Understanding the need for forensic accountants
The economic impact of Covid-19 has resulted in a significant increase in the volume of retailers and other business sectors feeling severe financial strain. The rise of Covid-19 related fraud may also have impacted businesses all of which gives potential for a surge in demand for forensic accounting skills in the coming months.
Forensic accountants often bring added value to the insolvency process, shown in the appointment of additional administrators to scrutinise Laura Ashley’s finances and pension scheme, following their collapse. We also routinely sift significant volumes of data to determine potential causes for financial difficulties. Our work can have possible benefits to creditors and business owners themselves, with the capability to lead to recoveries of more assets and discovery of underlying fraud, enabling recovery action against the responsible parties.
In the currently demanding economic environment, in which businesses are having to operate in accordance with fluctuating lockdown restrictions, the conditions are right for a rise in opportunistic fraud.
To an untrained eye, evaluating the reasons behind a business’s insolvency can seem clear cut. However, this is where a forensic accountant can flourish, uncovering the truth behind unusual transactions and assisting decisions about recovery strategy using our expertise in understanding the fine margins between best, acceptable and illegal practice.
The process of forensic accountants
Like the name suggests, forensic accountants delve deep into the workings of a business. Beyond the analysis of a company’s financial records we can review a range of sources: from social media, direct conversations with individual employees, and a thorough review of emails and other electronic records. The analysis of all evidence gathered helps uncover clues about the behaviour of both internal and external parties and how this may lead to insolvency should the company unfortunately fail.
Some obvious signs of irregular behaviour that a forensic accountant would look out for would include a rapid decline in value of assets, high volumes of transactions with associated companies and significant movement on a directors’ loan accounts. These irregularities can suggest overvaluation or rapid disposals of assets, or on occasion a sign of underlying fraud. Therefore, forensic accountants must determine whether these suspicious signs have a clear explanation or assess the resulting gain the party has made through their actions, following the money trail and identifying if it’s recoverable.
Consequences for parties
A forensic review of the financial performance of the business can lead to restorative action being initiated by the directors themselves, or if it fails, recovery via the appointed insolvency practitioner, often working with experienced lawyers. We can assist calculate the damage caused and seek financial recompense.
Insolvency cases are likely to rise as companies feel the continued effects of the pandemic. Historically the incidence of fraud grows when business failures significantly increase and it becomes harder to spot as other financial pressures weigh heavily on businesses fighting to survive. Simply put, this means there is actually an increasing need to determine the root cause of an organisation’s financial problems using forensic accounting and financial investigation skills. Potentially this could prove key to restore value to a business and for creditors and mitigate the financial crisis faced.
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