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Sponsored briefing: From Barings to Bitcoin, the forensic accounting market – past, present and future

Grant Thornton UK’s Michael Barber considers the progression of the forensic accounting profession and looks ahead to what may be in store in the coming months and years

The past

Origins: Maxwell, Barings and beyond

Forensic accountancy. The term strictly refers to accountants whose work supports legal proceedings of various kinds. This is not dissimilar to the way that a forensic pathologist might provide expert evidence to the court. Only forensic accountants substitute corpses for cashbooks and scalpels for sale-and-purchase agreements (SPAs).

Although its earliest origins can be dated back to the early 19th century (the first case in which an accountant was used as a testifying expert in court is thought to be the 1817 bankruptcy case of Meyer v Sefton), in the UK, forensic accounting as a specific professional discipline has only really existed in private practice for around one working generation, with the first true specialists in the field just approaching retirement today. Necessity is the mother of invention, and the field really took off in the wake of the major corporate indignities of the early and mid-1990s, including the Robert Maxwell pension scandal of 1991/92 and the original rogue trader Nick Leeson’s induced collapse of Barings Bank in 1995. The market required more general accountants to adapt their skills to support increasingly complex investigation and litigation challenges of the day.

‘… you only find out who is swimming naked when the tide goes out.’ – Warren Buffett

Recessions are always busy periods for those in the forensic field. Fast forward to the next global financial crisis in 2008, and I myself had joined the forensic profession shortly following qualification. It was the midst of the ‘credit crunch’, and my fledgling career in forensics quickly took in the likes of collapsed Icelandic banks, Bernard Madoff-related litigation, failed Indonesian shipping JVs and (allegedly) fraudulent $500m technology acquisitions. Each of these matters had been exposed at least in some way by the economic tide suddenly going out. Well over a decade later, one of my ‘credit crunch’ era cases is still working its way through the courts today.

The present

In the arts

Unlike their peers in the legal profession, forensic accountants have rarely been brought to the attention of the general public via the big screen. That changed in 2016 when the life of a forensic accountant was portrayed in the Hollywood crime thriller: The Accountant, unflatteringly described as a ‘surprise hit’. Ben Affleck played Christian Wolff, a tenacious maths savant who ‘uncooks the books’ for a series of unsavoury and increasingly dangerous clients, while doubling as an assassin. While at times deviating from the core work of forensic accountancy, The Accountant clearly made the numbers work as Affleck is reportedly eager to make a ‘double entry’ into the role of Wolff in a mooted sequel.

Beyond the numbers

Forensic accounting has come a long way since Barings. As well as the more obvious forensic work of ‘uncooking the books’, in other words investigating fraud and other financial irregularities, the work of top forensic teams today also encompasses challenges ranging from the preparation of loss quantum calculations, resolving disputes through expert determination appointments, advising on price adjustment mechanisms in SPAs and performing forensic business valuations for litigation and international arbitration.

‘Being able to manage reputational risk by responding rapidly if serious potential impropriety is discovered is paramount in today’s world.’

Teams of dedicated forensic professionals often work on niche sub disciplines of the field. There are forensic accounting specialists in disputes around locked-box completion mechanisms for instance, with others skilled in the arts of investigative interviewing, lost profits or data analytics.

Allied to our backbone of investigations and disputes work, our forensic team at Grant Thornton also delivers a wide range of digital and other associated solutions to modern-day challenges, including (among others): corporate intelligence and asset research services, digital forensic services, electronic disclosure and data hosting services, cyber investigations, data analytics, competition monitoring appointments and the provision of financial crime advice to financial services clients. We also work closely with our market-leading insolvency team in tracing and recovering assets for clients across the globe.

Our work is most often ultimately wrapped up into a written report designed to boil the complex and confusing down into something that can be readily absorbed by anyone. As well as understanding the numbers, it is therefore crucial that forensic accountants are skilled in effective communication, both in the written form and verbally, including, of course, when giving testimony at trials or hearings. The best forensic accountants are highly adaptable, bringing their inherent attention to detail, inquisitive nature, tenacity and honed analytical skills to bear on the unique set of challenges that arise with every new case.

Case study: Anatomy of a civil fraud case

Kazakh construction and land fraud, UK High Court
We were first appointed in 2013 by our Kazakh manufacturing client following the curious chance discovery of the accounting system of one of its major suppliers on its own servers. The supplier, a construction firm, had been paid millions of US dollars (equivalent) to organise and carry out major building works at a number of sites around Almaty and Astana in Kazakhstan.

Our colleagues in Moscow resurrected the accounting database in the relevant Russian accounting software, and we soon identified a large volume of cash payments to several parties of potential interest. Our cashflows analysis, when combined with legal work into the identity of the counterparties, led our client to suspect that it had been the victim of a major construction fraud: an ‘inside job’ by former management. The legal team soon secured a worldwide freezing order and a claim was issued in the UK High Court.

Fast forward three years and we were instructed to formalise our analysis into a full expert report. We analysed vast quantities of bank statements and accounting systems for dozens of allegedly implicated companies. Using modern charting tools, we brought key cashflows to life, in some cases highlighting peculiar circular simultaneous movements of funds.

In total, we calculated that a net US$175m had been transferred to companies with apparent links to former management across three separate alleged construction and land acquisition frauds. Meanwhile, expert evidence from a quantity surveyor indicated relatively little work had been performed or materials received for these payments.

During the 12-week trial, we presented expert testimony on the allegedly fraudulent cashflows and the quantum of other claimed sums – including loan interest and penalties incurred, while our cashflow charts were relied on extensively by both parties. We also gave evidence on certain issues relating to audit, which were relevant to the limitation defence.

Several months later, our client received favourable judgment of all sums misappropriated and was awarded over US$300m in damages. Since then, we have continued to support our client post-trial with further cashflow tracing and charting of the onward use of the misappropriated funds, as it has proceeded to enforce its award through the courts.

Fraud in international arbitration

As well as working to prove fraudulent cashflows for claimants in High Court fraud claims, we have also been instructed to perform similar work for defendants in international arbitrations where fraud and corruption defences are increasingly used.

The rising deployment of fraud, corruption and money laundering arguments in international arbitration led to the release last year of a toolkit for arbitrators on how to handle such allegations. Issued in English and Russian, the ‘Corruption and Money Laundering in International Arbitration: A Toolkit for Arbitrators’ was published in April 2019 by the University of Basel’s Competence Centre, Arbitration and Crime and the Basel Institute on Governance. It aims to ‘help arbitrators who suspect, or are confronted with, alleged corruption or money laundering in relation to the underlying dispute, to address these issues in a systematic and comprehensive manner, and to find a solution in accordance with the applicable laws’. The authors consider that an award rendered by an arbitral tribunal using the toolkit should have a greater chance of enforcement.

The ‘hot’ geographies of today

Our experience is that Russia and the CIS regions remain highly active for fraud claims requiring forensic accounting support. This is backed-up by the number of such cases that are seen being litigated in the UK. Our analysis indicates that during the last five years, almost one in five civil fraud and investigation-related cases in the UK courts involved a Russian or CIS party or subject (see Figure 1).

More broadly, we see that across our range of forensic work our assignments have become progressively more international, with current forensic matters spanning geographies as diverse as Cayman to China, Russia to Romania and Kazakhstan to Kyiv.

Michael Barber

‘It is a fascinating time to be in the forensic market, supporting clients with the increasing scale, complexity and international nature of their investigation and disputes requirements.’
Michael Barber, Grant Thornton

Busy regions for us today also include the Middle East, and increasingly Africa. In delivering on such cases, our experience is that being able to leverage a genuine global footprint puts firms such as ours at an advantage. Knowledge of local culture and practice as well as taxes, documentation, systems and procedures can add valuable insight to an expert or investigation report, not to mention the advantages of using local resources to perform analysis, for their language skills, or to obtain public documents.

The future

Which other key trends are influencing the forensic market in the near term?

Diverse teams for global disputes

The disputes and investigations of today are increasingly complex and global. The teams engaged to help resolve those issues need to mirror this. On our dispute cases, we are accustomed to identifying the most appropriate named expert, either from within our 140-strong UK forensic practice or from elsewhere across our firm of 4,500 people. Moreover, we can call on over 800 forensic practitioners from 37 territories across the Grant Thornton International network, as required. Aside from forensic specialists, the need for broader technical support for the expert witness, encompassing audit, tax, corporate finance, insolvency or regulatory skills is imperative as cases become more complex and nuanced. We ensure the expert is appropriately supported by experienced forensic specialists so that our clients receive the best team for these sensitive assignments.

Brexit’s impact on disputes

It would be remiss not to touch on Brexit, at least briefly. Major political, economic and regulatory changes invariably lead to the emergence of financial disputes as parties seek the help of the courts to resolve their differences. We expect the implementation of Brexit, post-transition period (currently scheduled for 31 December 2020), to be no different. Watch this space.

Business ethics and responsive boards

In the last few years, business ethics has become very much more than a box-ticking exercise; real corporate conscience has become a key differentiator for customers in today’s economy. Being able to manage reputational risk by responding rapidly and independently if serious potential impropriety is discovered is paramount in today’s world. We expect ever more firms will have response plans and independent advisers at hand to investigate such issues when needed.

Early resolution of disputes

We are also experiencing a growing demand for early case assessment in terms of both liability and quantum. Such requests come from funders, lawyers and clients alike. We have sometimes found that claim quantum has taken a back seat to liability or causation issues, however, clients are increasingly acknowledging that quantum rightly sits at the heart of the decision-making process. Quantum, and the parameters around it, needs to be well understood early on, so that smart decisions can be taken as to case strategy before it is too late.

Cyber threats and protections

The rise and rise of all things digital is having a considerable impact on the shape of our forensic team: over the last two years, we have invested heavily in our cyber capabilities, and will continue to do so. We will ensure we are prepared for the cyber challenges that our clients will experience, so we can help them identify cyber threats, protect against them and detect, respond and recover from incidents as they occur. As a way of fighting back, we note that cyber litigation is becoming a class in its own right, and the UK is meeting this demand with a new flagship court to be built by 2025 with the specific aim of tackling cyber crime, fraud and economic crime.

Competition disputes

The 2014 EU Directive on Antitrust Damages Actions was implemented in the UK in March 2017. In the last five years, there has been a steady stream of antitrust and competition disputes in the UK courts, with 88 reported judgments during 2015-19, 60 of which were for the ‘main’ (as opposed to procedural) hearings (see Figure 2). There will, of course, have been many more cases that settled at some point along the way.

This is an area of the disputes market that we are following with interest. Our view is that the potential role of the forensic accountant has been underplayed in such matters. We are increasingly active in this area, assisting clients with sourcing, collecting and analysing data, as well as performing initial quantum computations at the early stages of disputes. The October 2018 judgment in BritNed Development Ltd v ABB Ltd & ors, the first and only judgment handed down thus far by an English court in a cartel damages claim, highlighted the need for damages calculations to focus on data and evidence specific to the product/project in question. Our combination of electronic data collection capabilities, deep understanding of accounting data and quantum skills put us in a unique position to support clients on competition matters.

Summing up

There has been an immense amount of change over the years in the field of forensic accounting, as it has evolved to manage changes in technology, society and the economy. At no point has change been as rapid as we are seeing today. Only in recent weeks, we have seen that in the case of AA v Persons Unknown & ors the High Court endorsed the view that cryptocurrencies such as Bitcoin qualified as ‘property’ under English law, which will have ramifications for asset tracing work. Meanwhile, in February 2020, Zamira Hajiyeva, wife of Jahangir Hajiyeva (who was sentenced by a court in Baku to 15 years’ imprisonment for fraud and embezzlement), lost her appeal to discharge the unexplained wealth order against her and her husband, which was the UK’s first ever such order. Mrs Hajiyeva must now comply with the NCA’s original February 2018 order to explain the source of funds used to purchase two London properties valued at £22m: no doubt a significant forensic exercise.

It is a fascinating time to be in the forensic market, supporting clients with the increasing scale, complexity and international nature of their investigation and disputes requirements. One cannot afford to stand still in this period of rapid change, and we do not intend to.

Figure 1: Civil fraud and investigation cases heard in UK courts with Russian & CIS parties/subject, 2015-19*

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* As defined in The Lawyer’s Litigation Tracker, cases during the calendar years 2015-19 and with reported judgments.

Figure 2: Antitrust and competition cases heard in UK courts, 2015-19*

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Michael Barber, associate director, forensic and investigation services, Grant Thornton UK
+44 (0)20 7865 2380

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