ICAEW All Wales 020409

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Chris Makin mediator 1 A Legal Round-up (with emphasis on the naughty bits!) A presentation to the All Wales A presentation to the All Wales Chartered Accountants’ Chartered Accountants’ conference conference on 3 April 2009 on 3 April 2009 by by Chris Makin FCA FCMI FAE QDR MCIArb Chris Makin FCA FCMI FAE QDR MCIArb

description

A Legal Update for accountants with emphasis on the naughty bits

Transcript of ICAEW All Wales 020409

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A Legal Round-up(with emphasis on the naughty bits!)

A presentation to the All Wales Chartered A presentation to the All Wales Chartered Accountants’ conferenceAccountants’ conference

on 3 April 2009on 3 April 2009 byby

Chris Makin FCA FCMI FAE QDR MCIArbChris Makin FCA FCMI FAE QDR MCIArb

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Who am I? A “normal” accountant in public practice for 20 yearsA “normal” accountant in public practice for 20 years As sole trader, 500 clients including 2 plcs, family As sole trader, 500 clients including 2 plcs, family

businesses, market traders, tax clients, etcbusinesses, market traders, tax clients, etc Then a forensic accountant & expert witness for 20 years - Then a forensic accountant & expert witness for 20 years -

- of which also a mediator for the last 10 years- of which also a mediator for the last 10 years 14 years a sole practitioner, then mergers: 16, 60, 250 14 years a sole practitioner, then mergers: 16, 60, 250

partnerspartners First managing partner of Leeds office of RSM Bentley First managing partner of Leeds office of RSM Bentley

Jennison, then National Head of LitigationJennison, then National Head of Litigation ““Retired” butRetired” but Freelance expert & mediator for 3 yearsFreelance expert & mediator for 3 years ... ... and long may it last!and long may it last!

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Forensic ExperienceLITIGATION:LITIGATION: Loss of profit & con lossLoss of profit & con loss Business & share valuationBusiness & share valuation Matrimonial valuationsMatrimonial valuations Partnership disputesPartnership disputes Professional negligenceProfessional negligence Criminal fraud Criminal fraud

investigationsinvestigations Money launderingMoney laundering Personal injury & fatal Personal injury & fatal

accidentsaccidents Drug trafficking etc asset Drug trafficking etc asset

tracing and confiscationtracing and confiscation

MEDIATION:MEDIATION: Partnerships & share valuationsPartnerships & share valuations Company sale & purchaseCompany sale & purchase Section 994Section 994 Construction Construction Rights of way & boundariesRights of way & boundaries DefamationDefamation Intellectual propertyIntellectual property Professional negligenceProfessional negligence Business interruptionBusiness interruption Housing disrepairHousing disrepair ToLATAToLATA EmploymentEmployment

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Rules of Engagement

If you can’t hear me – If you can’t hear me – shout!shout! My funny accent – My funny accent – shout!shout! Any pressing issues – Any pressing issues – shout!shout! Tops of heads – Tops of heads – I will shout!I will shout!

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Outline

All for the benefit of you, the GP:All for the benefit of you, the GP: FraudFraud FraudFraud FraudFraud Money launderingMoney laundering ValuationsValuations Expert WitnessExpert Witness Expert DeterminationExpert Determination MediationMediation Where you can get helpWhere you can get help

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The Slippery Slope - 1 A Ltd, warehousemen, owned imported A Ltd, warehousemen, owned imported

soya beans which were to be drawn down soya beans which were to be drawn down by C Ltd, to be paid for on weekly by C Ltd, to be paid for on weekly account.account.

At A Ltd, Z was responsible for releasing At A Ltd, Z was responsible for releasing them, on the signed authority of C Ltd.them, on the signed authority of C Ltd.

B Ltd, the carriers, employed X.B Ltd, the carriers, employed X.

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The Slippery Slope - 2 When C Ltd needed goods, they issued a When C Ltd needed goods, they issued a

signed authority to B Ltd, who went to A signed authority to B Ltd, who went to A Ltd’s warehouse and withdrew them.Ltd’s warehouse and withdrew them.

So X (of B Ltd) handed C Ltd’s signed So X (of B Ltd) handed C Ltd’s signed authority to Z (of A Ltd), who allowed the authority to Z (of A Ltd), who allowed the goods to be removed from store and goods to be removed from store and loaded onto B Ltd’s trucks.loaded onto B Ltd’s trucks.

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The chronology – part 1 The arrangement started in 2007.The arrangement started in 2007. All went well for 6 months.All went well for 6 months. The routine became familiar.The routine became familiar. C Ltd suffered cash flow problems, and C Ltd suffered cash flow problems, and

tried to sell soya beans before it paid for tried to sell soya beans before it paid for them.them.

C Ltd persuaded X to withdraw goods C Ltd persuaded X to withdraw goods without a signed authoritywithout a signed authority

C Ltd is B Ltd’s C Ltd is B Ltd’s main customermain customer, so X , so X could not refuse.could not refuse.

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The chronology – part 2 X persuades Z, by making promises, to

release a consignment before payment. A release document from B Ltd is

received a week late, as promised – this builds confidence.

X again persuades Z, by use of deceit, to release beans before payment.

But now there is no release document. Z has not followed correct procedure, and

he is now vulnerable.

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The chronology – part 3 X takes out Z for an expensive meal and X takes out Z for an expensive meal and

“entertainments”. Z is now a co-“entertainments”. Z is now a co-conspirator.conspirator.

THIS IS THE POINT OF NO THIS IS THE POINT OF NO RETURN – RETURN – EVERYTHING EVERYTHING WHICH FOLLOWS IS WHICH FOLLOWS IS INEVITABLEINEVITABLE

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The chronology – part 4 Goods continue to be released without Goods continue to be released without

release documents.release documents. A Ltd cannot obtain payment for goods A Ltd cannot obtain payment for goods

sold to C Ltd, since there is no proof the sold to C Ltd, since there is no proof the goods have been collected.goods have been collected.

A week-long investigation discovers what A week-long investigation discovers what has happened.has happened.

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The chronology – part 5 Z is summarily dismissed.Z is summarily dismissed. The matter is reported to the local police, The matter is reported to the local police,

who arrest Z, X, and the MD of C Ltd.who arrest Z, X, and the MD of C Ltd. The police seize all the financial records, so The police seize all the financial records, so

that civil recovery of goods or money is that civil recovery of goods or money is hampered. hampered.

A Ltd suffers severe shortage of cash and A Ltd suffers severe shortage of cash and no means to collect; it goes into no means to collect; it goes into administration; all A Ltd’s staff lose jobs.administration; all A Ltd’s staff lose jobs.

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What went wrong? – part 1 C Ltd were under financial pressure C Ltd were under financial pressure

through over-extending themselves. through over-extending themselves. Honest people do strange things when Honest people do strange things when they are under financial pressure.they are under financial pressure.

Z was vulnerable, being the only person Z was vulnerable, being the only person needed to authorise release of these goodsneeded to authorise release of these goods

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What went wrong? – part 2 Goods could be released on one signature Goods could be released on one signature

only.only. Once Z had authorised the release of Once Z had authorised the release of

goods without a release document he was goods without a release document he was vulnerable, and once he had been treated vulnerable, and once he had been treated to the dinner and “extras” he became a to the dinner and “extras” he became a co-conspirator.co-conspirator.

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So what really went wrong? This was a fraud waiting to happen.This was a fraud waiting to happen. Lack of internal control.Lack of internal control.

The slippery slope -The slippery slope - QEDQED

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Who was to blame? The MD of C Ltd.The MD of C Ltd. X and Z.X and Z. The management of A Ltd:The management of A Ltd:

Weak internal controlsWeak internal controls Not regularly checking the goods in storeNot regularly checking the goods in store

The auditors:The auditors: Not verifying physical quantitiesNot verifying physical quantities Not advising on weak internal controlsNot advising on weak internal controls

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A Ltd - Lessons for the future Take stern action against Z, Take stern action against Z, “pour “pour

encourager les autres”encourager les autres” Tighten internal controlsTighten internal controls Auditors to make unannounced visits?Auditors to make unannounced visits? Recruit carefullyRecruit carefully Sack and sue the auditors?!??Sack and sue the auditors?!?? Insist on checking stock levels in future – Insist on checking stock levels in future –

don’t become lax, don’t be fobbed offdon’t become lax, don’t be fobbed off

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Common sense Nick Leeson:Nick Leeson:

Barings BankBarings Bank front office, back officefront office, back office cash calls when huge profits being made?cash calls when huge profits being made?

Barlow Clowes/Bernard Madoff:Barlow Clowes/Bernard Madoff: If it looks too good to be true...If it looks too good to be true...

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Risk factors – when is fraud more likely?

Dominant CEO (Robert Maxwell)Dominant CEO (Robert Maxwell) Extravagant example by management (Conrad Black)Extravagant example by management (Conrad Black) Low staff moraleLow staff morale Staff not taking holidaysStaff not taking holidays Staff retaining tasks when promotedStaff retaining tasks when promoted ““Nothing is too much trouble”Nothing is too much trouble” Expensive lifestyle not supported by payExpensive lifestyle not supported by pay Lack of Board support for internal controlsLack of Board support for internal controls Treasury or IT controls not understood by top Treasury or IT controls not understood by top

management – leave ‘em to itmanagement – leave ‘em to it

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More risk factors Subsidiaries with wide geographical spread Subsidiaries with wide geographical spread

(Parmalat?)(Parmalat?) Complex structure, no business reason, in shady Complex structure, no business reason, in shady

jurisdictions (BVI, Antigua, jurisdictions (BVI, Antigua, NigeriaNigeria)) Special purpose vehicle with no obvious purposeSpecial purpose vehicle with no obvious purpose Performance related pay/results at any cost Performance related pay/results at any cost

(bankers...bankers...bankers...)(bankers...bankers...bankers...) New employees – New employees – alwaysalways follow up references follow up references Lack of an anti-fraud policyLack of an anti-fraud policy

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...and an opportunity It is not the task of the auditor to discover It is not the task of the auditor to discover

fraud (arguably!) – fraud (arguably!) – Kingston Cotton Mill (No 2)Kingston Cotton Mill (No 2) 1896: 1896: “The auditor is a watchdog, not a bloodhound.”“The auditor is a watchdog, not a bloodhound.”

Bolam –v- Friern Hospital Management Committee Bolam –v- Friern Hospital Management Committee [QBD [QBD 1957]1957]

Why not offer your clients an anti-fraud Why not offer your clients an anti-fraud health check– you’re bound to find health check– you’re bound to find somethingsomething to justify the fee! to justify the fee!

““Trust in God, but tether your camel first” Trust in God, but tether your camel first” – – old Sufi proverbold Sufi proverb

““Trust your enemies, but carry a big stick.” Trust your enemies, but carry a big stick.” – – FD RooseveltFD Roosevelt

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What should one do on discovering fraud?

Get professional advice - Get professional advice - fastfast Don’t turn computers on or offDon’t turn computers on or off Don’t report to the policeDon’t report to the police Don’t use own auditors to investigateDon’t use own auditors to investigate Get in a team of professionals to handle Get in a team of professionals to handle

the whole project: the whole project: specialist lawyers, forensic specialist lawyers, forensic accountants, IT specialists, HR specialists, accountants, IT specialists, HR specialists, MRMsMRMs

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Why not involve the police? TheirTheir priority is a priority is a convictionconviction Your client’sYour client’s priority is priority is survivalsurvival So concentrate on recovering money and assetsSo concentrate on recovering money and assets Bradford & Bingley BS £100m mortgage scams = Bradford & Bingley BS £100m mortgage scams =

nationalisation. When the tide goes out...nationalisation. When the tide goes out... Freezing orders (Freezing orders (MarevaMareva injunctions) injunctions) Search & seize orders (Search & seize orders (Anton Pillar Anton Pillar orders)orders) SFO Annual Report for 2008:SFO Annual Report for 2008:

65 ongoing cases, value £4,800million65 ongoing cases, value £4,800million 11 freezing orders, value £201million11 freezing orders, value £201million 8 confiscation orders, value £42.3million8 confiscation orders, value £42.3million So they recovered So they recovered 0.88% 0.88% of the assets at risk!of the assets at risk!

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More common sense Car handwash – “Mr Sparkles”Car handwash – “Mr Sparkles” Tanning parlours – prime cost?Tanning parlours – prime cost? Casinos, horses, dogsCasinos, horses, dogs Cars paid for & returnedCars paid for & returned Solicitors holding funds pending deals: Solicitors holding funds pending deals:

Gene Gibson & Jonathan DuffGene Gibson & Jonathan Duff

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Money Laundering ...is the process whereby the origin ...is the process whereby the origin

of the proceeds of criminal conduct of the proceeds of criminal conduct are converted, through a cycle of are converted, through a cycle of transactions, into financial assets transactions, into financial assets which appear to have legitimate which appear to have legitimate origins.origins.

ICAEW Members’ Handbook 2009 ICAEW Members’ Handbook 2009 pages 647 -776 (130 pages!)pages 647 -776 (130 pages!)

HMCE £3.5millionHMCE £3.5million

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Expert witness work

Not a “filling in” jobNot a “filling in” job Fundamental principles: Fundamental principles:

CompetenceCompetence Civil Procedure RulesCivil Procedure Rules Criminal Procedure RulesCriminal Procedure Rules ICAEW Forensic SIGICAEW Forensic SIG Stick & carrotStick & carrot AccreditationAccreditation We will help serious “wannabees”We will help serious “wannabees”

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Share and company valuations

A specialised processA specialised process Dividend basis?Dividend basis? Assets basis?Assets basis? Earnings basis?Earnings basis?

““To whom, and for what purpose?”:To whom, and for what purpose?”: Sale of entire business (company or its net assets?)Sale of entire business (company or its net assets?) On divorceOn divorce Employee shareholding recovered on departureEmployee shareholding recovered on departure ProbateProbate Unfair prejudice prayer for relief (Sec 994, Companies Unfair prejudice prayer for relief (Sec 994, Companies

Act 2006)Act 2006)

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Share and company valuations Typical Articles of Association:Typical Articles of Association:

““... in case of dispute, the auditors of the company shall be required to ... 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 value the shares the subject of the dispute, acting as experts not as arbitrators...”arbitrators...”

BUTBUT see Auditing Practices Board Ethical see Auditing Practices Board Ethical Standard 5: Non-Audit Services Provided to Standard 5: Non-Audit Services Provided to Audit Clients:Audit Clients:

11 APB Ethical Standard 1 requires the audit engagement partner to identify APB Ethical Standard 1 requires the audit engagement partner to identify and assess the circumstances which could adversely affect the auditors’ and assess the circumstances which could adversely affect the auditors’ objectivity (‘threats’), including any perceived loss of independence...objectivity (‘threats’), including any perceived loss of independence...

5454 The audit firm should not undertake an engagement to provide a valuation The audit firm should not undertake an engagement to provide a valuation to an audit client where the valuation would both:to an audit client where the valuation would both:

a)a) involve a significant degree of subjective judgment; and involve a significant degree of subjective judgment; and b)b) have a material effect on the financial statements.have a material effect on the financial statements.

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Another warning Company Director Disqualification Act 1986:Company Director Disqualification Act 1986:

Certain criminal offencesCertain criminal offences Failure to keep proper accounting recordsFailure to keep proper accounting records Failure to prepare and file annual accounts and returnsFailure to prepare and file annual accounts and returns Allowing a company to trade when directors knew, or Allowing a company to trade when directors knew, or

should have known, it was insolventshould have known, it was insolvent Failure to pay the company’s taxes on timeFailure to pay the company’s taxes on time

Re Carecraft Construction Co Ltd Re Carecraft Construction Co Ltd [1994] 1 [1994] 1 WLR 172WLR 172

ICAEW Disciplinary ActionICAEW Disciplinary Action Your Support MemberYour Support Member

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Expert determination Company sale/purchaseCompany sale/purchase Partnership disputesPartnership disputes Fee disputesFee disputes IT, IP, business & contract disputesIT, IP, business & contract disputes Features & benefits:Features & benefits:

Not arbitrationNot arbitration No set procedureNo set procedure Flexible evidence gathering & representationsFlexible evidence gathering & representations PrivatePrivate No appealNo appeal No need to give reasonsNo need to give reasons

Choose the right person for the job, or Choose the right person for the job, or apply to President of ICAEWapply to President of ICAEW

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What is mediation? ““Facilitated negotiation”Facilitated negotiation” The mediator assists the parties to The mediator assists the parties to reach

a solution they can live with The parties are in charge throughout the The parties are in charge throughout the

process; the mediator merely assists process; the mediator merely assists them to negotiatethem to negotiate

Far cheaper and quicker than litigationFar cheaper and quicker than litigation A A hugely hugely successful process!successful process!

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An example The business neighbours…The business neighbours… ……had not spoken for TEN YEARS!had not spoken for TEN YEARS! Refused to join in first joint sessionRefused to join in first joint session ““Gentrification” of a run-down areaGentrification” of a run-down area Tarmac yardTarmac yard Water ingressWater ingress £100,000 loss of profits per expert “report”£100,000 loss of profits per expert “report” Rights of WayRights of Way Access to premisesAccess to premises The mediator works on the true aims of the The mediator works on the true aims of the

partiesparties

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Why does mediation work? The parties are in charge of their own disputeThe parties are in charge of their own dispute All proceedings are in private, with no publicityAll proceedings are in private, with no publicity The mediator listens, but does not give any The mediator listens, but does not give any

advice or make any judgementadvice or make any judgement In private sessions, the mediator gently discovers In private sessions, the mediator gently discovers

the true nature of the problem, and the the true nature of the problem, and the compromise which would be acceptable to bothcompromise which would be acceptable to both

Many solutions involve an agreement which a Many solutions involve an agreement which a court could never ordercourt could never order

Litigation destroys relationships; mediation often Litigation destroys relationships; mediation often restores themrestores them

Everything is without prejudice, and anything Everything is without prejudice, and anything told to the mediator will never be repeated in told to the mediator will never be repeated in subsequent hearingssubsequent hearings

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Mediation for accountants Partnership disputesPartnership disputes Fee disputesFee disputes Employment disputesEmployment disputes Professional negligenceProfessional negligence Clients with disputes:Clients with disputes:

Sale/Purchase disputesSale/Purchase disputes Valuation (eg Sec 459, matrimonial)Valuation (eg Sec 459, matrimonial) Personal injuryPersonal injury Business interruptionBusiness interruption

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Where the GP may get help Members’ HandbookMembers’ Handbook www.icaew.co.uk/memberswww.icaew.co.uk/members 029 2050 4595029 2050 4595 Your Support MemberYour Support Member www.caba.org.ukwww.caba.org.uk www.chrismakin.co.ukwww.chrismakin.co.uk

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Any Any Questions?Questions? Chris Makin FCA FCMI FAE QDR MCIArbChris Makin FCA FCMI FAE QDR MCIArb

Chartered AccountantChartered AccountantAccredited MediatorAccredited Mediator