Forensic accounting is the practice of binding together accounting and auditing with investigative skills to assist in legal matters. It is primarily used in areas such as litigation support, investigation, and dispute resolution.

 

The return paid to the preference shareholders was substantially higher than was paid by a bank for a similar deposit.

The company was set up and owned by two brothers and a computer specialist. The latter was responsible for designing a real time transaction processing system which ensured that retailers were paid the day after a credit card transaction took place.

The company used high profile advertising and marketing techniques to attract new investors and credit card customers. Its offices were very smartly decorated and were located in a prominent position in the town. However, the trading practices of the company were raising questions in the minds of senior government officials. The Forensic Accountant was appointed to review the activities of the company and to report on any likelihood of breaches of the Companies Act or possible insolvency.

Methodology

A meeting was held with the Directors of the company. They provided details of the structure of the group companies, and its ownership. They also explained how the business worked but directed all inquiries to the (newly appointed) financial controller for any financial information about the group. They insisted that there had been a misunderstanding and that the group was a going concern.

The review of the financial records did not provide any degree of optimism about the Directors' statements. It quickly became apparent that the company was insolvent and that the Directors had taken out some £1.9 million loans from the company. Further, the main assets of the company were accounts receivable of approximately £7.5 million. It was clear that there was substantial doubt concerning the collection of the majority of these. Indeed the company had no provision for bad debts.

Further investigation indicated the group structure had been altered with a view to defrauding creditors; prospectuses issued in relation to the redeemable preference shares had been misleading and one of the directors rebuilt his house at a cost of nearly £1 million using loans from the company.

A liquidator was appointed by the creditors shortly after the appointment of the Forensic Accountant.

Result

The report pointed to a number of illegal actions by the Directors and their agents. The Directors contested the appointment of a liquidator in court, however, their case was dismissed, partly on the basis of the Forensic Accountant's report. From the liquidation, investors are due to receive less than 50p on the £ and the Directors have been evicted from their houses which were later sold.