February 2019
Reviewing the financial statements of businesses and the underlying information is an integral part of the work of forensic accountants in various types of litigation, such as disputes between shareholders or partners, divorce cases, loss of profits claims and many fraud investigations.
The financial statements of private companies and LLPs which exceed certain size limits or which operate in certain sectors are generally subject to audit, i.e. an independent review by professional accountants who will report on them to the members. The financial statements of small companies, partnerships and sole traders are not normally subject to audit but may be accompanied by an accountants’ report, the scope of which is likely to be restricted. As part of any financial investigation by expert accountants, it is often very useful to obtain access to the auditors’ or external accountants’ working papers in relation to businesses’ financial statements.
We illustrate below why it may be useful for forensic accountants to review the working papers of auditors or external accountants underlying the financial statements of many types of business.
It is cost-effective to obtain access to working papers because…
- They are likely to include data supporting the financial statements so that it should be possible to pinpoint and consider in greater detail the make-up of the financial statements and various transactions which may otherwise need to be evaluated by reviewing businesses’ accounting records.
- They may provide detailed information on disclosures in the financial statements and would, for instance, provide data on director’s loan accounts, emoluments, dividends and benefits-in-kind.
- External accountants are likely to have considered transactions involving significant amounts and fluctuations in such amounts from one period to the next, e.g. turnover, inter-company transactions etc., which would otherwise need to be considered from “scratch”.
Working papers may underpin the credibility of information from the parties because…
- They may provide “corroboration” of information obtained from management, e.g. whether related party transactions between businesses and their owners were undertaken on an arm’s length basis.
- It may be important in certain cases to establish whether external accountants matched data on specific areas with the businesses’ underlying records, e.g. in relation to directors’ loan accounts and inter-company indebtedness.
- They are likely to highlight whether the businesses’ assets are recorded accurately, e.g. consideration may have been given to the “recoverability” of specific debtors or to obsolescent inventory.
- They may include a consideration of areas which are “problematic”, e.g. the recognition of turnover in the wrong accounting period, and may provide information which parties to the litigation have been reluctant to make available to expert accountants but which needs further investigation.
- It is likely that external accountants would have highlighted weaknesses in the businesses’ accounting systems and to have considered each year as to whether any action had been taken by the owners to address such weaknesses.
Working papers may include useful third-party information such as…
- Copy correspondence and notes of meetings between business owners and external accountants so as to enable experts to consider whether the accountants highlighted areas of concern to the businesses and whether appropriate action was taken on this basis.
- Correspondence between the accountants and HMRC and tax returns submitted to HMRC which will provide a clearer view on areas of concern and whether HMRC highlighted issues which were dealt with adequately by the businesses.
- Copy bank statements considered by external accountants in relation to significant bank receipts and payments and explanations which were provided in respect of “unusual” amounts, e.g. miscellaneous payments to the businesses’ owners.
Conclusions
Although auditors and external accountants are often reluctant to provide access to their working papers and it may be necessary to seek the Court’s assistance to obtain such access, forensic accountants are likely to derive significant benefits in terms of costs and the quality of information that can be obtained by reviewing working papers.
Download a pdf of this article
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.