There has been a significant increase in the demand for forensic accountants in recent years. In this article, Prof Niamh Brennan explains the breadth of skills and services a forensic accountant can bring to the table.
A review of the newspapers reveals that forensic accountants have been kept busy over recent years thanks to high-profile bankruptcies, rogue bankers, corrupt politicians and other more regular cases of fraud.
Former Taoiseach, Mr Charles Haughey, gave forensic accountants currency when he referenced his forensic accountant, Mr Des Peelo, as follows: “I’d say [the true figure was] considerably less. I cannot say… [by how much] because, as I say, these figures are so complex and extend over such a long period of time that in pursuance of my duty to the Tribunal, I engaged the services of a very expert forensic accountant to help the Tribunal in unravelling these figures.” This extract formed part of the evidence of Charles J. Haughey, which was given to the Moriarty Tribunal on 25 September 2000.
The term has also been used to describe Irish rugby coach, Joe Schmidt’s strategic “forensic accounting” game plan and it has provided enough material for the creation of the seminal legal text, Forensic Accounting, which I co-authored with fellow chartered accountant and senior counsel, John Hennessy, in 2001.
What is forensic accounting?
Forensic accounting is the use of accounting expertise to assist a court. “Forensic” denotes anything to do with a court of law and forensic accounting is increasingly recognised as a separate and important discipline at the intersection of law
and accountancy. A relatively new role within accounting, forensic accountants build on a unique blend of accounting and investigative skills. They are, in fact, financial detectives, dissecting financial statements, looking behind rather than merely at the numbers. Their expertise lies in working with sensitive financial evidence, lawyers, law enforcement agencies and the court system. Integrating accounting, auditing and financial investigation and their application in litigation and dispute resolution, forensic accounting is a highly specialised area of practice that combines accounting and legal disciplines.
The work of forensic accountants
Forensic accounting is a complex and broad area. It is deployed in resolving a variety of civil and criminal cases including those involving financial fraud, the calculation of damages in personal injury and commercial disputes, matrimonial litigation, employment disputes, taxation cases, business valuations, and corporate crime.
Unravelling complex transactions, opening up money trails, countering money laundering, exposing corrupt financial transactions, combating fraud, quantifying past losses, assessing future damages, dividing matrimonial and partnership property – all these are becoming bread-and-butter issues in proceedings heard in courts and tribunals. Each of these areas of forensic accounting has its own unique features and deserves an article on its own.
Investigative accounting
Forensic accountants become involved in a range of investigations spanning many industries. Investigative accounting usually involves the application of accounting principles and rules to basic financial data with a view to testing the validity of assertions based on accounting information, or verifying the accuracy and completeness of financial statements. The level of investigation depends on the availability and quality of books and records.
Investigative accounting is used in connection with allegations or suspicions of fraud that could potentially lead to civil, criminal or disciplinary proceedings. The focus of fraud investigations is on accounting issues but the role of the forensic accountant can extend to a more general investigation, including evidence-gathering. Investigative accounting can also extend to forensic audit, which involves examining an assertion to determine whether it is supported adequately by underlying evidence – usually of an accounting nature. Investigative accounting is often associated with criminal investigations and here, the primary concern is to develop evidence around motive, opportunity and benefit.
A typical criminal investigative accounting assignment involves:
- Reviewing the facts;
- Scrutinising documents and records in both written and electronic formats;
- Reconstructing a clear and detailed picture of what happened;
- Coordinating other experts including, for example, private investigators, forensic document examiners or consulting engineers;
- Suggesting possible courses of action; and
- Assisting with the protection and recovery of assets, which might include civil action or criminal prosecution.
Forensic investigations into criminal offences can involve assisting An Garda Síochána, the Criminal Assets Bureau, the Director of Public Prosecutions, or other organisations such as the Law Society. A forensic accountant’s report is prepared with the objective of presenting relevant and reliable evidence, together with a considered opinion, in a professional and concise manner.
Business investigations can involve forensic intelligence-gathering, funds tracing, asset identification and recovery, and due diligence reviews. Employee fraud investigations often involve procedures to determine the existence, nature and extent of fraud and may concern the identification of a perpetrator.
These investigations often entail interviews with personnel who had access to missing records, funds or other assets and a detailed review of the documentary evidence.
Litigation support
Forensic accounting is often thought of in relation to fraud, but the discipline is much wider. Litigation support involves forensic accountants as part of a team providing specialist advice in legal disputes, or where a claim for financial compensation is at issue. Assistance of an accounting nature is provided in both existing and contemplated litigation. Evaluations may be done in preparation for settlement negotiations, mediation, arbitration, and trials – both civil and criminal.
Forensic accountants examine the books and records of individuals and companies in litigation situations to assist lawyers in developing and preparing their case. Forensic accountants usually deal with issues related to the quantification and analysis of economic (i.e. monetary or financial) damages. A typical litigation-support assignment would be to calculate the financial loss resulting from a breach of contract. Losses of revenues and profits may have to be measured and valuations of business property or ownership interests may need to be carried out. Forensic accountants also provide input in areas where legal liability is influenced by matters within their field of expertise, such as the application of accounting standards in assessing whether financial statements have been properly prepared.
The role of the forensic accountant in litigation support is broader than is often assumed. The view that forensic accountants only have a role when a case goes to trial is widely held, but inaccurate. In fact, most cases do not go to trial. The quality and effectiveness of pre-trial activities is a significant source of opportunity (or danger) for the parties. Forensic accountants can act for plaintiffs or defendants in civil proceedings and for the prosecuting authorities or defendants in criminal cases. Forensic accountants can also assist plaintiffs in preparing a claim or, alternatively, materially reduce a claim when acting for defendants.
Expert forensic accountants can advise plaintiffs or defendants from an early stage on the financial aspects of the action. There is little point in reaching the door of the court, with perhaps significant liability for costs, if the value of the case is relatively modest and the case could have been settled sooner. Whether a dispute is settled by negotiation or through the courts, there will almost always be a benefit from authoritative and persuasive evidence based on financial and investigative skills.
The accountant’s duty to the court
If a case comes to court, forensic accountants are expert witnesses in the case. They owe their duty to the court, not to the party in the proceedings who instructed them. The expert witness’s job is to assist the court (not their client) in arriving at the truth by providing a skilled and expert assessment of matters requiring a specialist appreciation of the particular problem at issue. Thus, forensic accountant expert witnesses conduct evaluations, examinations, and inquiries before reporting the results of their findings in an unbiased, objective and professional manner. This objectivity and independence is a key element of the input of forensic accountants.
Conclusion
With the establishment of the Office of the Director of Corporate Enforcement (ODCE) in 2001 and more proactive raising of business standards in Ireland, there has been a significant increase in the demand for the services of forensic accountants. The ODCE regularly issues tenders for forensic accounting services and related IT forensic technology services. For example, with assistance from expert forensic accountants, it is becoming harder for rogue directors to hide behind the ‘corporate veil’ and personally profit from companies at the expense of employees, investors, and small businesses who usually have little opportunity to recover their losses. Codification of Irish company law into a single piece of legislation in the form of the Companies Act 2014 is likely to increase that impetus.
Chartered Accountants Ireland provides the only professional qualification in these islands on forensic accounting in the form of the Diploma in Forensic Accounting, which the Institute launched in 2008.
Prof Niamh Brennan is the Michael MacCormac Professor of Management at University College Dublin.