Forensic Accounting Case Studies

Civil

Here are some civil cases Chris has dealt with:

Shareholder & Partnership Disputes

Case 1 – Why ever did the parties refuse to mediate?

Chris has often acted as expert for one party or another in such matters, including the tracing and evaluation of diverted trade. With one such case, a S994 dispute, the hearing went part heard three times and costs escalated. The parties remained at loggerheads despite the judge urging them to mediate.

Parties insist on their day in court

Towards the end, the judge spoke very sternly, “over the heads of your lawyers directly to you two sensible businessmen who used to be friends”, urging them to ask for help from a mediator. They would not listen. Afterwards, Chris spoke to the other expert, a friend who was also a mediator, saying that he had been encouraging his side to mediate, but been told that the other side would not consider it. “Funny, that” said Chris’s friend; “that’s exactly what my side have been saying about your lawyers…”

The saving in costs would have been great

Instead of four part-heard hearings for several days each, Chris’s experience with many such cases is that the dispute could have been settled in a day with a mediator’s help. The saving in costs would have been huge.


Case 2 – The stolen accountancy practice

In an accountancy practice, a disaffected partner took clients and staff with him, and set up in competition with his old firm.

Chris took used an unusual method of ADR

There was clearly no sense in trying to restore the partnership; the need was for the departing partner’s goodwill etc to be quantified. Chris was appointed SJE to quantify the diverted profits and the value of goodwill, work in progress etc. He interviewed both sides and established a good rapport with all concerned.

In a teleconference he explained to lawyers on both sides that this dispute could probably be settled if he were allowed to mediate it. The lawyers were interested, but feared that they would have to appoint another expert if mediation were to fail.

Chris offered a choice of dispute resolution

So, again at Chris’s suggestion, he was appointed expert determiner, and the case was brought to an end at modest cost.

Insurance Claims

The true motive for the insurance claim

An insurer will be interested to learn whether there were signs of strain in a business, which might have induced the owner to set fire to their premises or vehicles.

Chris’s work revealed the strains in the business

A transport contractor had a business which on the face of it was very successful: a rapidly increasing business delivering containers from Felixstowe with a rapid increase in the fleet on hire. But Chris found that expansion had been too rapid, and cash flow problems were severe. The owner had attempted to “torch” his fleet of 22 lorries and his Porsche on New Year’s Eve, ostensibly lined up for a publicity shot by drone, but in fact to lodge a false insurance claim. His claim failed on two counts: the wind was blowing the wrong way (!!) and he lost only two trucks; and late disclosure of his bank manager’s file showed that he had told that manager, shortly before the fire, that an expected insurance claim would solve his cash flow difficulties!

The insurer was able to avoid the claim

It is seldom so easy to avoid a claim, but careful review of the finances of a business before a fire is often “illuminating”.

Business Interruption & Consequential Loss

This is a major part of Chris’s work, acting for the claimant, the defendant/insurer, or as SJE. Whether caused by a factory fire, blocked access to business premises, theft of a customer list, death or injury of the “rainmaker”, or any other cause, he is required to quantify the “would have been” but for the interruption.

The backroom work

He does this by careful examination of the performance of the business before the event, and review of comparable businesses and other factors to express his opinion. His chapter from Kemp & Kemp on loss of profits for the self employed and family company directors shows his deep understanding of business and what may affect its performance.

Reputation

Chris has been complimented on his clarity of thought and opinions, by judges and those instructing him, on many occasions.

Product Liability

Claimant abandoned £330k claim after Chris disclosed his findings

A manufacturing company was defending a claim from another party, alleging loss of £330,000 in profit caused by a faulty set of blades in a cutting platen.

Analysis revealed other factors contributed to the claimant’s losses

Chris meticulously reviewed the production records to identify any losses caused by downtime of the faulty cutting platen. He discovered and was able to demonstrate that a significant amount of the losses claimed had actually been caused by many other factors, including materials supply, labour shortage, power outages and routine maintenance shutdown.

He demonstrated that the loss as a result of downtime for the faulty tool was, in fact, just £105.

The claim is abandoned, and all the defendant’s legal costs are paid

As soon as Chris’s report was disclosed, and it was shown that the actual losses caused by the faulty platen amounted to 0.132% of the amount claimed, the claim was abandoned and the claimant also paid all the defendant’s costs.

Intellectual Property

How a £6m claim for loss of sale of a company was rebutted

Chris’s client had invented and patented a system which prevented customers from stealing trolleys from supermarkets. It was licensed to another company, who planned to sell the business thereby created. But that company alleged that the inventor, in meetings with the potential purchasers, had given away secrets which caused the sale to fail, and they sued him for the £6 million which they said they would have received in the sale.

Chris investigated and gave expert evidence in the High Court

Chris found the flaws in the claimant’s arguments, and gave expert evidence that mainly comprised a lengthy explanation to a recently appointed high court judge on how a company is valued.

The £6million claim is abandoned

After the hearing but before judgment, the case settled with the claimants abandoning the claim and paying virtually all the defendant/inventor’s costs, he agreeing to pass the business to them. But the product by now was obsolete, and the inventor had since invented a different system for securing supermarket trolleys.

Director Disqualification

Beware Carecraft Construction!

Where a company fails and the directors’ performance is found wanting, proceedings can be taken under the Company Director Disqualification Act to ban them from company management for a period of up to 15 years.

Chris’s experience in such cases

Although Chris has represented such directors, these cases require careful handling. There is pressure from the authorities to admit the faults and accept a shorter ban, under Carecraft Construction, which avoids the huge cost of a hearing which the director would have to pay; but to accept the invitation is dangerous particularly for directors who are professionals, such as Chartered Accountants, since that professional’s disciplinary body will inevitably also take action against the director.

Chris can help in these difficult cases as expert, and he is also an honorary confidential counsellor who helps Chartered Accountants with such ethical and disciplinary problems.

What to do when faced with such an invitation?

Chris has acted as expert for several such directors, but it has to be said that the risk of losing and paying the authorities’ costs, or of risking so much for a shortened ban, is usually not worthwhile. Chris’s article on this topic is available free on request.

Taxation Advocacy

Chicken huts and tax advocacy

Chris’s client had the unenviable task of cleaning out the filthy huts from mass chicken production, as each mature batch went for slaughter. He engaged operatives on a freelance basis who argued when their tax bills came in that they were employees, and that the tax had to be paid by Chris’s client.

How the problem was solved

The client could not afford legal representation, so Chris acted as his advocate, taking witness statements, agreeing skeleton arguments with inspectors from HMRC Technical Division, and representing the client and examining witnesses at a full day’s hearing before the General Commissioners in an old schoolroom in North Yorkshire.

How much the client saved

Chris’s arguments prevailed. The Commissioners found that the operatives were self-employed and had to pay their own tax, which saved the client a total tax and NI bill of £165,000.

Personal Injury, Clinical Negligence and Loss of Dependency

Case 1 – The Selby Rail Disaster

When Gary Hart fell asleep at the wheel of his Land Rover, going off the M62 onto the East Coast main line and colliding with the InterCity from Newcastle and a goods train, it caused the most expensive claim ever to be met by Fortis Insurance. Chris acted for the dependents of five high earning men who were killed in first class that fateful day.

Investigation and report writing

It was Chris’s onerous duty to visit each of the widows, asking about their late husbands and the life they led together. This is because for a loss of dependency claim it is necessary not just to project the deceased’s lost earnings, but also to quantify the portion of the family’s income which is now saved because the husband is no longer with us. The remainder, which would have come to the family, is the loss of dependency. Chris summarised his findings in detailed CPR-compliant reports.

The outcome

With each of the five widows, insurers made reasonable offers to settle the cases and no-one had to come to court. Hence, whilst Chris’s work could not bring the husbands back, the families did at least achieve a financially secure future.


Case 2 – The Human Dynamo – “Buy Him a Man”

Chris acted for a claimant with a “portfolio” career. He farmed 180 acres with no hired help. He ran a plant hire business, being the sole JCB and crane operator. He had converted farm cottages for rent. He was converting a second group of disused farm outbuildings to create a further science park for rent, the first group being fully occupied. And he was converting the family’s Grade II listed mansion, having stripped it to the bare walls. He had spent so much time on such property improvements that his annual accounts showed only a modest profit. When he suffered an RTA so that he could no longer do all this heavy work, how was he to be recompensed?

Accountant experts with conflicting views

The defence expert accountant contended that the accounts with modest profits formed the basis of the multiplicand. Chris disagreed. In his opinion, the claimant should be provided with a lump sum sufficient to employ a labourer to do all the heavy work which he could no longer do. As Chris said, “buy him a man” and the status quo ante would be restored, per Bradburn –v­ Great Western Railway [1874] LR 10 Ex 1.

The outcome at trial

At trial, the judge agreed Chris’s approach, and agreed his multiplicand to the penny.

Great help from you yesterday.