Many solicitors working in all areas of the law routinely use forensic accountants to assist them with the financial and business apsects of a case. However, some solicitors may be faced with the need to instruct an expert accountant for the first time, or must explain to a particularly demanding client why there is a need to spend additional money on appointing another person to the team! Victims of fraud may wonder if spending more money investigating their loss is worth it? This article examines why forensic accountancy adds value to any fraud matter, business crime defence or confiscation proceedings.
Any criminal or civil dispute involving fraud, money laundering or matters of finance generally tend to be more complex than other disputes. The reason why loss has occured is often due to the confusing nature of money transactions hiding somebody’s attempts to steal. Sometimes business losses are targeted by the regulators as frauds simply because the money trail is confusing! In short, there are many instances where it is essential that a clear and succinct picture is drawn up of any particular transaction, or series of transactions, so that a complete understanding is facilitated for all parties, many of whom do not have a clear or detailed understanding of finance issues.
Presentation of complex financial issues
Forensic accountancy is often no more than presentation of financial issues in a form that is easily understood – by disputing parties. This includes the police or other regulators, the lawyers, the Judge and the Jury. Complexity of financial accounts is often cited as a red flag of fraud. Complex group structures with inter-company transactions and charges often cloud the simple facts of the business taking place. Sometimes the reason is to cover up fraud, but often it can simply be the policy of the company owners structuring their business innocently.
Many businesses will use a different bank account for each strand of their business operation, often having several accounts for each company. Then they might have several companies to act as vehicles for different aspects of their activities. Thus one business may run with one company and one bank account, whereas a similar business may have dozens of bank accounts and a straggling group of companies. The complexity of the group might mean that if a dispute arose, forensic accounting would be needed to break things down to a simple level and present almost as if the business was like the single company.
Providing expert opinion
“Forensic accountant” and “expert accounting witness” are almost synonymous – it depends on who is making the comparison. At Mark Jenner & Co there is very little that distinguishes the two areas from each other. Every case that is taken on involves financial investigation – an examination of the financial situation that allows it to be distilled into a form that can be presented and understood by non-accountants. This work could be investigating a fraud, looking for answers to see how much money was lost and what weaknesses allowed it to happen. Or, the work could be a critique of a financial case prepared by another forensic accountant or a regulator. In this case, the forensic accounting task would be to look for errors and inappropriate assumptions.
But some cases may lead to an expert opinion being needed also. All forensic accounting work may become part of a dispute – as a company seeks to recover assets from the member of staff in a civil fraud case, the Crown seeks to confiscate assets from a convicted criminal or prove fraud against the fraudster. Most of the time the forensic accountant will simply be presenting the financial picture using his expertise – but sometimes he will provide opinions within his work. As an expert witness, he is one of the few people in a Court room allowed to have an opinion (other than the Judge). Everybody else must deal in facts.
Providing an opinion in court is very different from criticising errors in the opposition’s case or providing a clarification of the facts. An opinion is a powerful tool in any case – but equally vulnerable to attack from the other side. For example, take one recent case where an accountant was accused of failing to report suspicions of fraud and fulfiling his proper Money Laundering Regulations obligations. The Crown brought a very robust case against the individual for not having proper procedures in place such as “Know Your Client” checks and for receiving money into a client account on behalf of the fraudster.
To put this case in context, the accountant prepared the accounts for the fraudster and held around £200,000 client funds for about one year. For his services he took a very modest annual fee and returned the funds as and when his client instructed. He gained absolutely no benefit from allegedly hiding his client’s fraud.
On the face of it this person was innocent – but in today’s professional arena every practicing lawyer and accountant knows how seriously the Crown takes money laundering. We have all got to be careful who we deal with and make sure we record sufficient efforts that we have made to keep things straight. The fact that the matter described took place in 2002 just before the Money Laundering Regulations came in in 2003 seemed to have been missed by the Crown. Back then I recall even the big accountancy firms did not know what was expected of them or even when the new legislation came into effect. I was involved in the implementation of the regulations at the time, giving lectures and training on several occasions. In 2002/03 the accountant could have been forgiven for not being up to speed with the new developments – before the deadline early in 2003! In this case sense prevailed, hopefully the forensic accounting opinion that the accountant had actually done more than was he was legally obliged to do at the time helped. In this case there was hardly any numbers in the report and certainly no complex transactions to explain. However, a relevant expert accountant’s opinion was very much needed.