News Analysis - Forensic teams under the microscope.

The ever-increasing tentacles of the Big Five are causing something of a problem for the UK’s senior accountancy watchdog; it is running out of firms to hire for investigation work because of conflicts of interest. Despite its unsnappy name, the Joint Disciplinary Scheme is no stranger to the limelight because of its focus on the role of accountants and auditors in large-scale financial scandals. It made headlines last year when the Joint Disciplinary Tribunal – the independent body which sits on judgment on cases investigated by the JDS – imposed a #3.5m penalty on Coopers & Lybrand over the Maxwell affair. And last week it announced a tribunal would be looking at the role of auditors in the accounting irregularities scandal at Queens Moat House plc. The JDS was formed in 1979 to investigate the professional and business conduct of accountants and accountancy firms when it gives rise to public concern. Chris Dickson, formerly of the Serious Fraud Office, became executive counsel at the JDS at the beginning of 1998. With the recent focus on conflicts of interest at the large firms by regulators in the US, Dickson has this week spoken out about a problem which has caused him increasing concern and landed him with some logistical challenges. The problem is simple. ‘We are running out of firms who can work on the larger cases,’ he says. In its large-scale investigations, the JDS needs forensic accountants who not only have the expertise to carry out the job but also the independence. ‘If we are investigating a major company collapse, then probably most of the larger firms have already done audit work for them, so we can not use that firm to investigate the case,’ explains Dickson. As the larger firms extend their tentacles to offer clients a plethora of services, the more difficult it gets for him to do his job. Timothy Allen, partner at forensic accountants Lee & Allen, comments: ‘(The Big Five) have their fingers in so many pies.’ The Big Five’s irrepressible appetite has often got them into muddy waters. Take the landmark case which ran for years over mid-1990s involving a dispute between Prince Jefri Bolkiah and the Brunei Investment Agency. KPMG acted as both auditor and accountancy adviser to the BIA and later as forensic accountant to Prince Jefri and his myriad companies. The House of Lords later ruled the chinese walls that KPMG had set up to separate the work were unsafe. The use of chinese walls at Big Five firms is still employed to separate different assignments. The Prince Jefri case brought into sharp focus the growing difficulty for the Big Five to work on investigative assignments. However, there is light at the end of the tunnel for the JDS and other customers seeking independent forensic accountants. A niche market of firms specialising in forensic accounting work has gradually emerged over the past six years. The JDS now looks to smaller firms, retired chartered accountants or contracts specialist teams to work on disciplinary cases. ‘The more you have a concentration of a small number of mega firms the more difficult it is to find impartial accountants,’ comments Dickson. The rise of niche firms specialising in investigative work has come about specifically because of two reasons – ethical and commercial conflicts. ‘A major problem at the Big Five is that every time they look at a forensic job, they see an actual conflict or a commercial conflict exists,’ comments Hugh Matthew Jones, forensic accountant at Pannell Kerr Forster. The accounting profession’s watchdogs deal with the ethical conflict. The commercial conflict is usually taken care of by the Big Five’s bosses keen not to offend potential clients. Allen said: ‘Due to consolidation among the Big Five, it means they have done work for almost all companies. They don’t want to be seen to be acting against people.’ Allen and his partner left PwC in 1994 foreseeing the potential for a niche market and disenchanted at consistently losing assignments. Dozens of forensic accountants have left Big Five practices due to frustration at having to turn down assignments. The forensic accountant is a special kind of animal. Dynamic, inquisitive, analytical and persistent, they are not people who are easily brushed aside. ‘Yes it can get quite frustrating at times when we are conflicted out,’ says John Smart, director of Ernst & Young’s fraud and investigation group. But Smart is upbeat. ‘The Big Five probably won’t consolidate further because of the European Union’s ruling on competition. The levels of conflicts are not therefore going to increase anymore.’ In the wake of the large international labour-intensive cases such as Maxwell, BCCI and investigations into the Swiss bank’s hordes of Nazi gold, the need for large numbers of forensic accountants as experts has waned. ‘There isn’t as much litigation around since the end of the Nazi gold assignment,’ adds Smart. This might be the root of PricewaterhouseCoopers having to ‘let go’ of people on their data analysis and investigation team. But, others have left for different reasons. Five former PwC forensic accountants recently set up their own firm, explaining that their breakaway from PwC was caused by the firm’s increasing inability to accept forensic accounting assignments due to conflicts of interest. Nevertheless, a PwC spokesperson told Accountancy Age the market was big enough to accommodate both small and large firms. Comments by the US Securities and Exchange Commission’s chairman Arthur Levitt recently hinted at the possibility of completely separating the auditing arm of firms from most other services offered. It begs the question which service will next come under the SEC’s axe? ‘I do not foresee the SEC coming down hard on forensic departments,’ said KPMG’s Nick Andrews, partner and forensic accountant. The revenue that forensic departments contribute is not so significant as to cause great dismay were it to come under the SEC axe. Yet, the Big Five will not let go. They still see the sector as worthwhile despite the obstacles. Big Five firms dismiss rumours that they are downsizing their forensic practices. On the contrary, there are moves to reinvent them, they say. Since KPMG first set up its forensic department in 1990, its revenue from forensic accounting has grown from #700,000 to #33m in nine years. KPMG recently employed an IT forensic specialist. It is an area that will undoubtedly blossom. The firm denies rumours that it is cutting back. While the Big Five continue to battle with conflicts and build chinese walls, small specialist forensic firms are happy to sprout up unchallenged. And for now that solves the JDS’ problem.