Depending upon which business commentator you pick, the UK and, indeed, the world are in the midst of their worst recession for eighty years. When economies begin to slow down and the corporate sector begins to suffer, one of the outcomes is that people in or connected with businesses might become more financially desperate. For example, the staff or, indeed, management in a company may be tempted to “help themselves” to some of that business’ cash or other assets. Suppliers might be drawn in and convinced that, with some collusion, they could “rip off the business”.
Businesses who spot problems such as these often call upon the assistance of specialist financial investigators or forensic accountants to help them quantify the impact and assess how a fraud happened. Unless you or your business has been the unfortunate victim of corporate fraud in the past, you may never have come across a forensic accountant before. This article provides a brief introduction to the subject, covering in particular what a forensic accountant brings to the investigation of such cases.
Corporate fraud can manifest itself in many ways, but at its core is the fact that money or other assets that belong to a business are purposely taken away from it, or the business is otherwise denied the benefit of having those assets. This might seem like the blindingly obvious, but it is important to bear in mind that this is a simplistic rule of thumb and there is much more to demonstrating that a business or company has been the subject of a fraud and can, indeed, show that assets have been misappropriated from the business. The way in which a fraud investigation is conducted from the outset can be key to successfully prosecuting a case later on and recovering assets. So a business needs to consider, early on, if it would help matters to bring in a forensic accountant to assist with the financial investigation.
If you look up the word “forensic” in the dictionary, the word means “of the law” or something similar. When you have need for a forensic accountant, you are looking for someone who has taken the accountancy skills they have learnt from a lifelong career in finance and business and is comfortable applying them in situations which are, by their very nature, wrapped up in the legal process, whether this is civil or criminal. Not all accountants are comfortable with this or, indeed, have the experience of presenting their findings in a way that is easily understandable to non-accountants with an interest in the case.
When fraud is suspected, forensic accountants can be an important source of expertise. Frauds are about people and paper and an experienced financial investigator will know how to trawl through financial information to look for tell tale signs of irregular activity. He or she will also be skilled in interviewing key individuals within the business, whether it is alleged they are a party to the fraud or are innocent colleagues able to corroborate details of the fraud.
The expertise of the forensic accountant is then to draw together the information from the financial documentation with comments from individuals connected with the case. The accountant’s findings will usually be presented in a written report. Insofar as they can be established, the report will address matters such as:
• Which individuals are involved;
• What the financial documentation shows;
• What information has been corroborated with people involved in the business, including targets suspected of fraudulent activity;
• Whether there are weaknesses in the business’s financial systems which have helped facilitate any misappropriation of assets;
• A measure of the financial impact of any misappropriation; and
• Possible motives behind the fraud.
So the report will set out to provide guidance on (a) how much money has been lost, (b) who was involved, (c) how it happened and (d) why they did it, although the precise details in the report will depend upon the scope of the forensic accountant’s work and how much time and expense the business concerned is willing to devote in seeking to establish the points set out above.
Fraud can have a significant impact on a business. Internally, the continued existence of the business may be at stake if the sums involved are substantial. In the current business environment in particular, it can be devastating to realise the cash flow impact of misappropriated assets which is may be difficult to recover. If only systems had been tighter, it may have been possible for the business to have avoided that loss of cash flow in the first place.
Another effect can be the personal impact on those innocent people who remain in the business. Unless they are so thick skinned that they do not care about their job or about the business they work in, it will be a shock to them to find that one or more of their colleagues have had their “hands in the till”. They will have mixed emotions about the perpetrator or perpetrators and it is important not to underestimate the human impact on loyal employees when a business suffers a fraud.
Externally, the process of (a) getting the money back, and (b) punishing the fraudsters will need to be managed. Once the police begin to investigate the matter, it is likely the business will be required to hand over financial and other documents, and members of staff will be called upon to give statements and, ultimately, appear in court. If the local press have good connections with the police, they may decide the case is sufficiently noteworthy to report upon it, and the business will need to consider its response to press stories. At the same time the business may decide to launch civil recovery action against the fraudsters, and that will entail instructing solicitors and assessing the ability of the perpetrators to pay back what has been taken.
An experienced forensic accountant can help businesses manage these processes. For example, when seeking the advice of solicitors, they will look to the forensic accountant’s report to help inform their comments on the prospects for recovery. For the business the recovery of lost funds or other assets could be crucial, and in terms of criminal justice it is important to send out the message that financial crime does not pay.
It is likely that, if the current recession is deep and prolonged, more and more businesses will realise they have been a victim of fraud. They may well wish to involve forensic accountants with helping them to recover the sums involved and with any criminal action taken by the police.