Forensic accountancy: an introduction
Foresight now offers forensic accountancy within its comprehensive expert witness network. Brian is one of a number of forensic accountants within Foresight’s network and has written an introduction to forensic accountancy: definitions of forensic accountancy and where it can be used.
Forensic accounting is defined in the Oxford Dictionary as:
“The use of accounting skills to investigate fraud or embezzlement and to analyse financial information for use in legal proceedings.”
What is a forensic accountant and what is their role?
Forensic accountants are called upon to use their specialist accounting, auditing and investigative skills in multifaceted cases to give their professional and independent opinion on the facts surrounding dealings within a financial setting. These include personal cases such as divorce through to large and complex cases involving multinational organisations.
Forensic accountants are tasked with expressing an opinion on quantum rather than liability; liability is for the court to decide.
Quantum includes issues such as:
There is one exception to this rule which is when a forensic accountant acts in a case where negligence is alleged against another accountant or auditor. Here, the opinion of a forensic accountant will assist the court to decide whether the defendant was negligent or not.
Where is forensic accountancy used?
Personal injury, fatal accident
Claims for loss of earnings declined significantly when legal aid was curtailed for such claims and solicitors used conditional fee agreements and no-win-no-fee arrangements to attract claimants. This has resulted in solicitors being very picky about which claimant cases they accept, with larger firms choosing to represent only those claimants whose cases have a high likelihood of success.
The forensic accountant will be asked to compute the past loss and the future loss of earnings and possibly the loss of pension rights including state pension and S2P benefits.
Accountants are frequently asked by divorce lawyers to ascertain the value of a spouse’s shares or interest in a business or trace hidden assets. They may also be asked to suggest ways in which funds might be withdrawn from the business in a tax-efficient manner, acceptable to all investors.
Rarely are accountants asked to advise on the tax aspects of divorce, as this subject is not at the forefront of lawyers’ minds when they take on a client. The accountant may only be appointed some way after critical dates have passed such as the date of separation – 5 April or 36 months after separation.
One exception to this rule arises in what is known as collaborative law. The goal of collaborative law is to resolve matrimonial disputes without reference to a court and this way of working is based on an American concept and is currently used by a group of UK lawyers under the ‘Resolution’ association.
Typically, husband and wife will sit down with their respective lawyers and discuss what they need to do and/or consider. A collaboratively trained and accredited accountant may be asked to advise on tax and business valuation issues, an IFA (Independent Financial Adviser) might advise on pension sharing/splitting and there may be a child psychologist to advise on the rights of the children.
It sounds like – and is – a great idea and it requires extra skills from advisers over and above their professional knowledge. It’s also good because the accountant is brought in much earlier than in a usual divorce through the courts.
However, it has to be said that most divorces are acrimonious and getting husband and wife to sit down in the same room is difficult.
Fraud has always been an area where forensic accountancy expertise is needed – the employee who is embezzling money, stealing stock, the ex-employee who was working for himself whilst employed are just a few examples.
Since the introduction of the Proceeds of Crime Act 2002 (POCA) (amended in 2007) criminal benefit cases have mushroomed. The forensic accountant will usually act for the defendant, for example, a drug dealer who is now in prison and has to repay the proceeds of his crimes, or the employee who defrauded her employers, is now in prison and has to repay what she stole. Such criminals will be subject to a confiscation order by the court upon application by the prosecution. The prosecution will set out its case for quantifying, identifying and confiscating the proceeds of the convicted person’s crime using what is known as a Section 16 Statement.
Given the nature of some of the people involved in drug dealing and organised crime it is best not to act against them – there have been cases of forensic accountants being shot (though fortunately not killed), threatened with violence and assaulted! However, there are cases where such risks are not so high, for example, mortgage fraud, which is usually perpetrated by individuals with the assistance of corrupt solicitors and estate agents.
There are several areas of difficulty in all confiscation orders, and these include: criminal benefit vs. the available amount; changing POCA requirements as case law develops, for example, a courier and the value of drugs seized; availability of the matrimonial home; tainted funds and gifts. It often transpires that the criminal has spent, disposed of or hidden the proceeds of their crime so that the available amount that can be confiscated is much lower than the amount of the criminal’s benefit from their crime.
This can be the most lucrative area of work. Cases can include: breach of contract, for example, failure to supply product of the correct specification; breach of post-employment restrictions; warranty claims; commercial share valuations and unfair prejudice petitions under section 994 of The Companies Act 2006. Whilst lucrative, the work is often intense and to a very tight deadline.
An arbitrator is someone who is capable of resolving disputes because of their knowledge and experience of a particular field. In the accountancy world, an arbitrator is usually required where a dispute arises between the partners of a firm of accountants and the partnership agreement has a clause that states:
“In the event of a dispute arising the issues shall be decided upon by an arbitrator appointed by mutual agreement or in the absence of such agreement by the President of the Institute of Chartered Accountants in England and Wales.”
This is known in ICAEW circles as “The President’s Appointment Scheme” and it is used by the President to appoint arbitrators and single joint experts.
For an expert witness to act as an arbitrator in their particular field they are required to pass an exam for membership of the Chartered Institute of Arbitrators (MCIArb). To act as an arbitrator in any dispute (not just among accountants) experts have to be a fellow and to have passed the fellowship exams, which concentrate on the law of contract.
Many arbitration assignments can be ‘paper only’ where the forensic accountant will decide on the basis of documents, without meeting the concerned parties.
Sometimes, a forensic accountant is appointed, with the agreement of both parties to a dispute, to resolve a dispute which relates to a specific technical accountancy matter. An example might be where one company has agreed to buy the assets of another company but believes that the value of stock has been overstated by the seller.
It is important for both parties to realise that the decision of an expert determiner or an arbitrator is final and can only be challenged in very limited circumstances. Both forms of dispute resolution (arbitration and expert determination) are usually cheaper than going to court with a legal team.
Read more of our features:
A matter of opinion; what is an expert witness and what is their role?
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