The legal sector has many processes some of which include collection of forensic evidence. In this video Doug Hall explains how this applies to finance.

Legal sector collects forensic finance evidence

As a term forensic just means to do with evidence and really it’s any part of the legal process where you need accounting services. So the primary areas that we cover is my own practice, which is commercial disputes, fraud investigations and also computer investigations. I get that a lot that it’s about cutting up bodies but that’s forensic pathology. Forensic is really just, as I said, about evidence, it’s how a commercial issue is dealt with through the legal process and forensic is about establishing the evidence in support of or to defend a case, in my arena in disputes.

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Legal sector had a change in the types of case brought to them when the economic downturn disrupted businesses across the globe. In this TV show Doug Hall discusses the increase in breach of contract cases.

Legal Sector: The impact of the recession on commercial disputes

Very simply, it may be a cliché but the recession meant that pretty much overnight in some sectors the world changed and the example of the ship building is a prime example of that, in 2007 manufacturers in the far east can’t make enough ships, in 2008 suddenly people operating ships don’t want to buy them anymore, so suddenly the world changes overnight. That creates an impetus for all kinds of breaches to take place, because the world has changed simply. So what we saw after the recession or after the recession started was a big increase in the number of breaches of contract cases, we’ve seen a higher incidence of shareholder disputes and that’s simply there may be longstanding issues between shareholders but when there’s strife, when you’re operating in a difficult environment, maybe those tensions are amplified and they fall out, the same with partnerships, including professional partnerships. We’ve seen actions against professionals which for example arise out of insolvency, so a company goes down because times are tough, and in the lead up to the company going down there’s been issues with what advisors, professionals, auditors have done, there may have been issues with what the directors had done, they were doing their best to save the company but maybe they end up committing a breach of fiduciary duty or selling assets at under value, or getting confused about what’s their money and what’s the companies. Keep browsing the fantastic TV shows on Inside Finance to hear more about how the legal sector deal with business disputes. Look out for more form Doug Hall.

Informed financial planning advisors pass on their wisdom to clients. If a company fails they will naturally look at back at this advice. In this TV show Doug Hall discuses throwing the spotlight on professional advice.

Informed financial planning advisors

For example auditors, we are dealing with a number of cases, where a company has failed, and if the company had not failed there wouldn’t be an issue. But in the company going into administration for example, major creditors had lost and they may say that they have relied for example on audited accounts to make decisions, to lend money or to support the company and in the cold light of day the company having failed, that’s an example where you may go back and look at what the auditor said in earlier years.  So we have situations arising from insolvent companies where the spotlight is thrown onto a whole range of professional advice that they were given before the company failed. Which never would have come under that spotlight if the company hadn’t gone into administration for example.  It's not an area that we get involved in but valuers have seen a big increase in the number of actions against them very simple because the banks relied on valuations of properties for example, and then when the company has gone into administration and the bank has lost out, they then go back and look again at the professional opinions that they relied upon, in making their original lending decisions.

Inside Finance will continue to produce great videos on informed financial planning advisors and similar subjects.

Evidence of financial impact must be shown in court to win a breach of contract case. Doug Hall of Smith & Williamson explains further in this TV show.

Good experts prove financial impact

The adage is something like a good expert may not win you the case but a bad expert can certainly lose you the case. So if you take the sort of work I do where there is some sort of contractual breach, there’s two hurdles broadly to get over before let’s say the claimant gets a good result, firstly it’s to demonstrate liability, that there’s a case to answer. And once you’ve cleared that hurdle it’s pretty pointless if you can’t actually demonstrate that you’ve suffered a loss from it and you can have that loss awarded by the court. So the second limb is quantum, which is what I do. So okay there’s been a breach, liability is established, what’s it worth and therefore what does the claimant get awarded, and similarly from the other side acting for defendants, obviously hopefully to bring down the level of damages that are awarded against them.

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The legal sector now has less resources to pursue action for business disputes, as Doug Hall discusses in this TV show.

Legal Sector changes

So basically this whole arena that the commercial world changed overnight caused tension and caused a whole range of drivers for more commercial disputes.  However in more difficult times, parties or potential parties to commercial disputes were wary about committing funds to pursuing them.  So that’s the irony, that there were more disputes but less resources to pursue them and what we saw for a number of years is that cases would start and be settled very early, they’d be front end loaded and it required a different sort of input from forensic accountants for example and for the lawyers, that they would do a much more high level exercise to establish damages for example early on and then go for an early settlement.  I had a few years where I went to more mediations than I went to trials and we had to produce a different sort of report for a mediation to what we produce for a trail, a different purpose.  One really gives a less balanced view, a report, a WP report for a mediation, an experts repot for a trial needs to be very balanced and because an expert has a duty to the court. So the symptom we saw was there was definitely an increase in those sort of disputes for those sorts of reasons, but less of them actually went through towards the trial, which is really to do with cash flow and to do with companies under pressure and litigation was not a priority.  And this is the sort of picture that we had from all the lawyers we know, because we spend quite a lot of time talking to litigators, they’re the people we work with.

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Analysing data to show profit and loss is more complicated than it may first seem, and will be done best by a forensic accountant. Doug Hall of Smith and Williamson says it’s about presenting the right information in court.

Analysing data forensically

Probably the best way of illustrating that is a lot of cases that we get involved in, we get involved at a later stage, so the case has been running for some time. Because parties to litigation tend to focus because they’re guided by the lawyers, firstly on liability and quantum is left as a second stage. And we’re often involved in cases where the quantum has been estimated by the in house accountant, it’s the first time they’ve done it and may seem simple to actually work out that you’ve lost this much in sales and this is the profit on it, but there’s all kinds of nuances and techniques that are used and really what a good forensic accountant should be doing is to anticipate how, if you’re acting for a claimant, to anticipate how it would be defended.  For example you may say that my sales have been growing at 5% a year, year on year out, and if you hadn’t caused by business to fail then I would have got another 5% in growth, but that doesn’t necessarily follow, you need to look behind the headline evidence and to look at it from every angle. There is no single right answer and the key thing in my practice is whatever opinion I come up with I need to be thinking ‘There is a counter argument to this’, because ultimately the decision by the court or the tribunal is based on the balance of probability. There’s been some sort of breach, so therefore the claimant wants to be put back in the position they would have been, but for that breach and of course that position didn’t happen, so it’s what might have been. So the short answer is there’s lots of different ways of analysing the data and there’s lots of different ways of presenting it, there’s no single right answer but an experienced forensic accountant knows what works with a court and what doesn’t. And of course there is various conceptual issues, that you can be technically wrong in how you calculate damages and we’ve seen that many times.

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Business assets in a service based economy are more about customers, staff and ideas. This can put directors at risk, as Doug Hall discusses in this TV show.

Legal action and business assets

The UK economy has changed as we all know, from largely a manufacturing based to a service based, therefore typically when a company goes into administration, it doesn’t have any assets, it doesn’t have assets that you can kick, plant and machinery, it has intellectual property, it has customer databases, it has customer relationships. Other than that there may be very little that can actually be realised for the benefit of creditors and other stakeholders. However what the company may have is a cause of action against it’s advisors, that may effectively be it’s only asset. We’ve seen actions against directors that we’ve acted on both for the claimant, so creditors who’ve lost out, and also defending actions against directors from companies that have gone into administration, for example where the Inland Revenue, HMRC, has taken action against the directors because they’ve lost out. And we’ve seen examples where the HMRC will actually fund those actions, they’ll provide funding to the liquidators to pursue directors. Again that requires a forensic accountant to look at all the evidence to establish first of all whether the directors are liable, if they have carried out actions before the administration which has caused that loss and secondly if they have what is the value of that loss, how much of the loss that for example the bank or HMRC has suffered has been caused by the actions of the directors. Those situations can be very complex, because in the lead up to an administration company records are not the best that they could be typically, bluntly they can be a mess, so there can be a lot of work to do to piece it all back together and trying to avoid the benefit of hindsight.

Inside Finance TV will continue to follow discussions about business assets and liabilities. Keep an eye out for more from Doug Hall.

The legal sector in London is benefitting from globalisation. In this TV show Doug Hall discusses why London is a major centre for international disputes.

Legal sector underpinnings

It’s been a major driver, both for our practice and for legal services in the London market generally. London is one of the leading, if not the leading centre for international disputes, It’s probably a very large invisible export. I’d love to be able to add up the total fees that are generated in the London market from lawyers and accountants, for foreign nationals having their cases dealt with in London. For example, I gave evidence at an international arbitration last year, both the parties were Russian and they were arguing over an asset in Moscow, a property. They came to London for the dispute to be dealt with, they used lawyers, both sets of lawyers are based in London and I’m also based in London, so London is a great place to be for international disputes and because of increasing globalisation commercial relationships are across borders, and when they go wrong, typically, not always but it depends how the contract is framed, typically those are dealt with through international arbitration rather than through the courts in England or another country. It’s very similar issues for what I do, similar issues for the lawyers but there is a specialisation amongst some lawyers that they will concentrate more on international arbitration than for example higher court work in England. The interesting thing has been that during the recession, whilst domestic commercial litigation has been muted to some degree or front end loaded as I’ve described, international arbitration has been very strong. I haven’t come across a lawyer who specialises in international arbitration during those years who hasn’t been very bullish and been very busy, and that is very much a growing field because of that background of globalisation. And frankly some of the most exciting cases that we deal with are across borders. It’s the same principles, exactly the same issues, but there’s more complications, there’s more cotterill issues, there’s more practical issues in gathering and assessing evidence and presenting it, but that’s really where the future lies, well it’s already here, but I think there is reason for optimism for the London market for continuing to be a major centre for international disputes.

Inside Finance TV will continue to look at what is driving business in the legal sector and beyond.