27 Apr 2012 10:50am

Forensic accounting

Pressures resulting from the economic downturn, along with the increasingly complex global nature of business, mean that forensic accountants – also known as investigative or forensic auditors – are busy. Amy Duff hits the mean streets to find out more

Regularly seen working alongside solicitors and prosecuting bodies to help tackle white-collar crime and resolve disputes, they’re often the first port of call for organisations in a quandary over whether there’s anything going on in the first place.

As Hitesh Patel, UK forensic partner at KPMG explains, fraud is “a part of commercial life, albeit the darker side, and clients often need assistance” to counter or in some cases disprove it. “It’s complex by its very nature. When people do the wrong thing it’s not usually staring you in the face,” he says. Enter the accountant. “You need to find out what happened, how it happened, whether there’s a continuing risk, how to shut the doors and then look to preserve commercial interests,” says Patel. “A number of skills are required to make sure the incident and its impact are minimised.”

You’ve got to approach things sceptically, to have an investigative mind and a keenness  to uncover what’s  gone on

Gavin Pearson, vice-chairman of ICAEW’s Forensic Group

The bulk of the forensic accountant’s work will be in valuation cases rather than fraud. They focus on a range of civil and criminal matters including contractual, partnership and matrimonial disputes, criminal defence work and confiscation orders, warranty and business interruption claims or looking at the due diligence requirements of business transactions such as M&As. There’s also expert witness work for civil or criminal cases where accounting, investigative and quantitative expertise is required, which is why some departments now call it litigation support rather than forensic accounting.

And then there’s this other side of the role, which investigates possible financial deception. This could mean scrutinising accounts to see if embezzlement, value manipulation or money laundering has occurred, or it could be tax evasion. If a fraud is found, the forensic accountant will use evidence from the records to help ascertain who is responsible for the deceit and determine the financial impact of the deception. As recent events have shown, even a small fraud can have a massive financial impact, taking down not just a company but a section of the local economy as well.

The bad news is that fraud is on the increase. According to the latest KPMG figures, UK fraud reached £1.1bn from January to June last year with almost half (in volume terms) hitting the private sector. This increase is blamed largely on the state of the global economy. As success and growth remain elusive for many firms, a significant minority will do whatever it takes to help their business survive. And when people are losing their perks there is more incentive to take money out of the business, adds Gordon Hodgen, director of forensic accounting at RSM Tenon. “That’s the other side of austerity. If your personal circumstances aren’t what you’d hoped and you’re in a position of trust there are a certain proportion of people whose minds will tend to thinking how they can get a bit of money out of the business for their own needs. If times are tough and you haven’t got the bonus you think you deserve, then you might find your own way of getting one.”

There’s another aspect to the story, adds Maryam Kennedy, fraud investigation and dispute services partner at Ernst & Young. Detection of fraud has increased along with the public’s desire to unearth bribery and corruption and punish the offenders. She says, “Part of that detection is because profits are depressed and fraud, which may have been masked by good results historically, is found out. As Warren Buffet famously quipped, ‘It’s only when the tide goes out that you get to see who’s been swimming naked’. But also the tools and technology of the trade are light years ahead of what they were even four or five years ago. And the public perception of corruption is increasing. We saw with the MPs’ expenses scandal a demand for scrutiny and accountability on what the government was doing about that.”

The Bribery Act in the UK and the 2010 Dodd-Frank Act in the US represent both governments’ intentions to combat unethical business practices. While the Bribery Act is encouraging more organisations to think proactively and take preventative action against fraud by setting up systems and processes within their business models, it’s the whistleblowing provision within the US model that is having more impact in practice.

According to a report in the FT, company informants are flocking to US regulators with allegations of bribery, accounting fraud and market manipulation, incentivised by the offer of 10- to 30% of the amount that the Securities and Exchange Commission recovers through the courts or a settlement off a credible tip.

In 2010 Cheryl Eckard, a GlaxoSmithKline employee, received $96m as a reward for providing information to the government in relation to faulty drug manufacturing by her employer. It’s the biggest payout so far.

We could learn a lot from the way the Americans deal with fraud, says Hodgen. “They’re more inclined to try all the avenues for getting witnesses on side and they’re very, very tough on people who don’t cooperate. I’m not sure we treat whistleblowers as well in this country,” he says.

So if people are more willing to put their neck on the line as whistleblowers if they have some security or the prospect of a reward, will the UK government adopt a similar scheme here? Kennedy thinks it will take a wait-and-see approach, especially when there are concerns in the US that the SEC doesn’t have the resources to adequately investigate tip-offs. “The level of the fines in absolute levels that are being levied in the UK are much lower, so any percentage for the whistleblower would be lower,” she says. “I think the government will look at the impact this has in the US before considering it”.

Patel claims there’s an over reliance on employees doing the right thing. “There’s this belief that everyone’s done the training and set up the whistleblowing hotline so they’ve ticked the box. Unfortunately, it’s not that straightforward. You get someone who’s concerned about losing their job, they don’t want to rock the boat, they’re unwilling to report colleagues, they could be friends. All of that does happen in a business. People don’t want to do these things,” he says.

Culture plays a part, adds Kennedy. “Whistleblowing may be extensive in Western Europe and the US but it isn’t used in the former eastern bloc, the Middle East or China where culturally, to pick up a phone and give information to somebody you don’t know… it’s very difficult to establish that trust. Where companies operate globally they need to consider what’s going to work in each country.”

But there are other red flags, says Patel. Customers, competitors and suppliers will be vocal about tenders they’ve lost or accounts that have been mishandled. And new management often uncovers wrongdoing, says Hodgen. “They can look at things in a slightly different way and ask the questions that maybe hadn’t been asked in the past,” he says. “That’s very common if you get a new FD in, something that the fraudster isn’t used to and they therefore don’t know what information to forge. It’s not always a complicit thing; it can be as simple as just knowing the practices and how you get around them. Once someone knows your foibles they can exploit them.”

If a company finds itself in a financial crisis then fraud is often discovered, continues Hodgen. “More often than not it’s the recovery people who’ll uncover it. They’ll find that actually, the reason the company collapsed may have been a black hole of unaccounted-for funds. That’s what happened to the American firm MF Global. Funds weren’t where they were supposed to be and that was part of the reason why it collapsed.”

With such cunning and duplicity abounding, the forensic accountant must have an armoury of skills at their disposal. Good communication is key, says Hodgen. You’ve got to be able to explain what you’ve found and the significance of it in a way that best suits your audience, be that your client, other professions you’re working with, a judge or a jury. You need to be quite cynical, reckons Gavin Pearson. A forensic director at RSM Tenon and vice chairman of ICAEW’s Forensic Group, he’s also a member of the Expert Witness Institute and is instructed by solicitors and prosecuting bodies to act as expert accountant in a wide range of civil and criminal matters.

He says, “You’ve got to approach things sceptically, to have an investigative mind and a keenness to uncover what’s gone on. It’s very varied. I’ve acted in disputes between household name companies and quantified the losses on those; I’ve acted for defendants in very high-profile criminal fraud cases where people are accused of defrauding tens of thousands of pounds to hundreds of millions… Because all the work we do is on individual assignment, without any recurring clients in the way that an auditor or tax person would, we have to get out there and win new work,” he adds.

A good way to stand out within a fairly small but diverse community is by having professional approval. Pearson worked on the implementation of ICAEW’s forensic accounting accreditation scheme and explains its benefits. “The aim was to create a kitemark for forensic accountants and in particular for those instructing them so that they know they’re using someone who is accredited by ICAEW,” he says. “People have to answer detailed questions showing their competencies in different areas. There’s also  an expert witness accreditation, which is run in conjunction with ICAEW and the Academy of Experts.”

Being an expert witness requires much the same skills as an accountant, says Pearson. That means self-confidence, a good grasp of the facts, the willingness to engage with someone who challenges you, ask questions, read between the lines and to become intimately involved in the work. Ultimately your duty is to the court, adds Hodgen, so integrity is essential. “You have to have a strong vein of independence. Even when you’re talking to a judge and a jury there’s still a very human angle, they need to believe what you’re saying. It’s not the kind of job where you can make it to the top of the tree, have your whole team working for you and just turn up on the day, smile and sign the report.” It’s time-consuming, but “fun and exciting,” he says.

But the role has changed tremendously, admits Patel, as globalisation has lead to more offshoring, joint ventures and business across borders and jurisdictions. A forensic accountant these days is an investigator with accounting skills, and that doesn’t just mean technical nous, he says. It means a good understanding of the law and regulations. The internet and social media has, of course, helped enormously although it’s removed some of what Hodgen calls the “mystique” of the profession.

Nevertheless, it’s arguably one of the more thrilling niches of accountancy and the role is only going to become more varied and elaborate as the world progresses. Forensic accounting practices are already diverse, says Kennedy. “I’m a UK partner but I spend about 50% of my time working with overseas offices,” she explains. “I was born and brought up in Iran, I emigrated to the UK but for the past three years I’ve spent most of my time working in Russia and Africa. That’s not unusual. The teams reflect the nature of our clients’ work and businesses.”

Even disputes are more international, she says, so it’s not uncommon to find two parties that reside in different countries, where the event giving rise to the dispute has happened in a third country and the court is taking the case in a fourth. “A lot of the Chinese cases are in the Singapore International Arbitration Court, for example,” she says. Hodgen has witnessed the trend too. “You can see with those big Russian litigations that have happened where you had Abramovich and Barofsky battling in the High Court. People are choosing to come to England to fight their battles. And that’s a great credit to the legal system but also to the support teams like the forensic accountant. They trust the integrity of the system.”

While no two cases are ever the same, you see the same type of fraud or dispute over and over again says Pearson. Just look at the Ponzi fraud, which goes back hundreds of years – Madoff was doing nothing new. It’s the sheer blatancy that never fails to surprise Hodgen, he says, “the risks people are prepared to take”. If Steven Soderbergh is looking for his next script, he’d do well to consult the forensic accountancy profession. Just don’t ask them to name names.

Forensic accounting at a glance

Forensic accountants work alongside solicitors and prosecuting bodies to find out what happened, how, and then how to preserve commercial interests.

Fraud is on the increase as success and growth remain elusive for many firms. So too is detection, as the public desire to unearth and punish corruption grows.

The job is becoming increasingly internationalised as offshoring, joint ventures and cross-border business has increased.