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What are the most common cases the forensics team at GHJ works on?

We can divide our practice into two broad areas: Forensic investigations and litigation support.

Forensic investigations involve assisting companies to analyse allegations of wrongdoing. This could involve fraud, theft of cash or other assets and other misconduct, but can also include financial mismanagement, financial misreporting, as well as a review of the company’s internal control procedures. In these matters, we are generally engaged by the board of directors or senior management to provide clarity and solutions to the issues on hand. For example, if we are asked to investigate an allegation that someone has “cooked the books”, the question we would investigate may be:

  • Who cooked the books?
  • When were the books cooked?
  • How much were the books cooked?
  • How do we un-cook the books? Procedures for resolving thesematters may involve but are not limited to performing analytical procedures, interviewing key individuals, reviewing complex accounting data, and reviewing specific transaction details. For instance, various analytical procedures allow forensic accountants to identify unusual or unexpected trends that would otherwise be obscured in thousands or more complex transactions.

Common types of analytical procedures are analysing transactions made on weekends or holidays, large round numbers, common duplicate amounts, and unusual keywords. We also analyse large data sets by cross-referencing employee details against vendor details for concealed theft of assets between related parties. In the same data set, vendors with P.O. boxes are closely inspected, which is a popular method for concealing the perpetrator’s real location. In addition, we can verify employee details to identify “ghost employees.” In this procedure, we look for fictitious employees or other individuals receiving paychecks who are not actual employees.

Interviewing key individuals is also a critical component of a forensic investigation. Key individuals generally include the suspected perpetrator, the suspected perpetrator’s supervisor, peers, and any other employees with whom the suspected perpetrator had a close working and/or personal relationship. They also include other employees with the authority to sign checks, approve invoices, transfer funds, hire employees, approve pay increases, etc.

Interviewing can reveal a wide range of facts about the suspected fraud and provide insight into a larger scheme that was not questioned before. Additionally, interviews provide us with crucial qualitative information, such as the suspected perpetrator’s expensive hobbies or other red flags in committing fraud, including financial trouble or other personal pressure such as family issues or substance abuse.

“There are many key traits to be a great forensic accountant and an adviser, but it really comes down to two key traits: a drive to solve problems and clear communication with the attorneys and clients.”

Overall, a forensic investigation is a dynamic and iterative process. We employ a wide array of tools to provide answers for our clients; however, it is always crucial to adapt and pivot as necessary with the discovery of new information and data.

For engagements involving litigation support, we assist attorneys and clients in evaluating and untangling complex matters with our expertise. Our services may include analysing and calculating economic damages, assisting with discovery review, reviewing documents and financial data, determining appropriate damages methodologies, quantifying damages, preparing expert reports, providing expert witness testimony, and reviewing opposing experts’ opinions.

In these engagements, we may assist in producing an expert report for a trial or arbitration. An expert report generally includes our expert interpretation of the matter and a dollar amount of economic damages that our client may be owed. Calculating economic damages may involve analytical procedures, interviews, document review, and accounting data review similar to forensic investigations. Additionally, litigation support engagements may involve a significant portion of research and input on specific industry trends and projections. Once we have concluded our opinion for the court, we also assist attorneys and clients by attending depositions and providing expert witness testimony. We also assist by reviewing the opposing expert’s reports and attending their depositions. Overall, we work closely with attorneys and clients throughout all stages of the dispute.

What are the key traits a great forensic accountant and an adviser need to possess?

There are many key traits to be a great forensic accountant and an adviser, but it really comes down to two key traits: a drive to solve problems and clear communication with the attorneys and clients.

As forensic accountants, we are engaged to solve problems and provide clarity on issues that may be overwhelming for the client’s scope. In contrast to other areas of accounting, such as audit services, disputes we are engaged to resolve are often unique. For this reason, having a great drive to solve problems is one of the essential traits in this field.

Furthermore, we must be able to clearly and effectively communicate to those that we serve. Our investigation and litigation support become meaningful only when our work can be properly articulated to those who may not be experts in the field. This includes verbal communication throughout the process, writing skills to compose expert reports, and experience to navigate the challenges of one of the loneliest places on earth, the witness stand.

What is your favourite part about your job?

My favourite part about my job is that our work is rarely dull. We get to analyse and gain insights into all types of industries and diverse companies and individuals and we get to solve real problems. Whether it is a forensic investigation or expert witness assignment, our work provides tangible value by providing our clients with the bottom line. We bring real solutions to complex business problems.

For more information, visit: www.ghjadvisors.com 

The appointment of additional administrators to scrutinise Laura Ashley’s finances and pension scheme in the lead up to its administration is a reminder of the added value that forensic accountants often bring to insolvency processes. While Laura Ashley’s collapse was not specifically linked to coronavirus, a significant increase in the number of retailers and other businesses feeling financial strain, and the growth of COVID-19 related fraud, may well result in a spike in demand for forensic accounting skills in the coming months. Gavin Cunningham, partner and head of forensic services at accountancy firm Menzies LLP, discusses the role of forensic accountants and why they may soon be in demand.

The use of forensic investigation techniques in insolvent situations can unravel transactions that contributed to the downfall of a company and lead to asset recoveries to benefit creditors. Fraud can be a factor and the detection of irregular or inaccurate accounting practices may lead to the discovery of underlying fraud. The ability of forensic accountants to sift significant volumes of data to identify potential causes for a company’s financial difficulties, including in some circumstances the misapplication of funds, can help to secure the best possible outcome for creditors by enabling recovery action against those responsible.

The combination of tough economic conditions and the availability of government-backed wage grants and support packages means that the conditions are right for a rise in opportunistic fraud. At the same time, the lockdown restrictions and the large numbers of businesses claiming under such schemes are making it more difficult for organisations to address any financial shortfalls.

The combination of tough economic conditions and the availability of government-backed wage grants and support packages means that the conditions are right for a rise in opportunistic fraud.

In the business world, the lines separating best practice, acceptable practice and illegal business practice can sometimes become blurred. This means that to the untrained eye, it may be difficult to determine whether a business insolvency is simply the result of ineffective management, or whether other nefarious activity may have occurred. Forensic accountants are experienced in uncovering the truth behind what appear to be suspicious or unusual transactions and assisting the appointed insolvency practitioner in reaching decisions about the recovery strategy.

When instructed to investigate the financial position of a business leading up to the insolvency proceedings, forensic accountants will begin by gathering information related to the company before it fell into financial difficulty. This often involves delving deeper into a particular financial issue. In the case of Laura Ashley, for example, questions have been raised about the activities of the company’s directors before filing for administration. To get to the bottom of what happened, the forensic accountant will gather evidence from a wide range of sources - from complaints made about the business on social media, to direct conversations with individual employees, as well as securing the financial records of a company. Analysis of all the evidence gathered could potentially uncover clues about the behaviour of the directors in the months leading up to the appointment of administrators.

For a forensic accountant there are often ‘red flags’ observed, which could indicate irregular business practices in the past. For example, some obvious signs include a rapid decline in the value of assets which could indicate rapid disposals or overvaluation, high volumes of transactions with associated companies, or changes in balances owed on director loan accounts. Occasionally, the discovery of irregular or inaccurate accounting practices may also be a sign of underlying fraud. When there is evidence of unusual financial behaviours, it is then the job of forensic accounting specialists to investigate whether or not there is a clear explanation for this and it may show people obtaining financial benefit through dishonest or deceptive behaviour. They can then investigate how much has been obtained and follow through the money trail to see if the losses may be recoverable.

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Depending on the circumstances, the review of historical financial performance may lead to restorative action being possible for the Insolvency Practitioner under various recovery provisions of the Insolvency Act 1986. These cover antecedent behaviours and thorough analysis might show that directors could be civilly liable for their past actions, including, in some circumstances, for wrongful trading.

This statutory provision can render directors of a company liable for losses suffered if trading continues past a point at which they should have concluded that there was no reasonable prospect of the company avoiding an insolvent liquidation, or insolvent administration. They then have an overriding duty to take steps to minimise potential losses to the company’s creditors and should they fail to stem losses personal liability can follow. The provision has itself fallen foul of the pandemic such that the Government temporarily suspended it from 1 March 2020 until at least 30 September 2020. As a result, in the aftermath the process of calculating company losses resulting from wrongful trading will become even more complex.

With many businesses likely to be feeling the financial effects of coronavirus-related disruption in the months ahead, a further surge in insolvency cases is likely. Helping to get to the root cause of an organisation’s financial problems, forensic accounting skills can help to restore value for creditors and mitigate the financial crisis resulting from the pandemic.

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

 

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.

 

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