The scope of work on which forensic accountants are instructed is widening as the profession feels the effects of increased regulation
Are forensic accountants becoming a more common feature of the litigation landscape?
Peter Clough, head of litigation, Osborne Clarke: They are, but it’s important to recognise that this is due in part to the greatly increased requirement to process and review electronic documents. Most sizeable firms of accountants have document extraction and review offerings, which I’d distinguish from the ’accounting’ part of forensic accounting.
Tom Ellis, head of corporate investigations, Wragge & Co: Yes, because the areas they’re becoming involved with seem to be expanding. In addition to the more traditional areas such as quantum or as experts, there’s an increase in fraud work and corporate investigations, and you also have their relationships with internal audit.
We’ve had a number of fraud-related matters in the past 12 months where they’re the first contact point on the client side. Around issues on bribery and corruption forensic accountants have a higher profile as a result of compliance, in particular arising from the Bribery Act 2010 and the US Foreign Corrupt Practices Act.
Richard Bunce, financial markets litigation partner, Simmons & Simmons: Forensic accountants have been in the background of litigation processes for a long time, but they’ve had greater visibility recently. It’s a truism that more frauds come to light in recessionary than in boom times. Given the prevailing economic climate, and some high-profile fraud explosions, it’s inevitable that the need for forensic accounting services is on the up.
In what situations are forensic accountants normally needed? Should they ever be instructed as a risk prevention measure?
Clough: Traditionally forensic accountants have been needed at the stage in the litigation process leading up to providing accounting evidence on quantum. They can, however, also be a useful part of a claimant or defendant team at a much earlier stage, as both clients and their lawyers are keen to know what claims are ’worth’ and to develop their strategies on heads of claim accordingly.
Defendants to claims also often need to know at an earlier stage what their likely exposure might be so that appropriate reporting and reserve setting can be carried out.
Ellis: It’s the usual range of issues on quantum. I do a fair amount of professional negligence work involving the financial services industry and accountants – particularly where it’s expert-led – have an important role to play in terms of helping understand the financials in fraud and asset recovery work.
They’re already instructed as risk prevention. It seems to me they’re often instructed through chief financial officers, finance directors, internal audits or audit committees.
We also get interesting cases arising from audits where forensic teams are brought in to look at specific issues that are uncovered or revealed in the course of an audit.
Bunce: Most commonly cases where it’s necessary to track payment flows. But they can also help with testing the functional integrity or otherwise of sophisticated financial models.
However, it’s not usual to instruct them for risk prevention reasons unless there’s a specific business threat or suspected systems gap.
How do you think forensic accountants can best assist on an issue?
Clough: It really depends on the issue. We find that obtaining an early, quick view on quantum issues without a full forensic investigation is often what our clients value most.
One key question to ask when instructing firms of forensic accountants, and in particular those operating large teams, is: who’s going to be the person giving evidence if the matter goes to trial?
Ellis: They should be involved early and there should be effective teamwork. As with all areas of professional services, it helps to know who’s who and where individuals’ and teams’ strengths lie.
Bunce: Raw data can sometimes be a bit dry and impenetrable. The better forensic experts interpret the data in a way that gives it meaning – brings it to life, if you like – and helps the lawyers in their development of a coherent case theory.
Should forensic accounting be regulated more closely?
Clough: No. The existing methods of regulation work well from our point of view.
Ellis: It’s not an issue I’m aware of.
Bunce: No. We’re overregulated as a society. Purchasing forensic services is caveat emptor, but if you select someone reputable – and there are plenty of reputable people who have current or former associations with large firms of chartered accountants – you should be okay.
Two of the most important things from the buyer’s perspective are defining the brief precisely and keeping a close eye on the budget.