United Kingdom
Forensic Accounting and the Lifecycle of a Company - Mark Underwood
I was recently asked the question “at what point in a company’s life are forensic accountants most involved, specifically, is this during the start up of a company, during its life, at acquisition/sale or at the end?
In my view, this is a fascinating question, the answer to which can be obtained by walking through the company’s lifecycle whilst considering the type of matters that the BDO forensic team are involved in on a regular basis.
On the acquisition of a company, there may well be disputes in relation to breaches of warranties or based on what should or shouldn’t be included in the completion accounts. These are a considerable source of work, especially by way of expert determination, a clause for which is often included in sale and purchase agreements.
As the company progresses through its life many issues can arise.
Professional negligence can affect a company at any time in its life - be it a firm of lawyers, accountants or other professionals. Quantifying these losses is essential if they are to be recovered. Likewise, the company can suffer an interruption to its business leading to a loss of profits at any point in its life. This can for example be as a result of an event such as a fire or due to the breach of a contract or other agreement. The more developed the business is the more complicated and higher value this claim is likely to be.
We find that patents and IP disputes can arise early in the life of a company because competitors seek to strangle the company at birth or, further down the line, when the company introduces competing products. Much later in the company’s lifecycle, royalty disputes can arise as a result of licensing out their product or a dispute involving royalties on products they have themselves licensed.
Fraud can occur at any time and this can manifest itself in the form of fraud by employees or directors of a company or, alternatively, by external parties.
When a company becomes older and more established family frictions can cause divorce and ultimately there may be a need for a valuation of the business so that the husband (generally) can pay the wife as part of a matrimonial settlement. Equally, when companies are passed down through a number of family generations, shareholdings that were initially simple become dispersed amongst a number of family members and disputes become more likely. Prejudice on minority shareholders becomes more common and S994 claims can arise.
Finally, when companies at the end of their lives enter into an insolvency procedure (for example administration or liquidation), then forensic accountants can be involved to claw back illegal dividends to identify preferences, to highlight directors’ misfeasance/wrongful/ fraudulent trading and to generally recover monies for creditors.
In my view therefore the answer to the initial question is in fact that forensic accountants are involved at all stagesof a company’s lifecycle rather than at any particular point in time and this also illustrates the diversity of matters that a forensic team can be involved in.
If you would like to discuss any of the areas highlighted in this article please contact:
Mark Underwood, Forensic Accounting Director, on 0161 817 7570.
JULY 2012
Your comments
A very interesting article, Mark. I am sure that if asked, you could produce a case study for eac of the stages you have identified, all based on real events. Thank you for sharing your thoughts.