The importance of forensic financial investigations to insolvency and the economy

Insolvency and restructuring trade body R3 has recently produced a report highlighting the importance of the role that the insolvency, restructuring and turnaround profession plays in the economy.

The report lists the most common reasons why a business fails and more than 10 per cent of insolvency cases involve fraud or criminal activity.

According to the report’s authors, investigations of the individuals involved in fraud, corporate misconduct and director misconduct are often key to returning money to creditors and victims, which in turn helps the economy.

As Roger Isaacs, who is a fellow of R3, a licenced insolvency practitioner and Forensic Partner at Milsted Langdon explains, if a business is in trouble, directors and employees can sometimes be tempted to “borrow” money from the companies for which they work, often with every intention to repay the debt.

However, the line between legal and illegal activity is not a fine one. Often perpetrators of fraud find, that once they have crossed it once, it becomes increasingly easy to cross it again and again.

The result can be that employers or creditors can be left being many thousands or even millions of pounds out of pocket.

The job of the forensic accountant in these cases is to identify improper financial activity and trace any funds that may have been misappropriated so that they can be recovered for the benefit of the victims.

This is a painstaking business involving examination of bank accounts and other financial records, as well as conducting reviews of electronic data.

Roger said: “Fraud and the misappropriation of funds within a business can have a devastating impact on a company and can sometimes lead to insolvency.

“Unfortunately, however, white collar corporate crime is very seldom prosecuted and fraudsters often go unpunished, especially if the victims are keen to avoid adverse publicity that would see potential weaknesses in their financial controls put under the spotlight.

“The lack of appetite on the part of the Crown Prosecution Service to take action against fraudsters, partly because of the complexity and high cost of fraud trials, has seen an increasing number of private prosecutions. These can not only be used as a deterrent but often result in compensation being recoverable to victims.

“That is why forensic accountants can play an essential role in following the money trail so that assets that have been bought from the proceeds of crime can be recovered.”

Posted in The Forensic Blog.