How liquidators use forensic accounting skills

Introduction

A Chartered Accountant providing business services arrives at results through double entry bookkeeping. That is, for every debit there must be a credit. That same accountant, although they are excellent at their job, may be confused if they are asked to draw conclusions from inadequate records.

On the other hand, the forensic accountant thrives on inadequate records and is used to coming to conclusions by drawing information from different places and bringing it together to a meaningful conclusion.

One of the duties of a liquidator is to realise the assets of a company. Often those assets take the form of a claim against someone who has defrauded a company. For a liquidator to do their job properly they must recognise that fraud has occurred and that everything may not be what it appears at face value.

Common types of fraud include the following:-

  • Business assets such as cars and equipment somehow being regarded as directors' personal property
  • Sale of assets to the director or an entity controlled by them at an undervalue
  • Sale by director to company of assets at overvalue
  • False invoices from companies controlled by director or perhaps in-house accountant
  • Valid invoices to customers, but showing the director's own bank account details
  • Non-existent people on the payroll
  • Suppression of creditors at the time of preparation of annual accounts
  • Showing stock that does not exist in the annual accounts
  • Giving personal trading trusts the good profitable contracts and leaving the failing company with unprofitable contracts
  • Taking money and showing it as having been invested in an overseas investment

The skills of a forensic accountant

For a forensic accountant to succeed they need more than ordinary accounting skills. They need legal skills, an enquiring mind, and to be a student of human behaviour. A degree of cynicism also would not go astray.

Psychological skills

These become very important. What is the best way to approach someone to get information out of them:-

  • Do you flatter them?
  • Do you make them believe you already have the answers?
  • Do you suggest they might be more lightly treated if they come clean?
  • Do you give them the impression that you know more than you actually do?

Following this:-

  • What does the person's body language tell you?
  • Is the person hiding something?
  • Is the person telling the truth?

Accounting skills

The accounting skills required are unlike those of the usual accountant. For a start, in the usual accountant's office the detailed work such as posting individual items to the ledger is done by clerks. On the other hand the forensic accountant must themselves be prepared to trawl through a mass of detail.

The forensic accountant must be aware of creative accounting practices and have an instinct as to where something unusual might have happened. In particular, they must be able to differentiate between the ordinary and extraordinary.

They will notice things which would not be normally noticed in a Chartered Accountant's office; such things as abnormal behaviour and the timing and sequence of events. They will be on the look out at all time for possible manipulation. They will understand information flows and be in a position to compare ratios and results with those of similar businesses.

Legal skills

The duties of directors are set out in the Companies Act 1993. The forensic accountant will have those duties in mind at all times.

For example:-

  • Have the directors exercised their powers for a proper purpose?
  • Have they acted in the best interests of the company?

An example of the enquiring mind

An actual case which comes to mind came about when the director of a company had a new boat. The forensic accountant, with his enquiring mind, wondered how the director could afford such a luxury while the company was making losses?

An examination of the books and records solved both the problem of the losses and the acquisition of the vessel. The company was in the business of importing machinery to order for its customers. An invoice to one customer simply stated as follows:-

Machinery imported on your behalf as per attached schedule and as quoted

$600,000
Less credit as arranged in respect of traded in motor yacht

($400,000)
Balance due on delivery to your factory

$200,000

 

Needless to say, the motor yacht never appeared in the books of the company. The director of the importing company simply treated the vessel as a personal asset.

Computer forensics

Because they understand the flow of information, the forensic accountant will recognise when information is missing from a computer. They will then use forensic software such as 'Encase' to examine the computer. The forensic accountant connects to the target computer and selects the media (disc, hard drive, USB device etc) for investigation. A duplicate of the original media is created. This protects the integrity of the base data. Investigation is performed on the data image using the tools in Encase. These tools include keyword searches, hash analysis, file signature analysis, filters and compound queries and data encryption. Evidence and investigation results are documented using the Encase reporting function. Any hard drive of any size can be compressed and stored on removable media, allowing the forensic accountant to take evidence with them. Even files that have been deleted, hidden or renamed can be located quickly and easily.

Conclusion

For a liquidator to properly do their job they must take control of the assets and realise them. Without good forensic skills it is not possible for liquidators to recognise all those assets which are capable of being realised.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

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