An enormous amount of time and effort is put into any litigation process, and getting the most out of it is of paramount importance. Most law firms invariably use a forensic accountant where there are accountancy issues in their litigation, but getting the most out of any expert witness is another matter.
Sweeping changes in litigation are putting increasing pressure on the litigation process. The Woolf Report, difficulties with conditional and contingency fees and the pressures placed by insurance companies and legal expenses insurers have posed new challenges for litigators across the UK.
The Woolf reforms, in particular, will require very close liaison and understanding between the litigator and their experts, from the earliest stages of the dispute. The whole tenor of the Woolf reforms is openness up-front. This will mean that experts have to be brought in much earlier than has been the case historically.
An additional pressure is that of ‘Part 36 Offers’. Under the new Civil Procedure Rules (CPRs), which came into force on 26 April, both sides can now make offers which have the effect of payments into court. And there are swingeing penalties if the party has got it wrong at the outset. A court can order a defendant, who has made an inadequate offer, to pay, in addition to damages, interest at up to 10% over base rate and costs on an indemnity basis. Thus early and accurate advice as to the merit of the case – on both liability and quantum – is now essential.
KPMG’s forensic accounting team is providing an increasing number of services for litigators in assisting them to calculate and provide evidence of quantum, to follow up fraud and trace funds, and to express an opinion on an accountant’s standard of care in negligence actions.
An early understanding of the issues being faced by the forensic accountant will ultimately help make a lawyer’s litigation – to the extent in which it involves accountants and accountancy topics – more effective and beneficial.
Getting beneath the surface of accounts
Whatever sort of litigation is involved, the forensic accountant will invariably end up having to look at a set of accounts at some time or another.
For example, in personal injury or matrimonial work, if one of the parties involved is self-employed or involved in the family company, the accounts will be pivotal to the expert’s work. Similarly, in professional negligence cases against accountants or solicitors, or in a contractual dispute, then it is almost certain that a highly-detailed analytical review of the profits or assets shown by the accounts will be required.
The first and most essential matter to consider is whether the accounts being considered were audited. If so, then they may be considered more reliable than unaudited accounts, but only to a point.
If audited, it is important to look at the constraints placed on an auditor’s activity, the legal duties of the auditor, the purpose for which the accounts were produced, the actual wording of the audit report and all the disclosures contained in the notes to the accounts and in the directors’ report.
For example, if a plaintiff in a contractual dispute claims that his business (a limited company) suffered a catastrophe because of the defendant’s actions or misdeeds, then it will be important to see whether the directors of the plaintiff company referred to this catastrophe in their contemporary directors’ report on the accounts. It is surprising how often a company’s explanations for losses made at the time it published its accounts differ from those subsequently put forward in litigation.
A second requirement will be to consider consistency. It is a fact that there are many acceptable ways of, for example, valuing stock or land, or calculating depreciation of fixed assets.
To conclude on a profit trend, or to compare the accounts of different businesses, will be invalid unless the accounts have had all inconsistencies removed. In loss of profits cases, the claim for damages must be put in the context of the company’s general financial position disclosed in the relevant statutory accounts.
Graphs are useful. Sometimes a graph showing results over several years will demonstrate clearly that a claim is overstated – for example, if the year in which the problem arose was purported to be the one year in which the company would have done exceedingly well but for the problem, in comparison with actual figures drawn from audited accounts.
These are the basic aspects of where the forensic accountant’s work can assist, indeed is essential, in litigation involving accounts.
