by Bee-Lean Chew
This article looks at the potential ways in which a forensic accountant can be involved in a litigation. In the course of my career as a forensic accountant, I have often fielded enquiries from private individuals along the lines of “my lawyer informs me I need the services of a forensic accountant. Can you help? No, I don’t know what I need you to do… I just know that I need one. What exactly is it that you do?” After some unravelling (forensic, naturally), we come to the crux of the matter which usually falls in one or more of the following categories where the individual is a party or counterparty in a law suit and needs some assistance in:
(i) Understanding the financial figures and explanations presented by the other party
(ii) Quantifying the losses that either or both parties have claimed to suffer as a result of the action or inaction being litigated
(iii) Investigating the veracity and completeness of responses provided, particularly from the one who appears to be in a more financially robust position – bearing in mind that, oftentimes, the parties to the suit are in a fractious situation, where the level of trust between parties is at an all-time low, this appears to be the most common thread running through all enquiries – the suggestion that the other party is “hiding” assets, or obfuscating their financial position
(iv) Providing reassurance where another expert had already been appointed but, for whatever reason, they do not trust the opinion of the expert and want a second opinion
(v) Challenging the responses from the other party or the other party’s expert
(vi) Providing expert witness evidence in Court
There is no set time in a litigation at which a forensic accountant should be appointed – sometimes, they may be appointed pre-litigation to quantify the loss suffered in order for the potential litigant to decide whether or not to proceed with incurring the cost of litigation – no small amount, despite the Courts’ best efforts to limit the same. However, the potential litigant should always consult with their legal adviser before deciding to go down this route as the Courts may restrict the level of professional fees recoverable by the winning party. At the pre-litigation stage, the forensic accountant usually takes on the role of Expert Adviser, and his or her duty will be to the client or instructing solicitor. However, the forensic accountant needs to be aware at all times that, potentially, the pre-litigation work and/or advice they are giving will be converted into an expert witness report for presentation at Court – and at that stage their duty is to the Court. Therefore, during the period of their appointment as Expert Adviser, they should be careful to stay away from overly-partisan assumptions in preparing their calculations; there is always a fine balancing act here – while professionally-qualified accountants will be careful to adhere to their regulating body’s professional guidelines, there is a natural inclination for accountants in practice to safeguard their client’s interests which can result in overly-optimistic or overly-pessimistic quanta (whichever serves the client’s interests best).
The forensic accountant as Expert Adviser can be a very useful tool in a legal professional’s arsenal – knowing the potential financial outcomes of different decisions allows legal advisers to consider their litigation strategy from a more informed position and to test out different scenarios with the corresponding financial outcomes prior to deciding which would serve their client’s purposes best. But, of course, there is a corresponding cost with involving a forensic accountant which encourages many lawyers to defer their involvement. While many legal professionals are perfectly comfortable with numbers, it is generally not their main expertise and, oftentimes, involving a forensic accountant in the early stages can help to focus matters as well as maximise efficient management of the case. I have, on one memorable occasion, been passed my instructions and the requisite backing records (including a 1Tb hard drive) with a heartfelt “it’ll be a cold day in hell before I ever touch another Excel spreadsheet again” from my instructing solicitor. In that particular situation, we had a silvertongued counterparty who produced beautifully plausible reasons for every financial wrongdoing he was accused of perpetrating – in order to establish the veracity of his explanations and quantify the results of his misfeasance, we had to piece together the actual sequence of events, cross-check them to the defendant’s explanations, and present a robust report detailing where discrepancies arose between the defendant’s explanations and what factually occurred, from the company’s physical records, computer system back-up and decommissioned accounting system.
A more straightforward use of the forensic accountant, pre-litigation, would be in assessing whether there is any practical purpose to standing one’s ground. A fairly typical example would be where one party is aware that their business partner has used business funds for personal benefit – this often happens in small, closely-held, family-owned businesses where, over the years, the business partners agree amongst themselves that funds can be extracted and used for personal reasons. In itself, as long as such measures are properly accounted for in the business’ annual accounts and tax returns, this is not problematic. However, it sometimes happens that the business partners become complicit in gaining a tax advantage for their shared business which might not be strictly within the rules. When the business relationship breaks down, fingers start pointing, and accusations start flying as to who benefited unfairly from the business relationship. I have found that participants in this type of business relationship breakdown are rarely objective and discussions or negotiations can grind to a halt over each individual’s notion of fairness. Where the forensic accountant can be useful is in boiling down the arguments to black-and-white figures to illustrate whether there is any financial benefit to holding fast to an argument, or whether the financial benefit gained is outweighed by the cost of maintaining that argument, e.g. in legal costs. Knowing the potential quantum of certain decisions also helps the legal adviser to work out an effective strategy in the earlier stages of a law suit.
In a litigious situation, there is sometimes a weaker party with a lower level of commercial experience or knowledge and without a network of business contacts to whom they can turn for financial advice. In such situations, the forensic accountant can assist in an advisory capacity – helping the client to understand financial submissions by the other side, as well as helping the client to understand the personal financial implications of any offers put forward by the other side. Sometimes, the forensic accountant’s role is merely to be an interpreter for the less-commercially astute client. This often happens in matrimonial cases, where marital arrangements follow a more traditional route with one primary caregiver who stays home, the other spouse being the primary breadwinner. Often, the spouses will each have a share in a family-owned business, irrespective of their contribution to the management or running of the business – this is a common tax planning method for owner-managed businesses, to minimise tax payable on drawings from the business. In such scenarios, it is common that the stay-at-home spouse lacks the skills or confidence to understand or challenge financial assertions put forward by the breadwinner spouse regarding the robustness of the family business. In such situations, the forensic accountant can be useful as an interpreter and to highlight problem areas for both the legal adviser and client to challenge.
It can also be effective for the legal adviser to involve a forensic accountant at an early stage in the litigation process to help articulate the issues which need to be addressed in the manner which is best suited to the client’s case, as well as to aid in establishing the scope of work to be performed up front, thus providing some form of control over costs. Leaving the instructed expert to define their own scope can someeditorial times be the equivalent of issuing a blank cheque - an end result to no one’s benefit, arising from the expert’s desire to provide as comprehensive a report as possible with too wide a scope for an effective and efficient job to be performed. Involving the expert early on to assist with drafting the scope of instructions will help ensure a cost-effective use of the expert’s time.
Where the Court has given permission for the parties to do so, the forensic accountant can be appointed as an Expert Witness – either party-appointed or single joint expert. At this point, the forensic accountant owes his or her duty of care to the Court. Of course, in an ideal world, this switch of focus should make no difference to the expert’s opinion or conclusions – the expert should come to the same conclusion irrespective of which side he or she is engaged by. This can hold true where the subject under litigation is backed up by hard facts and concrete, contemporaneous documentary evidence. However, it is often the case that a significant proportion of the evidence presented to the forensic accountant for review and analysis is subject to interpretation. Additionally, detailed backing records get lost over the course of time – if they ever existed in the first place! Small businesses tend towards a more laissez faire attitude towards documenting management decisions on a timely basis; this is particularly true for family-owned businesses, where management and operational decisions are frequently made over the dining table. In such situations, the forensic accountant has to draw on their experience in order to assist the Court in establishing the facts of the case being considered.
In the final stages, the forensic accountant as Expert Witness can assist their client by assessing the quantum of whatever settlement figure has been agreed on.
This is just a brief overview of the many uses of a forensic accountant. A more detailed description is included in the book Forensic Accounting and Finance: Principles and Practice, 2017, Bee-Lean Chew (ed.), London: Kogan Page.
The book is available on amazon please see; www.amazon.co.uk/Forensic- Accounting-Finance-Principles- Practice/dp/074947999X
Bee-Lean Chew is Head of the Litigation Support team at Wilder Coe Ltd, a London-based firm of chartered accountants based in the City of London. She has been a qualified chartered accountant for over 20 years, specialising in owner-managed businesses. She is an accredited Forensic Accountant by the Institute of Chartered Accountants of England and Wales, as well as a member of The Academy of Experts.
