Getting the best from your accountancy expert

Posted on July 5, 2009, 5:57 pm, by gclark, under Publications.

A seminar for Barristers and Solicitors

Introduction

There are several main areas in which accountancy experts assist lawyers:

  • Professional negligence
  • Employment matters
  • Commercial litigation
  • Fraud
  • Personal injury

We will examine the practical aspects of the interface between accountancy or tax expert and the legal profession.

Different roles

The accountancy / tax expert can occupy five different roles that are quite apart from the technical matter being covered. It is essential that both the lawyer and the accountant are clear on the definition of the accountant’s role, in order to avoid confusion.

1. Technical adviser

In performing a technical adviser role, the accountant will typically be assisting with the following areas:

  • What is the generally accepted accounting principle in a particular area?
  • How likely was the tax avoidance device, attempted by the adviser, to succeed?
  • How will a settlement along certain lines be taxed?
  • What valuation method would be appropriate in the particular circumstances?

2. Factual evidence

The accounting expert will examine the factual evidence presented by the accounting records and likely pass comment on:

  • How does a competent accountant proceed in a given situation?
  • How likely was it that a lender would provide finance in a given situation? If so, on what terms?
  • What level of internal accounting controls would one expect to find in a business of a certain size/type?
  • How, in practice, would HMRC approach a particular matter and how should the accountant attempt to resolve any dispute?
  • How competent was the member of the accounting staff?

3. Expert Determinations

The accountancy expert will typically be asked to determine the value of items such as:

  • the shares belonging to a departing director.
  • the partnership share of departing partner.
  • intellectual property.
  • Fiscal valuations in disputes.
  • Independent expert’s determinations under, e.g.employment contracts

4. Computational matters

The accounting expert will use available accounting information and primary business data to calculate the value of important measurements such as:

  • Computing business losses and losses of profits
  • Computing the affect of lost tax reliefs
  • Investment losses
  • Present values of future cash flows

5. Investigatory

Typically a more in-depth analysis of underlying records and information not typically available within the accounting system. The analysis could involve:

  • Quantifying losses due to fraud – which may involve re-writing corrupted accounting records.
  • Investigating a person’s past income and expenditure in order to defend a major tax enquiry.

Case studies – differing roles

a. Professional negligence

This was a professional negligence case involving alleged bad tax advice. At first sight, the matter was a technical one.
The facts of the case were as follows:

  • Self-employed individual with high income.
  • The individual wanted her accountant to forecast taxable income, before the end of the tax year, so that she could make sufficient tax favoured investments as to eliminate her tax liability.
  • The accountant over-estimated the liabilities persistently, year after year, so that the client obtained a poor rate of investment return without much benefit of tax relief.

Points arising:

  • More of a practical and computational matter than a technical one.
  • The calculation could not be perfectly accurate.
  • Practical
    • How should the accountant reasonably have proceeded?
    • How accurate could the accountant reasonably have been?
  • Computational
    • How much money had the client lost due to channelling their funds into a low-yielding investment without obtaining tax relief?

b. Fraud

We were engaged to work on an alleged fraud by the managing director and largest shareholder. In this scenario the main thrust of work as experts was investigatory.

The added dimension in such a case is the need to prepare evidence in a form in which is can be used by the Police.

Practical matters:

  • What kind of expenditure on, for instance, business entertaining would be credible in such a business?

Technical matters:

  • To what extent should the loss be stated ‘net of tax’?

Skills required

Litigation Support work is not a single skill and not a separate skill. It pulls together members of different disciplines: tax, audit, accountancy. The individuals involved have sufficient technical, practical and organisational skills to ensure that:

  • Opinions are tied back to the authorities.
  • They are familiar with the requirements of lawyers as a special category of client.
  • They have daily exposure to regular client work

Case study – cross-section of skills

Overstating profits

The directors of the UK subsidiary of an overseas company had greatly overstated profits in the company (thus maximising their bonuses and protecting their jobs). In addition, there was evidence of some measure of incompetence on the part of the in-house accountant and the Group auditors (Big 4 firm) gave a clean audit certificate.

Points Arising:

  • Practical and investigatory skills were required to reconstruct the accounting records, restate the accounts and record exactly how the financial statements were subverted.
  • In order to demonstrate a failure of duty of care, however, it was necessary to delve deeper into Accounting Standards.
  • Tax expertise could also show that the VAT records could not have been consistent with transactions.

The appropriateness of the “usual method”

Accountants prepare reports for many different purposes and it is easy for them to become ‘conditioned’ to a certain style of report.
You need to ensure the accountancy expert is focussed on what is required rather than what they are used to doing. An example is the comparison between audit, due diligence and business valuations.

Points to consider

  • Is the expert to provide information (e.g. on accounting practice, valuations methods) or an opinion (e.g. on the reasonableness of a particular figure)?
  • What style of report are you and they expecting to produce?
  • The accountant’s role is not to second-guess legal opinion but to inform it.

Case Study – style of reporting

Facts:
A senior executive who was dismissed and therefore missed out on share options that he would probably have received and probably exercised, if he had not been removed.
This led to litigation against the employer and a claim for the loss of income from the putative share options.
Points:
The accountant’s work involved a mixture of computational work and tax knowledge as well as some practical input concerning the executive’s likely behaviour.
It was essential to understand that the report was to be used in negotiation and so needed to strike the right balance between considering all the options and putting forward a definite scenario of what would have happened.
A “standard” report with forty pages of computations would not have been appropriate.

Is the incumbent firm best?

Often, it is better that an independent firm of accountants be engaged on litigation matters;

  • The incumbent firm may be conflicted.
  • If the client has suffered a loss of some kind, the incumbent may be sensitive that they should have done more at the time.
  • An independent adviser will not have any inhibitions when reporting.
  • A fresh view may simply be required.
  • An independent adviser can be objective.

SUMMARY

  1. There are many different roles for the expert and we must be clear in each case which role or roles are to be played.
  2. Litigation support in not a single skill –nor a separate one.
  3. The accountant’s usual approach may not be appropriate –don’t let them just clone their usual style of report.
  4. The accountant must be clear about their instructions –these can be suprisingly informal.
  5. The incumbent firm may not make the best experts.

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