FORENSIC ACCOUNTANTS: There are no substitutes!

 3 May, 2013

Our role as forensic accountants require us to independently critique and form an opinion, in a range of relevant areas, including analysing other expert’s reports.

As a result of the current difficult economic climate we operate in, I am finding we are increasingly being called upon to critique the work undertaken by non-Forensic Accountants. What we are seeing is a range of professionals, eg. business services accountants and solicitors who (as part of the professional service provided) are undertaking financial analysis and forming opinions which I consider are outside their respective areas of expertise.

As an example, one accountant’s report recently reviewed, attempted to quantify losses arising from a termination and extinguishment of a commercial lease. The methodology adopted appeared to be a combination of two separate valuation methodologies to quantify the loss of valuation of the business. A third methodology was then adopted to assess the loss of profits and then added to the figure calculated for the business value.

The methodology adopted by the accountant was flawed. Thankfully, in this instance, the matter settled, and the accountant in question is none the wiser. Unfortunately, the accountant continues to operate in ignorance. Should any similar matter not settle and end up before the court, it is unlikely the Court would have accepted the report (notwithstanding the flawed methodology), but more likely because of a lack of actual independence, ie. the accountant was the tax and business services accountant for the business.

A further example is a solicitor who undertook their own internal financial analysis on behalf of their client in attempt to “save money” rather than engaging an independent forensic accountant. A practice I consider fraught with danger, not in the best interest of their client and unfortunately, resulted in significant financial detriment to all parties involved.

This matter involved a review of the decision of a statutory authority, to revoke an individuals’ licence to operate on the basis of insolvency.

Our review identified the decision of the authority appeared to be based on a review undertaken by the solicitor engaged by the authority, and was based on the assumption the business “had” to be insolvent in prior financial years because the balance sheet showed accumulated losses carried forwards from the prior year.

Forensic Accounting Queensland, identified, (amongst a number of other factors showing Solvency) the company had in fact been solvent in previous financial years, however the profits had been absorbed by the accumulated losses from earlier financial years when the company was commencing operations.

These examples highlight the solicitor was clearly outside their area of expertise and the business accountant/tax agent as well.

The above highlights the following:

  • The importance of engaging the correct professional to assist,
  • Accountants who only prepare financial statements and tax returns are not Forensic Accountants,
  • Solicitors practice law and should not attempt to undertake complex financial analyses.
  • Trying to “Save money” by not engaging the appropriate expert is likely to result in costing the client a lot more both financially and otherwise.
Steven Ponsonby is a Chartered Accountant FCA, a Certified Fraud Examiner CFE and Insolvency Practitioner RITP and is the founding Director of Forensic Accounting Pty Ltd, a leading independent forensic accounting practice, providing forensic accounting services and expertise to a broad spectrum of clients across Australia.