Vol 9 (2012) - Issue 4

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Challenges of Investigating Fraud-Based Insolvencies in the Current Economic Crisis?

During the past 20 years as a forensic accountant, I have spent considerable time working alongside insolvency practitioners investigating allegations of fraud and recovering the ill gotten gains.
In a career that now spans three decades, it is interesting to look back and reflect on certain economic 'fashions' and trends that have provided the framework for my assignments.
Following the recession in the early 1990s, I was involved in numerous investigations in relation to bank loans that were fraudulently obtained where the borrowers claimed the economic situation meant they could not afford to pay interest, let alone capital repayments. During the 2000s there were a number of investigations of insolvent companies, where in the chaos leading up to the appointment of IPs, assets were being stolen or transferred to related businesses. In the 2010s, I have been carrying out a variety of investigations for banks and investors, many of which are a result of the credit boom in the period leading up to the financial crisis in 2008.
I believe that we have currently got the upper hand when it comes to identifying and investigating fraud. However, fraudsters eventually get wise to advances in our abilities particularly those relating to technology, meaning that forensic accountants always have find new ways to stay one step ahead. And technology aside, the two features most critical to an investigation – access to information and funding – remain as crucial as ever.

Access to information
Back in the early 1990s, I recall browsing through manual ledgers and cash books of the businesses under investigation. Although it was much more labour intensive, there were some advantages to 'physical' ledgers as opposed to ones kept on a computerised accounting package.
When administrators or receivers were appointed, the books and records were normally boxed-up and archived, ready to be pored over by the forensic accountant. A laborious task, undoubtedly, but at least the records still existed.
Moreover, handwritten ledgers gave the experienced investigator a helping hand. I was able to identify suspicious transactions in a cashbook simply by spotting different handwriting. Most of the cashbook was written up by the cashier but there were the odd one or two entries entered in a different hand. A pattern soon emerged – all of those written in the rogue handwriting related to 'services' such as telephone, gas and water. However, the invoices revealed the costs were related to 'consulting', and the recipient company was controlled by the Finance Director’s wife. The Finance Director had unwittingly left his 'fingerprints' all over the cash book.
In this case, our hapless Finance Director was unlucky that his actions were not shielded by the existence of hundreds of bank accounts and numerous subsidiaries in the group which would have taken a lot more time to go through manually.
The advent of computerised book and records make this case obsolete in many ways, but has the rise of 'soft copy' documentation helped track down the fraudsters more easily?
Certainly not in the early days. If we fast forward to the early 2000s, and the many cases investigated following an insolvency, it was all to common for Insolvency Practitioners to dispose of computer systems as soon as possible as part of a process to realise the most marketable assets.
In those days, the accounting and other data was not backed-up or, at best, backed-up on tapes that were normally found to be incomplete or faulty. In the majority of cases, this brought the end to any investigation. Difficult to follow the cash if you do not know where it has gone, and have no records to trace it.
These days we are all more sophisticated users of technology and IPs are much more aware of the pitfalls of disposing of the computer systems without ensuring there are adequate back-ups. On one of my recent assignments, colleagues were able to make back-ups of the accounting, email and file servers. They also secured copies of the back-up tapes, first making sure that they were not faulty. Certain PCs used by directors and other key individuals were 'forensically' imaged to further ensure that any relevant data was preserved.