A Legal Round-up (with emphasis on the naughty bits!) <ul><li>A presentation to the All Wales Chartered Accountants’ confe...
Who am I? <ul><li>A “normal” accountant in public practice for 20 years </li></ul><ul><li>As sole trader, 500 clients incl...
Forensic Experience <ul><li>LITIGATION: </li></ul><ul><li>Loss of profit & con loss </li></ul><ul><li>Business & share val...
Rules of Engagement <ul><li>If you can’t hear me –  shout! </li></ul><ul><li>My funny accent –  shout! </li></ul><ul><li>A...
Outline <ul><li>All for the benefit of you, the GP: </li></ul><ul><li>Fraud </li></ul><ul><li>Fraud </li></ul><ul><li>Frau...
The Slippery Slope - 1 <ul><li>A Ltd, warehousemen, owned imported soya beans which were to be drawn down by C Ltd, to be ...
The Slippery Slope - 2 <ul><li>When C Ltd needed goods, they issued a signed authority to B Ltd, who went to A Ltd’s wareh...
The chronology – part 1 <ul><li>The arrangement started in 2007. </li></ul><ul><li>All went well for 6 months. </li></ul><...
The chronology – part 2 <ul><li>X persuades Z, by making promises, to release a consignment before payment. </li></ul><ul>...
The chronology – part 3 <ul><li>X takes out Z for an expensive meal and “entertainments”.  Z is now a co-conspirator. </li...
The chronology – part 4 <ul><li>Goods continue to be released without release documents. </li></ul><ul><li>A Ltd cannot ob...
The chronology – part 5 <ul><li>Z is summarily dismissed. </li></ul><ul><li>The matter is reported to the local police, wh...
What went wrong? – part 1 <ul><li>C Ltd were under financial pressure through over-extending themselves.  Honest people do...
What went wrong? – part 2 <ul><li>Goods could be released on one signature only. </li></ul><ul><li>Once Z had authorised t...
So what  really  went wrong? <ul><li>This was a fraud waiting to happen. </li></ul><ul><li>Lack of internal control. </li>...
Who was to blame? <ul><li>The MD of C Ltd. </li></ul><ul><li>X and Z. </li></ul><ul><li>The management of A Ltd: </li></ul...
A Ltd - Lessons for the future <ul><li>Take stern action against Z,  “pour encourager les autres” </li></ul><ul><li>Tighte...
Common sense <ul><li>Nick Leeson: </li></ul><ul><ul><li>Barings Bank </li></ul></ul><ul><ul><li>front office, back office ...
Risk factors –  when is fraud more likely? <ul><li>Dominant CEO (Robert Maxwell) </li></ul><ul><li>Extravagant example by ...
More risk factors <ul><li>Subsidiaries with wide geographical spread (Parmalat?) </li></ul><ul><li>Complex structure, no b...
...and an opportunity <ul><li>It is not the task of the auditor to discover fraud (arguably!) –  Kingston Cotton Mill (No ...
What should one do on discovering fraud? <ul><li>Get professional advice -  fast </li></ul><ul><li>Don’t turn computers on...
Why not involve the police? <ul><li>Their  priority is a  conviction </li></ul><ul><li>Your client’s  priority is  surviva...
More common sense <ul><li>Car handwash – “Mr Sparkles” </li></ul><ul><li>Tanning parlours – prime cost? </li></ul><ul><li>...
Money Laundering <ul><li>...is the process whereby the origin of the proceeds of criminal conduct are converted, through a...
Expert witness work <ul><li>Not a “filling in” job </li></ul><ul><li>Fundamental principles:  Competence </li></ul><ul><li...
Share and company valuations <ul><li>A specialised process </li></ul><ul><ul><li>Dividend basis? </li></ul></ul><ul><ul><l...
Share and company valuations <ul><li>Typical Articles of Association: </li></ul><ul><ul><li>“ ... in case of dispute, the ...
Another warning <ul><li>Company Director Disqualification Act 1986: </li></ul><ul><ul><li>Certain criminal offences </li><...
Expert determination <ul><li>Company sale/purchase </li></ul><ul><li>Partnership disputes </li></ul><ul><li>Fee disputes <...
What is mediation? <ul><li>“ Facilitated negotiation” </li></ul><ul><li>The mediator assists the parties to  reach a solut...
An example <ul><li>The business neighbours… </li></ul><ul><li>… had not spoken for TEN YEARS! </li></ul><ul><li>Refused to...
Why does mediation work? <ul><li>The parties are in charge of their own dispute </li></ul><ul><li>All proceedings are in p...
Mediation for accountants <ul><li>Partnership disputes </li></ul><ul><li>Fee disputes </li></ul><ul><li>Employment dispute...
Where the GP may get help <ul><li>Members’ Handbook </li></ul><ul><li>www.icaew.co.uk/members </li></ul><ul><li>029 2050 4...
<ul><li>Any Questions? </li></ul><ul><li>Chris Makin FCA FCMI FAE QDR MCIArb </li></ul><ul><li>Chartered Accountant </li><...
Upcoming SlideShare
Loading in …5
×

ICAEW All Wales 020409

516 views
440 views

Published on

A Legal Update for accountants with emphasis on the naughty bits

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
516
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

ICAEW All Wales 020409

  1. 1. A Legal Round-up (with emphasis on the naughty bits!) <ul><li>A presentation to the All Wales Chartered Accountants’ conference </li></ul><ul><li>on 3 April 2009 </li></ul><ul><li>by </li></ul><ul><li>Chris Makin FCA FCMI FAE QDR MCIArb </li></ul>
  2. 2. Who am I? <ul><li>A “normal” accountant in public practice for 20 years </li></ul><ul><li>As sole trader, 500 clients including 2 plcs, family businesses, market traders, tax clients, etc </li></ul><ul><li>Then a forensic accountant & expert witness for 20 years - </li></ul><ul><li>- of which also a mediator for the last 10 years </li></ul><ul><li>14 years a sole practitioner, then mergers: 16, 60, 250 partners </li></ul><ul><li>First managing partner of Leeds office of RSM Bentley Jennison, then National Head of Litigation </li></ul><ul><li>“ Retired” but </li></ul><ul><li>Freelance expert & mediator for 3 years </li></ul><ul><li>... and long may it last! </li></ul>
  3. 3. Forensic Experience <ul><li>LITIGATION: </li></ul><ul><li>Loss of profit & con loss </li></ul><ul><li>Business & share valuation </li></ul><ul><li>Matrimonial valuations </li></ul><ul><li>Partnership disputes </li></ul><ul><li>Professional negligence </li></ul><ul><li>Criminal fraud investigations </li></ul><ul><li>Money laundering </li></ul><ul><li>Personal injury & fatal accidents </li></ul><ul><li>Drug trafficking etc asset tracing and confiscation </li></ul><ul><li>MEDIATION: </li></ul><ul><li>Partnerships & share valuations </li></ul><ul><li>Company sale & purchase </li></ul><ul><li>Section 994 </li></ul><ul><li>Construction </li></ul><ul><li>Rights of way & boundaries </li></ul><ul><li>Defamation </li></ul><ul><li>Intellectual property </li></ul><ul><li>Professional negligence </li></ul><ul><li>Business interruption </li></ul><ul><li>Housing disrepair </li></ul><ul><li>ToLATA </li></ul><ul><li>Employment </li></ul>
  4. 4. Rules of Engagement <ul><li>If you can’t hear me – shout! </li></ul><ul><li>My funny accent – shout! </li></ul><ul><li>Any pressing issues – shout! </li></ul><ul><li>Tops of heads – I will shout! </li></ul>
  5. 5. Outline <ul><li>All for the benefit of you, the GP: </li></ul><ul><li>Fraud </li></ul><ul><li>Fraud </li></ul><ul><li>Fraud </li></ul><ul><li>Money laundering </li></ul><ul><li>Valuations </li></ul><ul><li>Expert Witness </li></ul><ul><li>Expert Determination </li></ul><ul><li>Mediation </li></ul><ul><li>Where you can get help </li></ul>
  6. 6. The Slippery Slope - 1 <ul><li>A Ltd, warehousemen, owned imported soya beans which were to be drawn down by C Ltd, to be paid for on weekly account. </li></ul><ul><li>At A Ltd, Z was responsible for releasing them, on the signed authority of C Ltd. </li></ul><ul><li>B Ltd, the carriers, employed X. </li></ul>
  7. 7. The Slippery Slope - 2 <ul><li>When C Ltd needed goods, they issued a signed authority to B Ltd, who went to A Ltd’s warehouse and withdrew them. </li></ul><ul><li>So X (of B Ltd) handed C Ltd’s signed authority to Z (of A Ltd), who allowed the goods to be removed from store and loaded onto B Ltd’s trucks. </li></ul>
  8. 8. The chronology – part 1 <ul><li>The arrangement started in 2007. </li></ul><ul><li>All went well for 6 months. </li></ul><ul><li>The routine became familiar. </li></ul><ul><li>C Ltd suffered cash flow problems, and tried to sell soya beans before it paid for them. </li></ul><ul><li>C Ltd persuaded X to withdraw goods without a signed authority </li></ul><ul><li>C Ltd is B Ltd’s main customer , so X could not refuse. </li></ul>
  9. 9. The chronology – part 2 <ul><li>X persuades Z, by making promises, to release a consignment before payment. </li></ul><ul><li>A release document from B Ltd is received a week late, as promised – this builds confidence. </li></ul><ul><li>X again persuades Z, by use of deceit, to release beans before payment. </li></ul><ul><li>But now there is no release document. </li></ul><ul><li>Z has not followed correct procedure, and he is now vulnerable . </li></ul>
  10. 10. The chronology – part 3 <ul><li>X takes out Z for an expensive meal and “entertainments”. Z is now a co-conspirator. </li></ul><ul><li>THIS IS THE POINT OF NO RETURN – EVERYTHING WHICH FOLLOWS IS INEVITABLE </li></ul>
  11. 11. The chronology – part 4 <ul><li>Goods continue to be released without release documents. </li></ul><ul><li>A Ltd cannot obtain payment for goods sold to C Ltd, since there is no proof the goods have been collected. </li></ul><ul><li>A week-long investigation discovers what has happened. </li></ul>
  12. 12. The chronology – part 5 <ul><li>Z is summarily dismissed. </li></ul><ul><li>The matter is reported to the local police, who arrest Z, X, and the MD of C Ltd. </li></ul><ul><li>The police seize all the financial records, so that civil recovery of goods or money is hampered. </li></ul><ul><li>A Ltd suffers severe shortage of cash and no means to collect; it goes into administration; all A Ltd’s staff lose jobs. </li></ul>
  13. 13. What went wrong? – part 1 <ul><li>C Ltd were under financial pressure through over-extending themselves. Honest people do strange things when they are under financial pressure. </li></ul><ul><li>Z was vulnerable, being the only person needed to authorise release of these goods </li></ul>
  14. 14. What went wrong? – part 2 <ul><li>Goods could be released on one signature only. </li></ul><ul><li>Once Z had authorised the release of goods without a release document he was vulnerable, and once he had been treated to the dinner and “extras” he became a co-conspirator. </li></ul>
  15. 15. So what really went wrong? <ul><li>This was a fraud waiting to happen. </li></ul><ul><li>Lack of internal control. </li></ul><ul><li>The slippery slope - </li></ul><ul><li>QED </li></ul>
  16. 16. Who was to blame? <ul><li>The MD of C Ltd. </li></ul><ul><li>X and Z. </li></ul><ul><li>The management of A Ltd: </li></ul><ul><ul><li>Weak internal controls </li></ul></ul><ul><ul><li>Not regularly checking the goods in store </li></ul></ul><ul><li>The auditors: </li></ul><ul><ul><li>Not verifying physical quantities </li></ul></ul><ul><ul><li>Not advising on weak internal controls </li></ul></ul>
  17. 17. A Ltd - Lessons for the future <ul><li>Take stern action against Z, “pour encourager les autres” </li></ul><ul><li>Tighten internal controls </li></ul><ul><li>Auditors to make unannounced visits? </li></ul><ul><li>Recruit carefully </li></ul><ul><li>Sack and sue the auditors?!?? </li></ul><ul><li>Insist on checking stock levels in future – don’t become lax, don’t be fobbed off </li></ul>
  18. 18.
  19. 19.
  20. 20.
  21. 21.
  22. 22. Common sense <ul><li>Nick Leeson: </li></ul><ul><ul><li>Barings Bank </li></ul></ul><ul><ul><li>front office, back office </li></ul></ul><ul><ul><li>cash calls when huge profits being made? </li></ul></ul><ul><li>Barlow Clowes/Bernard Madoff: </li></ul><ul><ul><li>If it looks too good to be true... </li></ul></ul>
  23. 23. Risk factors – when is fraud more likely? <ul><li>Dominant CEO (Robert Maxwell) </li></ul><ul><li>Extravagant example by management (Conrad Black) </li></ul><ul><li>Low staff morale </li></ul><ul><li>Staff not taking holidays </li></ul><ul><li>Staff retaining tasks when promoted </li></ul><ul><li>“ Nothing is too much trouble” </li></ul><ul><li>Expensive lifestyle not supported by pay </li></ul><ul><li>Lack of Board support for internal controls </li></ul><ul><li>Treasury or IT controls not understood by top management – leave ‘em to it </li></ul>
  24. 24. More risk factors <ul><li>Subsidiaries with wide geographical spread (Parmalat?) </li></ul><ul><li>Complex structure, no business reason, in shady jurisdictions (BVI, Antigua, Nigeria ) </li></ul><ul><li>Special purpose vehicle with no obvious purpose </li></ul><ul><li>Performance related pay/results at any cost (bankers...bankers...bankers...) </li></ul><ul><li>New employees – always follow up references </li></ul><ul><li>Lack of an anti-fraud policy </li></ul>
  25. 25. ...and an opportunity <ul><li>It is not the task of the auditor to discover fraud (arguably!) – Kingston Cotton Mill (No 2) 1896: “The auditor is a watchdog, not a bloodhound.” </li></ul><ul><li>Bolam –v- Friern Hospital Management Committee [QBD 1957] </li></ul><ul><li>Why not offer your clients an anti-fraud health check– you’re bound to find something to justify the fee! </li></ul><ul><li>“ Trust in God, but tether your camel first” – </li></ul><ul><li>old Sufi proverb </li></ul><ul><li>“ Trust your enemies, but carry a big stick.” – </li></ul><ul><li>FD Roosevelt </li></ul>
  26. 26. What should one do on discovering fraud? <ul><li>Get professional advice - fast </li></ul><ul><li>Don’t turn computers on or off </li></ul><ul><li>Don’t report to the police </li></ul><ul><li>Don’t use own auditors to investigate </li></ul><ul><li>Get in a team of professionals to handle the whole project: specialist lawyers, forensic accountants, IT specialists, HR specialists, MRMs </li></ul>
  27. 27. Why not involve the police? <ul><li>Their priority is a conviction </li></ul><ul><li>Your client’s priority is survival </li></ul><ul><li>So concentrate on recovering money and assets </li></ul><ul><li>Bradford & Bingley BS £100m mortgage scams = nationalisation. When the tide goes out... </li></ul><ul><li>Freezing orders ( Mareva injunctions) </li></ul><ul><li>Search & seize orders ( Anton Pillar orders) </li></ul><ul><li>SFO Annual Report for 2008: </li></ul><ul><ul><li>65 ongoing cases, value £4,800million </li></ul></ul><ul><ul><li>11 freezing orders, value £201million </li></ul></ul><ul><ul><li>8 confiscation orders, value £42.3million </li></ul></ul><ul><ul><li>So they recovered 0.88% of the assets at risk! </li></ul></ul>
  28. 28. More common sense <ul><li>Car handwash – “Mr Sparkles” </li></ul><ul><li>Tanning parlours – prime cost? </li></ul><ul><li>Casinos, horses, dogs </li></ul><ul><li>Cars paid for & returned </li></ul><ul><li>Solicitors holding funds pending deals: Gene Gibson & Jonathan Duff </li></ul>
  29. 29.
  30. 30. Money Laundering <ul><li>...is the process whereby the origin of the proceeds of criminal conduct are converted, through a cycle of transactions, into financial assets which appear to have legitimate origins. </li></ul><ul><li>ICAEW Members’ Handbook 2009 pages 647 -776 (130 pages!) </li></ul><ul><li>HMCE £3.5million </li></ul>
  31. 31. Expert witness work <ul><li>Not a “filling in” job </li></ul><ul><li>Fundamental principles: Competence </li></ul><ul><li>Civil Procedure Rules </li></ul><ul><li>Criminal Procedure Rules </li></ul><ul><li>ICAEW Forensic SIG </li></ul><ul><li>Stick & carrot </li></ul><ul><li>Accreditation </li></ul><ul><li>We will help serious “wannabees” </li></ul>
  32. 32. Share and company valuations <ul><li>A specialised process </li></ul><ul><ul><li>Dividend basis? </li></ul></ul><ul><ul><li>Assets basis? </li></ul></ul><ul><ul><li>Earnings basis? </li></ul></ul><ul><li>“ To whom, and for what purpose?”: </li></ul><ul><ul><li>Sale of entire business (company or its net assets?) </li></ul></ul><ul><ul><li>On divorce </li></ul></ul><ul><ul><li>Employee shareholding recovered on departure </li></ul></ul><ul><ul><li>Probate </li></ul></ul><ul><ul><li>Unfair prejudice prayer for relief (Sec 994, Companies Act 2006) </li></ul></ul>
  33. 33. Share and company valuations <ul><li>Typical Articles of Association: </li></ul><ul><ul><li>“ ... in case of dispute, the auditors of the company shall be required to value the shares the subject of the dispute, acting as experts not as arbitrators...” </li></ul></ul><ul><li>BUT see Auditing Practices Board Ethical Standard 5: Non-Audit Services Provided to Audit Clients: </li></ul><ul><li>1 APB Ethical Standard 1 requires the audit engagement partner to identify and assess the circumstances which could adversely affect the auditors’ objectivity (‘threats’), including any perceived loss of independence... </li></ul><ul><li>54 The audit firm should not undertake an engagement to provide a valuation to an audit client where the valuation would both: </li></ul><ul><ul><li>involve a significant degree of subjective judgment; and </li></ul></ul><ul><ul><li>have a material effect on the financial statements. </li></ul></ul>
  34. 34. Another warning <ul><li>Company Director Disqualification Act 1986: </li></ul><ul><ul><li>Certain criminal offences </li></ul></ul><ul><ul><li>Failure to keep proper accounting records </li></ul></ul><ul><ul><li>Failure to prepare and file annual accounts and returns </li></ul></ul><ul><ul><li>Allowing a company to trade when directors knew, or should have known, it was insolvent </li></ul></ul><ul><ul><li>Failure to pay the company’s taxes on time </li></ul></ul><ul><li>Re Carecraft Construction Co Ltd [1994] 1 WLR 172 </li></ul><ul><li>ICAEW Disciplinary Action </li></ul><ul><li>Your Support Member </li></ul>
  35. 35. Expert determination <ul><li>Company sale/purchase </li></ul><ul><li>Partnership disputes </li></ul><ul><li>Fee disputes </li></ul><ul><li>IT, IP, business & contract disputes </li></ul><ul><li>Features & benefits: </li></ul><ul><ul><li>Not arbitration </li></ul></ul><ul><ul><li>No set procedure </li></ul></ul><ul><ul><li>Flexible evidence gathering & representations </li></ul></ul><ul><ul><li>Private </li></ul></ul><ul><ul><li>No appeal </li></ul></ul><ul><ul><li>No need to give reasons </li></ul></ul><ul><li>Choose the right person for the job, or apply to President of ICAEW </li></ul>
  36. 36. What is mediation? <ul><li>“ Facilitated negotiation” </li></ul><ul><li>The mediator assists the parties to reach a solution they can live with </li></ul><ul><li>The parties are in charge throughout the process; the mediator merely assists them to negotiate </li></ul><ul><li>Far cheaper and quicker than litigation </li></ul><ul><li>A hugely successful process! </li></ul>
  37. 37. An example <ul><li>The business neighbours… </li></ul><ul><li>… had not spoken for TEN YEARS! </li></ul><ul><li>Refused to join in first joint session </li></ul><ul><li>“ Gentrification” of a run-down area </li></ul><ul><li>Tarmac yard </li></ul><ul><li>Water ingress </li></ul><ul><li>£100,000 loss of profits per expert “report” </li></ul><ul><li>Rights of Way </li></ul><ul><li>Access to premises </li></ul><ul><li>The mediator works on the true aims of the parties </li></ul>
  38. 38. Why does mediation work? <ul><li>The parties are in charge of their own dispute </li></ul><ul><li>All proceedings are in private, with no publicity </li></ul><ul><li>The mediator listens, but does not give any advice or make any judgement </li></ul><ul><li>In private sessions, the mediator gently discovers the true nature of the problem, and the compromise which would be acceptable to both </li></ul><ul><li>Many solutions involve an agreement which a court could never order </li></ul><ul><li>Litigation destroys relationships; mediation often restores them </li></ul><ul><li>Everything is without prejudice, and anything told to the mediator will never be repeated in subsequent hearings </li></ul>
  39. 39. Mediation for accountants <ul><li>Partnership disputes </li></ul><ul><li>Fee disputes </li></ul><ul><li>Employment disputes </li></ul><ul><li>Professional negligence </li></ul><ul><li>Clients with disputes: </li></ul><ul><ul><li>Sale/Purchase disputes </li></ul></ul><ul><ul><li>Valuation (eg Sec 459, matrimonial) </li></ul></ul><ul><ul><li>Personal injury </li></ul></ul><ul><ul><li>Business interruption </li></ul></ul>
  40. 40. Where the GP may get help <ul><li>Members’ Handbook </li></ul><ul><li>www.icaew.co.uk/members </li></ul><ul><li>029 2050 4595 </li></ul><ul><li>Your Support Member </li></ul><ul><li>www.caba.org.uk </li></ul><ul><li>www.chrismakin.co.uk </li></ul>
  41. 41. <ul><li>Any Questions? </li></ul><ul><li>Chris Makin FCA FCMI FAE QDR MCIArb </li></ul><ul><li>Chartered Accountant </li></ul><ul><li>Accredited Mediator </li></ul>

×