For there to be a meaningful fight against fraud there needs to be a legal system capable of dealing with the cases brought by the prosecution authorities. There is no point beefing up the police fraud squads and giving them resources (which should include adequate funding for forensic accountants) to investigate fraudulent activity if the cases are going to falter at court.

Why would they do that? If a criminal trial is not managed properly and proportionately it will either fail completely leading to a re-trial or an appeal. This happens a lot and is the biggest reason why costs of dealing with criminals in general are so high.

The Legal Services Commission comes under fire a lot – not just from this blog site! The Daily Mail yesterday (2nd February 2009) reported the gross waste of public funds by the LSC. Audits have revealed that they have paid some £25 million too much to criminal defence lawyers over the year. If a public auditor is able to uncover £25 million wasted out of a budget of £2 billion per anum then just think how much a proper fraud investigator would find!

This may sound a bit of a sweeping statement, and is based purely on anecdotal evidence. But do not forget that as a forensic accountant I not only get paid for a lot of my work by the Legal Services Commission but also deal very closely with firms of solicitors and barristers that do also. Yes I do see some barristers getting paid £1 million each year from public funds, but I also struggle myself to receive ordinary market rates for my own work.

Sometimes I must argue my case with an LSC case worker that is questioning a quotation that I have submitted. Having done these sorts of jobs for over 15 years I usually have a good idea of how long they will take and what resources I will need to apply. It is not always easy to translate these ideas into a recipe for my costs and sometimes have to argue whether or not each of 10,000 documents will require 20 or 25 seconds to review! I know that I will need a week and a half or so but putting it into simple science is not always so easy.

Apparently since the 1980s spending by the LSC has multiplied 7 fold. Its not surprising – forget the published inflation figures – in 1983 we bought a house for a price that we would easily have to pay 12 times more for now. That aside, the past decade or so has seen the labour government increase the amount of legislation in place many times. The Proceeds of Crime Act 2002 is only one example of many new laws that were introduced, were lengthy and ill conceived. They have led to substantially more work needed to be done by the Defence solicitors and barristers to prevent miscarriage of justice. I have assisted in some of this and know how much time can be wasted by the Crown.

I would rather be putting the fraudsters away any day, but am happy to present a truly interdependent stance within my Fraud Advisory Services work portfolio and act as expert accounting witness for the defense in white collar crime cases. Because the Crown tends not to prepare financial cases in a safe fashion, often by not utilizing forensic accountants, there is much scope for checking and representing the case by the defense. My work in this area is not intended to get the dguilty off, but ensure that their case is presented at an accurate level of severity so that the courts can award a just sentence. If the LSC continue to be criticized for waste and their budgets cut accordingly, who will be doing the essential fraud defence work to balance the system?

I remember back in 2003 when the Proceeds of Crime 2002 legislation and associated Money Laundering Regulations 2003 (both subsequently amended by Serious Organised Crime and Police Act 2005 and Money Laundering Regulations 2007) were coming into force. As an accountant working in the regulated sector and specialising in fraud/asset tracing/money laundering I naturally took an interest in these new developments.

For the first time professionals, namely accountants and lawyers, were placed firmly in the firing line when it came to dealing with crime. It was argued that criminals needed professionals to not only give their exploits a veneer of respectability but also to help them get rid of their criminal earnings – to help launder the money. In fact history has shown that most big time money launderers for organised crime have been lawyers and accountants.

So now we were expected to be the government’s unpaid guardians preventing illegal money transfers – in a way banks and other finacial institutions had already been recruited. I gave lectures around the firm about the penalties for getting it wrong, for tipping clients off or even being in a position of being accused of actually laundering the spoils. One talk was at Northumbria Police’s inaugrual North East Fraud Forum conference held in St James Park,  Newcastle in March 2003. That drew around 300 delegates from all over the country – the general feeling was of uncertainty as to how the developments would affect professionals. I was also one of the few civilians to attend the Association Of Chief Police Officers biennial Fraud Forum later on that year in the Autumn – with a very similar theme of money laundering. Again I remember that the talks discussing professional involvement were a little unclear.

By now we all know that a number of professionals have found themselves in deep water (or prison to be precise) for turning a blind eye to their clients activities – even if they were not involved directly. We have to undertake rigorous checks on our clients – check their passports, utility bills, addresses, company details etc. To “Know Your Client” and to report any “suspicious activities” means that we should be able to prevent the criminals from dealing in financial transactions.

But fraud is as prevalent as ever. The frauds seem to be getting bigger (Maddoff!) and the estimates of its effect on the economy are growing (£100 billion per annum in the UK – 5% of all USA businesses turnover lost to fraud). I do not think that the new legislation and regulations have made any difference to the seriod fraudster and their supporting cast of professionals. They have given the rest of us professionals another layer of regulatory administration to struggle with!

As a forensic accountant specialising in fraud investigation I do two types of work. The first is publicly funded – I am paid by the Police, the Department for Business Innovation and Skills, the Legal Services Commission etc. Publicly funded work is not considered to be regulated and therefore I do not check out my client (KYC) and I am not concerned about reporting and fraud or crime I come across – because it would be pointless reporting to SOCA when I am already working for the Police (for example).

The other type of work is privately funded – i.e. I am investigating (usually fraud) for a private client. Whichever way you look at it, fraud is a crime and therefore not only have I carried out checks on my client (the victim of the fraud) but in all likelyhood I will have to put in a SAR to the Serious and Organised Crime Agency. In practice I will do this and also report to the appropriate police force regional fraud liaison officer to ensure that my client’s business is not surprised by a dawn raid!

It seems that we still have a way to go, probably by way of simplification of the current Act and Guidelines and a more joined up approach between the public and the private sector, before we professionals can be properly effective in assisting the authorities in their fight against fraud and organised crime.

I was searching the Internet last night to see if my Fraud Resource web site had moved up Google’s ranking at all and came across a link to my name concerning a job I did around 4 years ago.  It is interesting to see the contents of a forensic accounting report being quoted in the press as usually the forensic accountant remains in the background in criminal prosecutions even when his or her work is critical to the proper outcome of the matter.

The article was by ComputerWeekly.com and highlighted the plight of a number of postmasters who ran 7 of the Post Office’s 14,000 or so branches throughout the UK.  All of them had been convicted or accused of stealing typically £40,000 from their branch.  One of the cases was mine.  I am quoted as saying that the Post Office system was unlikely to be flawed otherwise you would see systematic problems through many of the 14,000 branches [inferring not just those run by postmasters who just happened to also have financial difficulties?].  I have to say that the contents of my report should not have been disclosed but hopefully no harm has been done in this case.

What the article did not say was that I had a couple of similar cases a year or two previously where I did examine the Post Office Horizon computer system in more detail.  I concluded then that the system was essentially straight forward and could be considered to be an “Excel spreadsheet” with a fancy front end.  There were unlikely to be such substantial and regular errors on the Post Offices part limited to only a few individual cases – however the apparently disadvantaged postmasters failed to consider the most obvious facts:

1. The deficit typically grew by a few £1000 per week over a few months.

2. The deficit was discovered by a Post Office audit that would probably be triggered by the increasing funds drawdown compared to usual.

3. The postmaster was responsible for reconciling his accounting system with the Post Office daily and weekly.  Any deficiencies should be reported immediately so that they could be sorted (the Post Office would often bear a loss in this way).

4. The postmasters knowingly carried forward an increasing error by falsifying returns – failing to report the differences.

5. Whether or not the postmaster stole the money, a member of staff stole it or it was negligently overpaid regularly to customers of the branch in error – the fact remains that the postmasters were responsible for reporting problems to the Post Office and because they allowed the error/loss to mount up – they were responsible for it – either as criminals or incompetents.

In the most recent case that was being reported I had been asked by the barrister to advise the defendant in conference of my findings and as a result he pleaded guilty to false accounting – in return the prosecution dropped the theft charges for which he would I am sure have been convicted.  His sentence was accordingly much lighter.  12 weeks in prison against probably a couple of years at least.

Hopefully this was a just outcome.  If he had been convicted of theft he would have face confiscation proceedings for the £40,000 and given the nature of the alleged offences may even have endured the lifestyle assumptions.  Clearly the postmaster had little in the way of assets and if he had defaulted on the confiscation his whole term in prison could easily have reached five or even more years!