The sum of all fears

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An attempt to pinpoint a single alleged incident of fraud can often open up a whole can of worms, offering significant secondary evidence in a case, and this is when an expert accountant can be worth their weight in gold, as Greg Lacey explains

It is often the case that, when an expert accountant is instructed for the defence in an alleged fraud case, they are directed to only investigate specific aspects of the case, typically those identified by the prosecution as being supportive of its case, in the hope that a specific piece of evidence appears to support the defendant's version of events.

However, when assessing a specific issue, an expert accountant often has to review wider financial information to understand the context to any opinion they may form. As a result, the accountant obtains insight into more than the isolated issue they have been specifically asked to address by the defence team. It is here that secondary evidence can come to light, which occasionally compromises other areas of the defendant's case. The wider financial information in fraud cases can be seen as the "soft underbelly" - without a full understanding of which there is always the risk of overlooking something relevant to the case.

Vanishing act

By way of example, in a recent alleged Missing Trader Intra-Community fraud, a review of Her Majesty's Revenue and Customs' reconstruction of accounts was necessary. Its reconstructed figures appeared to show a gross loss of some £1m in monetary terms - a helpful conclusion in the context of trying to portray the trader as being involved in a carousel fraud. However, the internal accountant instructed by HMRC had included the purchase of a consignment of computer chips, but had failed to take account of the value of the chips within closing stock (in itself unusual for a trader allegedly involved in a carousel fraud). Although a box of chips is small in size, it had a value of £2m, which, if adjusted for in the reconstructed accounts, would imply a gross margin of £1m instead of the apparent £1m gross loss.

So far, so good. Unfortunately, during the course of the work a series of other transactions/issues were also identified, which, although not areas instructed to comment upon, certainly fell within an expert accountant's area of expertise. These issues included the making of third-party payments, third-party loan funding - which appeared interest free and had no repayment term - and, in fact, had no documentation at all to support it, and, perhaps more subtly, the accounting records themselves.

While the VAT returns and the VAT records were up-to-date and perfectly maintained, these records almost stood alone and were completely independent of the banking records and the underlying accounting records, which had barely been maintained at all. The very fact that the accounts needed to be reconstructed at all spoke volumes with regard to how poor the general book-keeping had been. This may not have been obvious to a non-accountant, but given the exactness with which the VAT records had been maintained, it just did not make sense from a record-keeping point of view not to maintain the other accounting records to the same standard.

In short, had the business traded to a period end, there would have been an almighty headache when trying to produce year-end accounts. Accounts which, but for minimal effort, could have been straightforward to produce given that the VAT records had been prepared in a meticulous manner.

If asked about this, based on my experience in general practice, my conclusion would have had to have been that the accounting records were not really consistent with what would be expected if someone had been truly interested in the day-to-day performance of the business, let alone interested in complying with the record keeping requirements of the Companies Act.

When all these secondary points were brought to the defence's attention, it became clear that evidence that had at first appeared potentially helpful, actually had a rather more bleak angle to it. However, things were probably not as bleak as they might otherwise have been, had it been left until cross-examination for these other points to come out. After all, there are ways and means of introducing accounting evidence without necessarily calling an accountant as an expert witness.

Point of interest

However, this raises a few further points worth bearing in mind, where exposing the details can be painful but, overall, is probably helpful to the case because it enables a full understanding of the risk of producing expert accounting evidence, identifies points that up until now have not been put forward by the prosecution, but which may well be raised later in court and helps establish a better informed overall picture when it comes to reviewing a pleading.

Occasionally, an experienced forensic accountant will identify issues and aspects arising from a review of the wider financial information that will provide support to a defence team's case that until then had been overlooked, which although particularly subtle, will be no less valid.

To ensure the chances of missing any of these angles are minimum, it is probably always worth taking the time to discuss a case in outline with a forensic accountant. This should generate ideas and angles for consideration and help to make the initial assessment of whether any are worth reviewing further. The main point is that it is impossible to know everything unless it is checked. Ultimately, it is more than likely that it will be in everyone's best interests to understand the full extent of the soft underbelly come what may.

Greg Lacey is managing director of Far Consulting.

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