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Investigating Civil Fraud - The Role of Forensic Accountants

Author: Nicola Sharp  3 October 2023
3 min read

Forensic accountants investigate the financial records of a company or an individual to uncover evidence of misconduct or fraud.

In cases of complex civil fraud, the role of the forensic accountant is usually critical to building a case against the defendant and managing the outcome of the case.

Establishing if a Fraud has Taken Place

The first task of a forensic accountant in a civil fraud claim is to establish whether or not a fraud has taken place.

The claimant may have a suspicion that fraudulent or dishonest behaviour has taken place. But given that a person who carries out a fraud is concerned with concealing their actions, often the evidence is difficult to pinpoint.

A forensic accountant will unearth data and information that indicates the nature of the fraud through:

  • Analysis of banking records and financial transactions.
  • Reviews of management accounts.
  • Identifying anomalies in the financial records.
  • Considering any data that is missing.

The last bullet point, which may be summarised as ‘identifying the unknown’, is an invaluable skill in civil fraud cases. Only experienced professionals are able to recognise omissions and find data that has been deliberately concealed.

Deciding Whether or Not to Pursue the Claim

If the evidence suggests that a fraud has taken place, then the claimant has a decision to make about whether or not they pursue the claim. Civil fraud cases are often lengthy, stressful, time-consuming, and expensive.

So before a claimant launches into litigation, they need to know if the defendant is ‘good for the money.’ In other words, does the defendant have substantial assets to cover an adverse award in damages and costs against them?

A forensic accountant can uncover this vital information. They dig into the financial records of a company or individual and work out what the assets are, and where they are located.

Calculating Loss

Proving loss is an essential part of any claim. Without loss, there is no claim.

But proving and calculating loss in cases of civil fraud is particularly complex. For example, if a business has been acquired at a price of £5 million, but it was subsequently identified that the price was founded on fraudulent misrepresentations, how do you re-evaluate the price the buyer should have paid for the business?

An accountant will prepare valuations of a business and business assets to help answer that question. In other cases of fraud, they will review the financial records to discern how much money has been obtained fraudulently, and feed that into the calculations for loss.

Identifying Stolen Assets

Given that the nature of fraud involves dishonesty and deception, it is often a challenge to identify the whereabouts of stolen assets for the purpose of recovery.

Forensic accountants will deploy their expertise to essentially ‘follow the money’. They identify where the money has ended up, and whether or not assets have been dissipated.

This is particularly helpful in the early stages of a civil fraud claim so that assets can be frozen promptly, and effectively ring-fenced until the outcome of a trial.

In the cryptocurrency space, these tracing skills are vital for revealing the identity of fraudsters, and establishing the location of stolen cryptocurrency. Forensic accountants link digital wallets to their owners by examining transactions, and analysing internet histories. They will review the blockchain and analyse the public ledger to determine where certain cryptocurrencies have ended up.

Preparing Expert Reports

The forensic accountant is responsible for illuminating the financial aspects of the claim to the court through their expert report.

An expert report may only be required for a discreet element of the claim. In all cases expert evidence is restricted to “that which is reasonably required to resolve the proceedings[1] (CPR 35.1). The scope of the expert’s evidence is usually decided at an early Case Management Conference.

The sorts of issues which a forensic accountant may be required to provide expert evidence on include:

  • Explaining the nature of the financial crime.
  • Explaining the correct way to calculate loss.
  • Why, on the balance of probabilities, the evidence indicates that a fraud has taken place.

A forensic accountant acting as an expert witness may also be cross examined in court on his / her report. Their methodology and conclusions will be scrutinised to determine how robust the case is, on the particular points that require expert input.

A Team of Professionals

In practice, a complex claim for civil fraud will usually require a team of professionals including solicitors, counsel, and forensic accountants. Our roles are intertwined in establishing the nature of the claim, causation and loss and we work together to recover stolen assets for our clients.

References:

  1. Ministry of Justics PART 35 - EXPERTS AND ASSESSORS
    https://www.justice.gov.uk/courts/procedure-rules/civil/rules/part35
Nicola Sharp C 09983

Nicola Sharp

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nicola.sharp@rahmanravelli.co.uk
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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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