle and business and social development over the preceding years, as this can materially affect the level of compensation payable. If their lifestyle is sedentary and earnings steady, and the injury minor and inconvenient, then the compensation will be adjusted for inconvenience.

If, however, they were active with earnings growing considerably and the injury had curtailed both their activities and their earning capacity, then the compensation will take account of the anticipated loss of earning for the rest of their life, together with compensation for the loss of mobility.