Next up, we hear from Jeffrey Davidson, the Managing Director of Honeycomb Forensic Accounting, who has over 20 years’ experience in working on complex business disputes, with particular focus on the accounting, financial, economic and commercial components. Jeffrey specialises in forensic investigations, litigation support, contentious valuations and dispute resolution, covering civil, criminal and regulatory cases, and here he tells us about trends in the forensic accounting sector.
In your opinion, what types of skills, both accounting and non-accounting, are needed to be a successful thought leader in the forensic accounting sector?
Thought leadership in forensic accounting is all about responsiveness to client needs. It is about being able to quickly and effectively identify the structural and technical requirements needed to find a solution for the client. Once that solution is found, it must be delivered and presented swiftly and purposefully. It is about attention to detail, without losing sight of the bigger picture within which the role sits, and what the added value of the project is.
How does modern technology present a challenge to uncovering vital information relating to an investigation? How do you overcome this challenge?
Modern technology is a challenge, but it also represents an opportunity and an enabling tool. The purpose of technology is to complement and enhance human intellectual skills and judgement. It comes into its own in giving access to information, particularly in terms of capturing electronic data, and then in enabling very large amounts of data to be reviewed, sifted, searched and analysed. Big data technology tools allow specific references, anomalies and oddities in large data sets, whether verbal, numerical, or even pictorial, to be identified in a fraction of the time and at a fraction of the cost of using humans. This then allows the humans to concentrate on a small data set, most likely to produce results, and which justify the application of human thinking.
How can companies mitigate the risk for economic crime and fraud?
The keys to this are the triple factors of unpredictability, curiosity, and constant review. Fraud and economic crime flourish in an environment of complacency and repetition, where it becomes easy for fraudsters to work around the patterns of control and review. Systems of control are only effective when the fraudster cannot predict what part of the system and which procedures an auditor or forensic investigator will next review, or when and how system changes will be made. The success and longevity of nearly every fraud we have investigated has at least been contributed to by the lack of critical review by those entrusted with the task of keeping a business safe from both internal and external threat. The advice we give the client as part of providing ongoing protection always involves suggestions how to keep ahead of potential fraudsters (and hopefully encourage them not to start!) with ongoing unpredictable review patterns.
What are the most common hurdles that Honeycomb is faced with when assisting with forensic accounting disputes and investigations?
Honeycomb is a very experienced and well-resourced forensics provider, but like any other business, it has to manage resources and make sure it has a well-conducted approach to meeting clients’ needs. Forensics is also a fast moving environment, not only in technological terms. We need to ensure we have the latest technical and electronic tools at hand to complement our human resources, which also require constant training in technical and other areas. Managing the forensic part of the dispute resolution process can also prove a challenge, managing the differing demands of clients and their legal teams, while at the same time engaging productively with opposite numbers.
What differentiates Honeycomb from its competitors?
Honeycomb can deploy teams as large and effective as most large accounting and consulting firms, but it does so as a wholly specialised and dedicated practice committed to client service. This means that all staff are trained and qualified forensic accountants and investigators. The work is partner-led and our goal is added value to the decision making and problem solving our clients require. As a boutique firm, we have no conflicts of interest so that clients can be assured that we have their interests in mind at all times.
Could you tell us a bit about Honeycomb International?
Honeycomb, although based in London, has instructed on many cases which are international in scope. Boutique forensic investigation firms, however entrepreneurial and agile, will be able to compete more effectively on this international stage when part of a worldwidenetwork. That’s why we have established Honeycomb International, an international network of independent, boutique and entrepreneurial forensic accounting and investigations firms.
At Honeycomb, we believe that cross-border cooperation of this nature is mutually beneficial, improving each firm’s profile, reach and agility, and expanding the scope of our capabilities. Member firms are better able to compete for work in their own territory, and will be able to collaborate and promote themselves jointly on cases originating in one country but involving work in others. Member firms also have access to trained staff where there is a need to bulk up teams on larger cases and are able to second staff to other member firms across the network to gain international experience
Contact Details:
www.honeycombpsg.com
jeffrey.davidson@honeycombpsg.com
+44 (0)20 3709 9250
Óscar Hernández has spent the last 11 years working in the Forensic department of Deloitte. His current position is Director, with a primary focus on financial fraud investigations and the preparation of expert witness reports, as well as the defence of the expert report in the Court (during the judgement).Here, Óscar talks to Finance Monthly about financial crime in Spain, recent changes to the criminal justice system and offers advice for companies on how they can protect themselves from fraud.
Financial crime is becoming more and more prevalent - what legal remedies are available to businesses that fall victim to financial crime, especially fraud?
In Spain both the legislation and the sensitivity of companies, especially some financial institutions, despite the improvements, are still very far from those in other neighboring countries, such as the United Kingdom, Germany or Switzerland. There is still no developed fraud prevention culture in Spain, which is why companies tend to act only reactively. In order for the damage suffered to be mitigated as far as possible, from the instant the fraud is identified, the company must put itself in the hands of its legal advisors. From a forensic point of view, it is essential to preserve the evidence of the possible crime in order to face possible legal proceedings that could be initiated and aimi to mitigate as much of the economic damage suffered by the company as possible.
How has the criminal justice system changed in recent years to combat the increased sophistication of fraud? What have been the significant changes?
The Criminal Code has been modified in recent years in order to provide judges and prosecutors with more powerful tools for the fight against corporate fraud and organized crime. Among other reforms, the assignment of criminal liability for legal persons, modified penalties for fraud and revised punishment for corruption in business (payment of bribes to politicians and officials) stand out. Although there is a social environment that is very sensitive to the many cases of political corruption that affect many institutions, there still exists some tolerance and permissiveness in relation to the submerged economy. These newly introduced reforms are on the right track, but still not enough.
What are the trends in Spain, in terms of the types of financial crimes that are being committed? What factors drive crime in certain sectors, for example the financial sector?
The most relevant fraud cases in Spain are closely related to political corruption. This corruption is intimately linked to corporate corruption and bribery, with the ultimate goal of achieving public work awards circumventing the legal awarding procedures based on quality and price. With regards to the financial sector, since the beginning of the financial crisis almost ten years ago, there have been a number of financial scandals related to the management of Savings Banks. Many of those entities have disappeared as a result of the crisis itself, but also due to ruinous investments made by the former management, payment of millionaire pensions and unjustified expenses.
What precautionary measures can companies take to protect themselves against fraud?
The reform of the Criminal Code and the attribution of criminal responsibility to legal persons have led to greater awareness of the companies’ Boards of Directors against financial crime. A greater development of proactive fraud prevention policies is being noted, especially in large companies, with the proliferation of Ethical Codes, Whistleblower channels and action protocols for fraud situations.
What are the complexities and challenges of investigating accounting irregularities?
Most of the fraud investigations related to accounting manipulation in Spain are mainly aimed at the upward manipulation of revenues, with different objectives such as achieving budgeted results or EBITDA, that are linked to the variable compensation of the Management, the makeup of the results for the possible sale of the company, etc. The investigation of these irregularities is very thorough and is based, most of the times, on the use of technological tools focused on communications review and data analytics.
What are the specific challenges that you are typically faced with when working on financial crime cases?
In recent years, fraud investigations have become increasingly complex. The fraudsters are getting more and more “professional”, which on many occasions forces us to adapt the investigation strategy on the fly and introduce even more technology in the investigations. It is becoming more necessary to have an open-minded attitude in order to be able to put ourselves in the fraudster’s shoes.
Next up, we reached out to Derek Patterson and Emma Hodges who are forensic accountants at Forensic Risk Alliance (“FRA”). Since 1999, FRA has worked all over the world to solve complex forensic issues for multinational clients. They are experts across the spectrum of white collar crimes and dispute resolution, including litigation support, damages valuations and calculations, anti-bribery and corruption, sanctions, anti-money laundering, counter-terror financing, tax evasion, fraud and anti-trust investigations, and compliance testing.
In your opinion, what skills do you need to be a successful thought leader in forensic accounting?
Forensic accountants need to understand the way businesses operate, the risks and challenges they face, and how regulators or a court are likely to consider the issues. One of the most valuable attributes that effective forensic accountants develop is the ability to truly understand and contextualise issues, so that we are able to develop strategies that are targeted and effective for the particular client and specific risk or concern we have been brought in to assess or resolve. This broader perspective is what keeps us attuned to developments in key industries and jurisdictions so we can anticipate trends and help companies prepare.
In what ways does the development of new regulatory risks affect finance functions?
Regulators and enforcement authorities in the UK are demonstrably building momentum in their efforts to tackle corporate economic crime head-on. We are beginning to see the SFO flex its muscles with the conclusion in January 2017 of the largest investigation it has conducted to date (Rolls-Royce).
The enactment of the UK Bribery Act 2010 introduced a section 7 corporate offence of failure to prevent a person associated with the company committing bribery on its behalf. This lead to efforts by companies, often with the assistance of finance personnel or third-party forensic accountants, to consider control activities through a different lens, and to identify, document and enhance internal controls to prevent bribery.
The vital challenge for finance functions is whether they are truly guardians of the company’s assets. Is the finance culture to protect and guard and take independent judgement calls, or is it a deferential function, which simply executes what line management requests. As the UK Ministry of Justice looks for ways to more effectively prosecute corporate economic crime (tax evasion, fraud, false accounting and money laundering) we are seeing an expansion of the risk that companies are at risk of committing economic crime. Boards and Audit Committees must look to their finance functions to design and uphold robust systems of financial control.
How can companies mitigate the risk of corporate economic crime?
The risk of corporate economic crime itself is not new, it is legislative changes that will bring new legal and compliance risks. Companies will need to take stock of their existing policies and procedures and identify what already exists within the existing control framework, potential gaps, areas that need bolstering, and develop a plan for enhancements. This assessment should be informed by a risk-mapping exercise, to ensure that efforts are risk-based, reasonable and proportionate to the business. For example, money laundering risks faced by financial institutions will not be the same as those faced by industrial companies. As the signs point towards companies needing to review and improve procedures to prevent bribery, tax evasion, fraud, false accounting and money laundering, they also signal the need for a streamlined, integrated approach to doing so in order to minimise business disruption, and maximize efficiencies.
What does this mean for companies and their finance functions?
Readiness efforts will lead companies and their finance functions to look at their existing financial controls system in a new light. It will require staff to be trained in different ways so that they understand the overlapping objectives of certain controls, and staff - particularly those in the finance function - should be empowered to ask questions and challenge their colleagues in situations where they have concerns about transactions, for example the counterparty, structure, or the underlying business purpose.
With the push to hold corporates to account for their failings, now is the time for finance functions to find a place at the top of the agenda for preparedness efforts.
