Getting to grips with forensic accounting

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GETTING TO GRIPS WITH FORENSIC ACCOUNTING (31/07/08)

The high profile scandals of Enron and WorldCom have thrust the practice of forensic accounting into mainstream consciousness.

As a specialist area, it has existed for a very long time, but forensic accountants are now being quoted in the press, used by regulators and law enforcement agencies as well big businesses, and have even featured in soap operas and other TV series.

So what it is it? forensic accounting is the application of the skills and training of a chartered accountant to investigations, disputes and other reviews, the results of which could end up in a court of law.

Although high profile fraud or financial disasters may hit the press, dealing with this type of work is only one aspect of the forensic accountant’s role.

“A large proportion of my work is the provision of litigation support services to solicitors and barristers where expert witness evidence is required to assist the court,” says Kenton May, partner at Burgess Hodgson, who heads up the Canterbury-based firm’s forensic accounting team. Many instructions for this type of work come from solicitors in disputes. This could include matrimonial cases where owner-managed businesses may need to be valued, and commercial disputes or other claims.

Historically, most instructions were as Party Appointed Experts, where each side instructed their own expert. Some so-called experts have been discredited as “hired guns” where the evidence given has fallen far below the expected level of impartiality.

One of the problems is that there is a distinct lack of awareness among some accountants as to their overriding duty to the court when giving expert evidence. “The degree of impartiality should be such that your opinion would be the same regardless of which party instructed you,” says Kenton.

If an accountant is instructed on a case by one of the parties, and he doesn’t know what his responsibilities are, he can fall short on all sorts of aspects under the Civil Procedure Rules: his duties, the content of the report (there are guidelines under which it should be prepared); and the presentation of the report (how matters of fact are differentiated).

“If the court decides that the person doesn’t understand their duties and hasn’t done their homework, then that can undermine the evidence, because the first thing the barrister will do under examination or cross-examination is to establish the credentials of the expert,” says Kenton.

“They could be technically competent as an accountant, but if they don’t understand those aspects, then, at best, the case could be difficult to defend; at worst, it could fail,” he warns.

This is why, says Kenton, it’s critical that the forensic accountant has not only prepared all the correct materials in accordance with the protocols, but that he or she can convincingly articulate in court how his opinion has been reached on the basis of the evidence they have seen.

He has seen several cases where the other accountant has not even had the right instructions to be appointed. “It’s not very credible, as one of the requirements is that your instructions should be incorporated into your report,” he says.

More recently, the courts have been looking increasingly towards the use of a “Single Joint Expert”, certainly in the business valuation cases on matrimonials and general disputes dealt with at a local level.

In this instance, the expert is jointly instructed by both parties to the dispute, through their solicitors, and operates completely independently rather than being instructed by one side. The courts are very conscious of costs, and one expert is cheaper than two, and the judge will place much more reliance on the expert’s view.

Where the court has decided that a jointly appointed expert should be used, the prime concern of the solicitors is to instruct someone who is competent and independent. If the expert is useless, then the judge will have to sort out the technical points himself and may criticise the solicitors or barristers!

Kenton carries out a great deal of expert witness work both on a Party Appointed basis and under Single Joint Instruction. He believes the key requirement of an expert is to keep up to date with developments within their own specialist field as well as with how the courts perceive and use expert witnesses: ongoing training is a must as, not only do tax and accounting rules change, but so does the way experts are expected to prepare reports.

A chartered accountant and chartered tax adviser, Kenton is a fully accredited practising member of the Academy of Experts, the judicial committee of which has just carried out a review of the Model form of Experts’ Report: the Academy is at the forefront on developing the role of experts and raising standards.

The role of the expert in litigation is technically challenging and mentally rewarding but with this also comes a large degree of responsibility. “If you are an expert witness, you are in a very privileged position in that you give your opinion which is then relied on for the purpose of the proceedings,” says Kenton.

He believes that, with the increasing risk of litigation, there is a growing demand for decent expert witnesses. “If you just think of the number of people who get divorced every year who also have family businesses, they could all probably benefit from having expert evidence,” he says.

In addition, business valuations, commercial disputes, partnership disputes, personal injury claims and VAT and direct tax investigations are all areas in which an accountant may be asked to provide an evidentiary report.

In the case of many disputes, the problem is that many people simply use their own accountants, who may not be independent or understand their role and therefore subject to attack from the other party; effectively prolonging the litigation which can be very expensive.

But, they may also not be qualified to provide the advice – which, says Kenton, is more common than most people think. “The benefits of selecting a qualified expert witness are that a solicitor (or both solicitors) – and their clients - can rely on them. In the event they are called to court, you want someone who knows exactly what they’re doing.”