EXECUTIVES AND FRAUD RISKS Why problems at some major retailers are a warning to executives about their responsibilities. 29 November 2016 12 months ago Some big retailers have been facing major legal problems. Tesco is facing a claim of more than £100M in damages from a group of investors who say that the supermarket giant made misleading statements to the stock market. It is the latest episode in an accounting scandal that emerged two years ago when a £263M black hole was identified in Tesco’s finances. The controversial collapse of BHS is another example of the major headaches caused when the numbers don’t add up: the authorities investigate, vested interests start apportioning blame and many involved have to defend themselves. Neither case seems to indicate a willingness nor the ability to tackle a problem before it becomes too big to manage. Which goes to prove that acting as early as possible can bring rewards – or at least greater protection from prosecution. Investigation A suspicion of problems should be the catalyst for an internal investigation. We carry them out for a range of corporations and organisations. Some suspect they may have problems that need to be identified and tackled, others want to ensure no problems arise. The result can be the creation and implementation of strong, anti-corruption measures that can tackle any current problems and prevent any further ones. Some company executives, however, argue that they have little need for such investigations - or any assistance in preventing fraud. Some claim that it is their accountants who are in the best position to know what is happening as they see all the figures. But there is no guarantee that the accountants will spot wrongdoing. A failure to identify the problem can lead to not only the risk of fraud. It can lead to a company’s collapse and its executives facing serious questioning once it is in administration. Administration The Insolvency Service (IS) will want to discover why a company has had to go into administration. It will consider if there has been incompetence and any breach of the Companies Act. But executives must remember that such an investigation will not necessarily remain a civil law issue. Answers that executives give could later be used in a criminal investigation – making it essential that you seek expert legal advice immediately. If the IS issues a petition for the compulsory winding up of the company or bankruptcy proceedings, the Official Receiver (OR) will be notified and will look into the causes of the winding up of a company. Legislation gives both these bodies significant powers to force those at the top of a company to explain and justify their actions. Insolvency Act 1986 Section 236 of the Insolvency Act 1986 places on officers of a company that has been wound up a duty to provide information in relation to official enquiries. If they fail to do so, the Court can summons them to appear before it. If that person fails to appear before the Court when summonsed the Court may, under Section 236(5), issue a warrant for their arrest. It must be remembered that following winding up orders or voluntary liquidation, the OR will investigate the company’s failure and the conduct of its directors in accordance with the Company Directors Disqualification Act 1986. The OR can also request that information be provided under section 236(2)(a) or Section 236(2)(c) of the Insolvency Act. If you are, therefore, a senior figure of a company that fails because you did not carry out your duties diligently, Section 236 gives the authorities a lot of power when it comes to calling you to account. Truth Section 236 (2) is designed to help discover the truth regarding a company’s problems so that its affairs can be put in order and the liquidation process completed. Any information using Section 236 (2) can then be given to the authorities to either initiate a criminal prosecution or director disqualification proceedings. For this reason, anyone questioned under Section 236(2) must be aware of the possible implications of what they say under interview. The section applies to directors, debtors, shareholders, auditors, solicitors and bankers. Anyone who is questioned under either Section 236(2)(a) or Section 236(2)(c) could later be subject to criminal investigation. Section 236(2)(a) applies to any officer of the company. Anyone questioned under it is legally obliged to answer the questions. Section 236(2)(c) applies to any person that the Court thinks is capable of giving information regarding the business dealings of the company. The distinction between Section 236(2)(a) and Section 236(2)(c) is important. If you are asked under Section 236 to appear before the court for examination, submit a witness statement or produce any records, you may be able to resist if questioned under (2)(c) to resist – that is not an option if you’re questioned under (2)(a). Such situations emphasise the need for expert, specialist legal representation for executives who find themselves in such an unfortunate situation. But they should also make it clear to any executives reading this that the best way to avoid any such problems would be to – as we said earlier – remove the risk of wrongdoing at the earliest possible stage.