Forensic accounting is now big business and a major part of litigation. Could this lead to merged legal and accountancy firms?
A generation ago the term ‘forensic accountant’ would have elicited looks of bemused confusion from lawyers; today many litigation specialists can’t move without tripping over them.
Forensic accountants have performed a miracle of modern professional marketing. They have taken accountancy, a profession stigmatised as being populated by boring number-crunchers, and successfully cloaked it in an ambience of sleuthing mystery – more CSI than Big Keith from The Office. And, for litigation lawyers involved in disputes ranging from corporate investigations to high-value divorces, forensic accountancy has become unavoidable.
But there are signs the profession has become almost too successful for its own good. Recent years have seen a proliferation of niche players tumbling out of the Big Four practices and mixing it up in the UK with recently arrived boutique US firms. That increased competition combined with the grinding pressure on fees caused by a sluggish economy means that forensic accountants are courting law firms with increased enthusiasm.
“I’ve been wined and dined at lunches and rugby matches by a stream of forensic accountants in the past year or so,” comments one City lawyer, quipping quickly that all contact has been within the parameters of the Bribery Act.
“They’re keen,” says the lawyer. “That may be because there’s so much pressure on costs – and forensic accountancy is a big expense.”
Accountants themselves dispute that they are having to fight harder for work, claiming that international instructions, particularly relating to the Bribery Act and generated by non-UK lawyers, are booming. However, they grudgingly admit that fee pressure is intense.
“There’s a lot of work but there’s much more of a challenge around rates,” confesses a partner at one of the Big Four firms.
Whispers also waft around both professions of the possible resurrection of a concept many assumed dead and buried 10 years ago – the one-stop-shop, multidisciplinary practice. The Big Bang structural changes in the legal profession that created ABSs are now seen as an open door to lawyers and forensic accountants forming partnerships.
Indeed, that development would solve some of the relationship difficulties between forensic accountants and lawyers. While the two sides rely on each other, that dependency has also bred issues over client contact and ‘ownership’, as well as a degree of friction over who should be instructing whom.
A developing role
Nonetheless, magic circle and other City lawyers acknowledge the importance of the profession.
“Forensic accounting is a key part of the accountancy practice offering,” says Ali Sallaway, a partner and co-head of the global investigations practice at Freshfields Bruckhaus Deringer.
“To their credit, the large forensic accountancy practices have marketed themselves well,” acknowledges Stephen Ross, head of the civil fraud department at Withers. He reckons the term itself was originally coined by the old Touche Ross. “They used to call it litigation support but rebranded themselves as forensic accountants and marketed themselves to the point where they now often have the client relationship.”
Forensic accountants readily acknowledge that they have transformed both the role and the image of their profession.
“My friends now know what forensic accountancy means,” says Andrew Gordon, head of UK forensics at PricewaterhouseCoopers. “But that’s not a marvel of marketing – it’s a reflection of client demand.”
Driving that demand, say accountants, is far greater scrutiny of corporate affairs, with senior executives and directors increasingly being held to account partly by increased regulation and partly by shareholder activism.
There has also been a shift in attitude at some multinational and other large corporations. While historically forensic accountants would have been instructed to conduct postmortem investigations into corporate disasters, businesses are now keen to obtain a dose of preventative medicine, drafting in forensic accountants before accidents happen.
“They’re attempting to understand the pathology of fraud and why people commit bad acts – what can go wrong and what measures can be imposed to prevent it,” explains Gordon.
Others trace the boom in UK forensic accounting to the launch, in 1987, of the Serious Fraud Office (SFO).
Alex Plavsic, head of forensic at the London office of KPMG, points out that accountants had performed as expert witnesses for many years, but the SFO brought together accountants, lawyers and the police into an investigative unit. This created a model for private practice.
“Lawyers now have a greater degree of respect for what forensic accountants do,” maintains Plavsic. “We are good at crunching through lots of data and giving an overview of a business.”
Andy Cottle, a forensic accounting partner at the London office of accountancy firm BDO, says the main development in forensic accounting has been specialisation.
“Around 20 years ago you’d have non-specialists turning their hands to forensic accounting, routinely doing a wide range of services. Small firms would do a bit of tax, a bit of accounting and every so often they’d be asked by their local solicitor to help on a case,” says Cottle. “Now the larger firms dominate and forensic accountancy has become an accepted career path. Things have become more complex in business and you need specialists.”
Bread, butter and numbers
In basic terms, forensic accountants are instructed on any matter involving a dispute over a number. Determining quantum is their bread and butter – and that can involve contract disputes and divorce cases. But lawyers increasingly bring them in on corporate investigations, not least because of their superior technology awareness and skills.
“Not many law firms can manage reviews in the way forensic accountants can,” admits Sallaway. “They’re skilled on the technology side. It’s invaluable to have accountants on board if you are looking at payment trails.”
Forensic accountants agree.
“The technology aspect of what we do is driving a lot of our business,” comments John Smart, the partner heading Ernst & Young’s London fraud investigation and dispute services department.
“The increase in the volume of data to go through in investigations means you’ve got to be comfortable using technology and lawyers haven’t shown that much interest,” says Smart.
But it is more than an ability not to flinch at concepts such as predictive coding that lawyers value in forensic accountants.
“In fraud cases you need to act fast,” says Ross. “You need to work out what’s happened quickly because you may be trying to get injunctive relief. And in those circumstances we, as lawyers, don’t have the expertise to analyse financial data. Often, one of the first calls we make is to forensic accountants.”
However, forensic accountants maintain that not all lawyers are quite so quick to pick up the phone.
“The most important thing from the accountant’s perspective is getting early instructions from the lawyers,” explains Kevin Harding, a partner in the London office of US-based forensic accountancy boutique RGL.
But, say the accountants, in some cases lawyers will drag their feet, preoccupied by liability issues that can take months of negotiation between the parties.
“Then, as trial approaches, it suddenly dawns on them that they’ll need a report on quantum,” adds Harding. “That often happens because they want to sort out liability first and then do a deal over quantum. But often that doesn’t happen and the matter progresses to trial. We often find ourselves appointed late in the day, leaving two or three weeks before trial to prepare an expert report. Although you can do it, it doesn’t necessarily give you time to get all the documents and interview all the people you need to.”
The message from forensic accountants to lawyers is that ideally they need at least three months to provide a full report. They are also keen to impress on lawyers the importance of being kept fully briefed on court deadlines and when those dates change.
And crucially, regarding the role of expert witnesses, says Harding, “we need to make sure the lawyers understand what is and isn’t within an accountant’s area of expertise. We have to be careful not to be seen as straying outside it. Judges don’t like that.”
But, just as forensic accountants plead with lawyers to instruct them early, the legal profession claims there can be issues over accountants failing to call the lawyers in time – sloth that could trigger dramatic problems around privilege.
Increasingly, accountants are first on the scene of a corporate disaster. For example, a company discovers a financial irregularity where some big sums don’t add up. The finance director is holidaying at the other end of the world so the directors call in their auditors or accountants and pass over a few laptop computers with shaking hands.
It rapidly emerges the finance director has had his hand in the till and is now living every middle-aged executive’s dream by tooling around a remote island in a bright red Ferrari.
“The issue for us in those circumstances is that they don’t call in the lawyers quickly enough, and there are potential dangers because of that,” warns Ross. “In circumstances where the accountants are on board early when a big fraud is being unearthed and events are moving fast, client care letters and other communications between client and accountant are unleashed, but none of that is covered by privilege because lawyers aren’t on board yet.”
Those cases proceeding to trial will involve parties having to disclose that correspondence, much of which could involve embarrassing dirty laundry and potentially deadly smoking guns.
“We try to get the message across to clients that they should get us on board as soon as possible,” says Ross, “so we can get the chain of instruction right – so that we instruct the accountants, which means that most likely all the communications will be covered by privilege. Generally, smart corporate directors and accountants know this and get the chain of command right. It’s about putting egos to one side and saying ‘we need to do the right thing by the client’.”
Ross acknowledges the irony that the accountants will conduct much of the initial work in that type of investigation.
“If they want the main client relationship, that’s absolutely fine from our view,” he says. “But sometimes, when people are making a grab for work, they can be reluctant to call in the lawyers at an early stage and that’s not in the best interests of their clients.”
For their part, forensic accountants claim to agree.
“Privilege is an issue,” acknowledges Ernst & Young’s Smart. “And we will almost invariably recommend that our clients appoint us through a lawyer.”
But he goes on to point out that increasingly clients are prepared to sacrifice legal privilege because they don’t want the business world to see them instructing lawyers.
“Sometimes, clients prefer correspondence to be unprivileged at the beginning,” explains Smart. “The rationale being that there is an implication that if lawyers are instructed ‘we’ve got a bigger problem than we think we’ve actually got’. It’s a perception issue.”
Does the increasingly close working relationship between lawyers and forensic accountants act in favour of revitalising the multidisciplinary practice concept now the model has legislative backing in the form of ABSs? Opinions vary.
“There may well be a case for law firms getting in forensic accountant partners,” says Ross. “You would have to have a globally substantial practice that was highly involved in this field because bringing in either associate- or partner-level accountants would be expensive.”
Gordon also sees potential scope for ABSs in the field, although he adds a caveat.
“There’s a lot we do that doesn’t need lawyers,” he says. “And a lot of what law firms do doesn’t need forensic accountants. But it might happen in due course.”
A significant hurdle for any firm thinking of launching an ABS in the field is the issue of conflicts. Plavsic envisages “huge problems” on that front.
“It doesn’t really make sense for the Big Four accountancy firms to be in an area where we connect with lawyers,” he says. “All you’ll do is introduce twice as many conflicts. When we define what we do and stick to our knitting, you don’t get accountants trying to be clever about the law or lawyers telling clients about numbers – you get a perfect balance to an investigation.”
Smart says Ernst & Young is keeping an open mind on the ABS possibility, pointing out that the firm retains legal practices in several -European jurisdictions.
“But I suspect we won’t create our own international law firm,” he adds. “The challenge is that unless you are going to be the best and have a truly global practice – which demands a lot of investment – then you’ll always be a bit-part player. Global clients want the best legal advice they can get so unless you do that you probably won’t enhance your brand. In fact, you’re more likely to dilute it.”
Having worked so hard to build the forensic accounting brand, that is the last thing they want.