British business faces a tough year as it grapples with the global credit crunch, turmoil in world markets, a slowing in the property market and rising energy costs. Certain businesses may start to feel the pressure on their profits resulting in conservative spending plans going forward and, perhaps, reduced investment. When business is under pressure and individuals face difficulties in maintaining their lifestyles, then you have the breeding ground for disputes and possibly even fraud.There can be many issues to be settled in a business dispute, but almost always there will come a point when the "money" involved gets examined. This can be at an early stage when the parties are attempting to negotiate a settlement, or at a later stage when the parties have submitted to the jurisdiction of the Courts. Often the parties to a dispute and their legal advisers will call in forensic accountants to help their and, if necessary, the Court’s understanding of just what the financial impact of falling out means. But what is a forensic accountant and in what situations can they provide help and assistance?
What is forensic accounting?
Forensic accountants act in situations where the disciplines of the law and accountancy meet. Whilst forensic accountants are not lawyers and will be careful to ensure they do not give advice on legal issues, they work closely with lawyers in dispute situations. Forensic accountants have a good understanding of how evidence on accounting and taxation issues can help with understanding the amounts involved in a dispute. They will analyse financial evidence and offer expert opinions to the parties in a case, their lawyers and the Courts on issues that arise from their work. The accountant acting as an expert witness in court is usually there to express his or her expert opinion on the circumstances relating to damages in a case and how these damages should be quantified. From time to time the accountant may also be asked to give evidence on the responsibilities of accountants, for example, in cases concerning allegations of professional negligence. From the outset, the work of the forensic accountant is done to a standard that makes it appropriate for presentation in Court, where it can be tested in cross examination.
Why use a forensic accountant?
Forensic accountants act in a wide variety of situations, from helping someone to deal with a tax enquiry into their affairs by H M Revenue & Customs (“HMRC”) to fraud investigations, from a partnership dispute or personal injury claim to a professional negligence case. Some of the situations where they get involved are considered in more detail below:
Valuation of businesses including shareholder and partnership disputes - shareholder and partnership disputes have been described as corporate divorce, and the analogy is apt. Forensic accountants who specialise in valuation matters can value companies and partnerships in these
situations. Shareholder disputes, for example, might occur under s994 Companies Act 2006 (unfair prejudice against shareholders), previously known as s459 cases. Alternatively there may be a requirement to value company shares or partnership equity pursuant to contractual agreements at a value to be set by an independent valuer.
Quantum calculations
A typical situation where a forensic accountant might be instructed is in a loss of profits case. A business might have suffered loss from a breach of contract by a key supplier or key customer and is looking for recompense under the terms of the contract.
The forensic accountant will look for evidence to demonstrate the strengths of his client’s case, at the same time pointing out to instructing lawyers the weaknesses or the possible counter-arguments and alternative methods of calculating damages which might be put by the other side’s expert.
Matrimonial disputes
Any dispute can become bitter and vigorously fought and this may be especially so in matrimonial cases. Forensic accountants can assist by carrying out investigations to help the parties identify and understand the net worth of an individual or help to determine what means, financial or otherwise, are available to fund a settlement. The forensic accountant can also assist with tracing funds through various bank accounts and investments to help demonstrate that all has been properly disclosed.
Professional negligence
In cases of professional negligence, an opinion may be required on the standards exercised by an individual or firm of accountants, as well as advice on causation and quantum. Where there are complex liability issues, the expert opinion of forensic specialists can be vital. An authoritative expert report in such cases can be of great value in bringing about an early settlement.
Alternative dispute resolution
Increasingly parties to a dispute are choosing to resolve their differences outside formal court processes. Many contracts now include an arbitration clause. Sale and purchase agreements frequently make provision for an expert accountant to be appointed to determine disputed items in completion accounts. Even in respect of cases before the courts, judges often require parties to go through mediation first and forensic accountants often attend mediation to help clients assess offers and counter offers.
Tax fraud and commercial fraud
A forensic accountant can assist in dealing with HMRC in respect of investigations into suspected tax fraud. They can manage such an investigation from start to finish, liaising with HMRC, preparing all required disclosures and conducting all negotiations over tax, penalties and interest with H M Inspector of Taxes. In commercial fraud cases a failure of controls provides the opportunity for fraudsters to expropriate funds and assets. Forensic accountants can help identify those failures and provide recommendations as to how controls might be changed. In many cases they can often provide an estimate of the loss suffered and assist with asset tracing exercises, attempting to identify the channels through which funds or assets have been taken. Often a detailed investigation
of a business’ accounting records is required and an assessment undertaken of the extent of any falsification of records.
In conclusion
With the UK economy going through uncertain times, you may be advising a client or find yourselves engaged in disputes where forensic accountancy help is needed. Harwood Hutton have specialists in this field who can help with commercial cases or personal disputes. Both are areas where the involvement of forensic accountant can be very useful in terms of progressing and resolving cases.