One of the key aspects underlying the work undertaken by forensic accountants in relation to disputes involving businesses is the availability of evidence that is reliable. Expert accountants therefore need to ensure that any conclusions reached for the purposes of negotiation and Court or other proceedings are not undermined by information which has not been subject to sufficient scrutiny. The reliability of evidence is as important whether the expert is instructed on behalf of the Claimant or the Defendant.
It is important for forensic accountants to consider “corroborative” information when deciding whether evidence provided to them is reliable. The reliability of evidence needs to be construed in a wider context, e.g. it may be necessary to check that transactions have been undertaken on an arm’s length basis or to establish, on the balance of probabilities, the evidence to be relied upon where there is conflicting information. On this basis, this article covers below some of the key corroborative questions which could be raised when forensic accountants are instructed to consider the workings of businesses. Such instructions may arise in various types of dispute including loss of profits cases, family law cases where one or both parties are integral to a business, contractual disputes and personal injury cases involving the loss of earnings relating to a business.
Clearly, as the subject matter of each case will be different, not all of the issues listed below will be relevant on all matters on which forensic accountants are instructed. Nevertheless, it is important for expert accountants to underpin their opinions with a solid factual base and a number of the questions listed below will be part of the process in specific cases.
- Have employees been questioned on key aspects to identify conflicting information?
- Have the external accountants’ working papers been reviewed to identify exceptional issues and adjustments made in the preparation of the final financial statements?
- Have the business’ VAT returns been compared in broad terms with its financial statements?
- Have final signed financial statements been obtained from the directors and compared with those filed at Companies House?
- Have bank statements been obtained for three years to identify recurring transactions?
- Have key customers been contacted regarding aspects of their dealings with the business?
- Can sales invoices be matched with the original orders received from customers to ensure that there have been no deliberate attempts to delay the recording of sales?
- Are sales as recorded in the financial statements consistent with the sales day book, sales invoices and cash receipts from customers so as to identify false invoices and bad debts?
- Have invoices for major purchases been reviewed, e.g. to check that related party purchases are on an arm’s length basis and that cars etc. are used only in a business capacity?
- Is documentation available to support exceptionally large or one-off expenses such as legal fees, e.g. invoices and evidence of payments in bank statements?
- Have business tax returns been reviewed to identify expenses which have been disallowed because they are not considered to have been incurred for the benefit of the business?
- Have connected parties been contacted to corroborate data relating to business transactions with the connected parties, e.g. rent paid for property owned by a director’s spouse?
- Are payments made to senior employees and consultants supported by employment contracts and consultancy agreements?
- Have directors’ current accounts been reviewed to establish reasons for payments to them?
- Have the personal bank statements of business owners or employees been reviewed to check that receipts reflect payments to them as recorded in the business’ financial statements.
- Are the amounts attributed to rented properties verifiable by reference to underlying leases and do they relate solely to accommodation used by the business?
- Have Land Registry records been obtained to verify data in relation to owned properties?
- Are amounts attributed to owned properties supported by updated external valuations?
- Have external valuations been obtained in respect of any intangible assets, e.g. trade marks, patents etc.?
- Have internet searches identified aspects of the business which are not consistent with the available documents and information provided by management?
Corroborative information enables decisions to be made on the reliability of the available evidence and provides a basis for requesting further relevant information. Obtaining additional information to underpin the forensic accountant’s conclusions is clearly important in ensuring that objective evidence is available in Court and other proceedings.
The information contained in our Newsletters is provided as general information only. It does not constitute professional advice and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. In addition, since the Newsletters were published in recent years, the information contained in them may not be applicable at the current time.