The fraud squad
10 July 2000
25 November 2013
12 July 2013
25 November 2013
20 February 2014
3 March 2014
Due to a tightening of regulations, accountants working in the sexy area of forensic accountancy have had a fairly peaceful year. But as Jon Robins reports, that does not mean we may never see a Maxwell-style fraud case again.
It is not likely that many people are drawn to a career in accountancy in pursuit of glamour and excitement, but if they are, they could do worse than make a beeline for forensic accountancy, where it is possible to combine number crunching with the more obvious thrills of tracking down the proceeds of drug cartels or dealing with the fall out of a Maxwell-style fraud.
The image of the forensic accountant being the sexy member of the family is one that Humphry Hatton, partner in charge of forensic services at Deloitte & Touche, wants to move away from. "It's a bit corny," he says. Mind you, Hatton does let slip the smallest details of the time he spent in Latin America investigating a drug smuggling operation. And then there was the headline-making political risk case which involved "a risk of physical danger".
By contrast, life in the forensic accountant market has been fairly peaceful, with the big five firms maintaining the same stranglehold that they do elsewhere. But life has not been without its surprises. For example, there was the House of Lords' ruling in the Prince Jefri case where KPMG came to blows with the prince of Brunei over the adequacy of its Chinese walls.
The Law Lords called for accountancy firms to separate their departments to prevent confidential information passing between them. So far, the line from the big five has been that they will keep their departments in-house.
The case was decided on particular facts, says Chris Lemar, head of the disputes analysis and investigations group at PricewaterhouseCoopers. Lemar adds that far more has been made out of the case than ought to be. "The concept of auditing involves independence, so to suggest that by being an auditor you're in league with a client is odd," he says.
The firm has no plans to hive off its forensic practice. "It's clear that there is no regulatory need to do so and we don't find the conflict issue in the UK a barrier," Lemar says.
But not everyone is happy with the mega firms' approach to conflict of interest issues. Andrew Mainz left PwC, where he was a partner, with four senior staff to set up Forensic Accounting in April. "We were fed up with all the conflict," he admits. "How can you possibly act against 'Mega Corp' when 'Mega Corp' might be your client tomorrow?"
Mainz is unimpressed with what the big five offer their clients. "They're over-priced, too bureaucratic and completely stuck on conflicts," he says.
Tony Levitt, partner in charge of the London office of RGL International, says that there is an opportunity for niche players. RGL claims to be the world's biggest stand-alone forensic practice. Over the last year, he says that the UK practice's profits have increased by around 30 per cent. He cites the Lloyd's litigation as a dramatic illustration of the problems that the major firms have with conflict. "We were appointed on every one of the major cases because all the big firms were either auditors to Lloyd's syndicates or involved in the market someway," he says.
Forensic accountants at the big five admit that they can lose a lot of work because of conflict. But, as one accountant points out, if they lose one big job because of conflict, more often than not it goes to the next available big-five firm.
Unsurprisingly, Lord Woolf's shakedown of the civil justice system has hit the forensics as fewer cases go to trial. According to Deloittes' Hatton, the reforms have had a greater effect on the smaller scale litigation and been felt most acutely in the regional offices.
In fact, many forensic accountants report that the emphasis on the "front-loading" of cases has caused a greater involvement at an earlier stage in the big-ticket litigation work. Hatton says that if anything, costs have increased in the big-ticket litigation as case management conferences are treated as major hearings in their own right.
Over the past decade, the accountants have had a lot to keep them busy, with mega frauds such as the missing Maxwell pensions fund, the £6bn collapse of the Bank of Credit and Commerce International, and the hunt for Nazi gold in the Swiss banks. The latter was reported to have had 400 people working on it.
But since those halcyon days there has been talk of a downturn in the market and cutbacks at the big firms. But the only real evidence of downsizing in the big five has been at PwC, where 50 staff have left the forensic department since Pricewaterhouse and Coopers Lybrand merged two years ago. PwC's Lemar says that the exodus was largely a result of the merger. "Some have gone through downsizing, others have gone through natural drift," he says.
At the beginning of the year, Stephen Lewis left PwC to join Clifford Chance, becoming the first forensic accountant to join a magic circle firm (The Lawyer, 31 January).
Elsewhere firms are reporting growth. Not least at KPMG, where the forensic department reported last year as its best year ever, with fees shooting up by 50 per cent to £33m. There might well be a trend towards tighter corporate governance in the wake of scandals such as the Maxwell case, says Nick Andrews, a partner at KPMG Forensic Accounting, but there are still plenty of big frauds taking place.
Andrew's assertion is borne out by a new KPMG survey which found that the figures for major reported fraud last year were double the previous year's figures. There were 72 cases of serious fraud reported, each of £100,000 or more, costing a total of £667m.
Like many forensics, Kroll Lindquist Avey managing director Ted Baskerville expects the current merger and acquisition activity to be good for the accountants as deals "done in a hurry and done with a bit of infatuation" turn bad. The firm was the result of last year's merger between the international investigation agency Kroll Associates and London forensic accountants Buchler Phillips Lindquist Avey.
Baskerville says that files such as BCCI and Maxwell make the difference between a good year and a great year. "Everyone says we need a catastrophe and that will really turn the market around," he says. But he is not without hope, believing that there are big frauds just waiting to happen. "They just haven't happened yet, but I'll keep my fingers crossed."
THE BIG FIVE
The global professional services organisation's forensic accountancy practice has 50 dedicated specialists divided between its fraud and disputes units. The practice draws heavily on industry experts elsewhere. The firm claims: "Staff work within a business consultancy practice rather than within an accountancy practice." It is currently recruiting, but there is no information available about fee income.
Areas of specialisation include competitions and regulatory disputes, valuation disputes, expert determinations, ADR and fraud investigations. The forensic team represented the Premier League in the negotiations for TV rights and provided the expert determination on the sale of a large chain of betting shops from Grand Met to Brent Walker.
Deloitte & Touche
Deloittes was the first of the big-five firms to have a dedicated forensic practice and the department now comprises five partners and 44 fee earners. In the last three months, the firm has taken on eight new people nationally. The fee income from forensic work represents 2 per cent of the firm's total fee income.
Areas of specialisation include fraud prevention, assets tracing, business intelligence and expert determinations. The forensics team has led some of the largest multi-jurisdictional investigations, such as Banco Ambrosiano and BCCI.
It has been some time since there has been a corporate collapse on the scale of BCCI or Maxwell, says partner in charge of forensic services Humphry Hatton. But he adds: "There is no reason to believe that business practices have changed. There may need to be a change in the economy to flush them out."
Ernst & Young
In London there are approximately 100 fee-earners working in the firm's fraud investigation, litigation support and valuations groups. Fee income is estimated to be in the region of £20m. The three departments have taken on five new staff over the past 12 months.
Areas of specialisation include expert determinations, ADR, tracing assets, and fraud prevention. The group has been the lead investigator on the collapse of Barings Bank, the fund management problems at Deutsche Morgan Grenfell and Codeloco, the Chilean copper producer.
According to John Smart, a partner in the fraud investigation group: "There has been a lot of talk in the press that we [the big five] are frustrated with conflict. Although there is frustration, most of the work we get conflicted out of seems to go to another big-five firm."
KPMG Forensic Accounting has 150 fee-earners throughout the country and last month it appointed four new partners. Last year was a record year for the department with profits growing by 50 per cent to £33m.
Areas of specialisation include commercial disputes, professional negligence, fraud investigation, regulatory investigations, expert determinations, and arbitrations. Last year the firm was involved in one major arbitration involving more than $2bn (£1.3bn) and international fund-tracing work seven years after the Gruppo Torras case, one of the largest fraud cases in the High Court.
Nick Andrews, a partner in the department, says: "It is clear post-Woolf that it is important to get forensic accountants on board sooner rather than later because the case moves quickly and before you know where you are it has settled."
There are about 150 fee-earners in PwC's disputes analysis and investigations group, which has lost 50 members of staff since the merger two years ago. According to Chris Lemar, who heads the group, the departures are a result of the merger, downsizing and natural drift. The department represents "about a £25m business".
Areas of specialisation include construction disputes, insurance claims, fraud investigation, intellectual property, and computer and e-business.
The department has representatives in Italy, the West Indies and Hong Kong working on international construction disputes. The firm is still involved in work from the investigation into Nazi gold in the Swiss banks.
According to Lemar, a flat UK litigation market has characterised the last 12 months. "The UK legal market has looked elsewhere and we've done the same," he says.