Tuesday January 23, 2024

Our Forensic Services experts discuss the outlook for 2024

In our latest article, FRP’s Forensic Services specialists outline their expectations for the year ahead, drawing on key insights from their respective areas of expertise:

Christopher Osborne

Last year I predicted an increase in investigations and disputes deriving from the economic downturn, and the need for work to be undertaken quickly due to regulatory issues. This turned out to be accurate; in the investigation arena we have seen a significant uptick in projects requiring independent review and analysis, especially with a regulatory angle.

Litigation and arbitration continue to be very busy, but with no discernible change from last year. We have seen private equity houses being more active in litigating to recover losses or create value. We were instructed on a significant number of shareholder disputes last year, but I anticipate these instructions may slow down in 2024 mirroring the recent general decrease in transaction activity.

More generally for 2024, my sense is that we are going to continue to see auditors insisting that their clients undertake independent, forensic investigations. I anticipate a beefed-up Serious Fraud Office (SFO) being more active under the new leadership of Nick Ephgrave QPM.

With a marked increase in the number of company insolvencies over the last year, I suspect we will see more contentious assignments (including an element of fraud-based litigation) especially with the fallout from the pandemic starting to permeate through the economy.

Fiona Hotston Moore

Given the complex economic and political landscape, I expect to see even greater volatility in business valuations. Company valuations are inherently subjective and the expert valuer will need to draw on their own experience as well as the considerable market data that can be accessed. The past year has seen a range of challenges, with inflationary pressures – particularly in energy and labour costs – as well as consumer uncertainty, interest rate rises and the uncertainties surrounding Ukraine and the Middle East. All of these result in additional complexity for business valuations and the need for real expertise.

In matrimonial cases we are often asked to produce updated valuations to reflect changes in the business, and the impact on valuations between two dates across two or three years can, at present, be significant.

I am also seeing an uptick in engagements as “shadow adviser” where a party in a dispute requires an independent review of the report produced by the Single Joint Expert.

Looking ahead, I foresee an increase in forensic accounting work arising from the audit process and the need for an independent view on suspected frauds.

Jon Dodge

As a specialist business valuer, it is clear to me that the impact of Covid on recent financial performance (positive or negative, or often both in consecutive years) should continue to be analysed very carefully indeed to properly understand the performance history of a business. Experts usually look backwards as well as forwards for valuation support – so the results of any business for 2020 to 2022 will be of significant relevance for a good while yet.

Similarly, through my ongoing Corporate Finance and M&A work, it has been clear that the impact of the current volatile trading environment continues to influence risk (and therefore related value) analysis for both buyers and sellers – and the expert valuer will also need to take this into account, particularly when considering market-based comparator transaction data.

I anticipate that both of these major contextual valuation issues will continue to be of particular importance in determining realistic valuations in the coming year. In addition, in the Family Courts (where much of my work is undertaken) it is also clear that continuing restrictions on ‘surplus’ liquidity as a result of recessionary pressures will often also be a key issue that valuers should take into account when making their assessments.

All of this should continue to drive demand for valuation experts with current deal experience and M&A market exposure alongside their technical valuation skills.

Faye Hall

Due to the well-documented backlog in the Family Courts, there is an increasing need for alternative methods of resolution. In addition to the difficulties in being able to reach prompt resolutions through a court process, the costs associated with often lengthy proceedings highlight the benefits of advisers being involved in mediations, arbitrations and collaborations, as well as the more recent ‘one legal team approach.’ This enables the parties to understand the issues in dispute and achieve a reasoned and transparent resolution, which can be agreed upon outside of Court, where possible. The involvement of experts in such processes, engaging with both parties and their advisers, aids their successful resolution of matters especially where there is an inequity in the level of knowledge and understanding of financial matters in dispute. I see the need for such alternative mechanisms continuing to increase.

The nature of the unpredictable wider economic climate and geo-political events which have impacted on the domestic economy make expert opinions on matters such as business valuations, liquidity and continuing income streams more uncertain, yet they are still vital in enabling the achievement of a settlement between the parties. The complexity of business arrangements and transacting on a worldwide basis further enhances the need for independent input and review of the available information. In addition, the ability to explain the conclusions reached during a more collaborative process enables the parties to understand the work undertaken and the opinions put forward.

Looking ahead, I therefore foresee (and welcome) an increased need for the involvement of expert forensic accountants in alternative resolution processes.

Jonathan Wheatcroft

Overall, I believe there are some notable changes afoot which will result in a greater need for independent investigations.

The new Director of the SFO, who started at the end of September 2023, has signalled his intention to ramp up their activities. This is already proving to be the case, with criminal investigations launched into suspected frauds at aircraft parts supplier AOG Technics Ltd and the lawyers Axiom Ince, as well as into the collapse of the funeral care provider Safe Hands Plans Limited (a business which FRP Partners have been appointed as Joint Administrators). The more active and overt approach by the SFO, along with its intention to increase staff numbers, will refocus corporate governance on the need to undertake timely investigations into potential misconduct.

I am seeing that external auditors are increasingly requiring those charged with governance to undertake more objective and independent investigations in situations where material fraud may have occurred, or where the integrity of key members of a company’s management team is called into question (e.g. suspected theft by a financial director).

Separately, FRP’s Restructuring and Financial Advisory teams are seeing first-hand how financial strain is being felt by businesses in the slower recovering sectors. Unfortunately, certain decisions taken now by some of the affected management teams may not be consistent with their fiduciary responsibilities; indeed, certain actions may be outright fraudulent. Such issues typically come to light a number of months later. The consequences of these actions can often be worse than the issues they were intended to resolve. I suspect we will be working on contentious insolvencies with greater frequency throughout 2024.

Henry Pocock

Last year I predicted that increased scrutiny of ESG commitments would give rise to investigations and disputes. It is fair to say that I have not yet seen much activity in this area but I am still confident it will happen, although hesitant to say it will be in 2024.

One trend I have seen in 2023 and which I am expecting to continue into 2024 is the requirement for forensic accounting services being driven by the financial statement audit process. My view is that increased scrutiny on auditors is resulting in greater challenge to management, prompting them to seek independent corroboration of the impact of events that have occurred in the financial year.

While this is not necessarily new in the case of fraud that has a material (or potentially material) impact on the financial statements, I am seeing a desire to gain an independent view on frauds that are not material and unusual – or non-recurring events or transactions. For the forensic accountant, this presents an opportunity, but one which comes with a new and important stakeholder to be taken into account as we design and deliver our work.

Adrian Coates

I envisage 2024 will be the year in which the use of Large Language Models (LLMs) within eDiscovery platforms takes off. Compared with the slow adoption of Technology Assisted Review (TAR) by legal teams and the UK courts, I anticipate the adoption of LLMs as an integral part of document review workflows to be significantly quicker, with maybe the first guidance handed down by the Courts before year end, though 2025 is probably more realistic.

I expect to see greater focus on the most efficient way to process and review Short Message Data such as Teams, Slack and WhatsApp messages. As well as greater consideration as to how such data is shared with opposing parties at the point of production.

Jon Walklin

In 2024 I anticipate an increase in lawyers’ awareness of the wider variety of forensic services available to support litigation and other matters, aside from forensic accounting and eDisclosure. This will be particularly apparent in forensic questioned document analysis, a forensic discipline that has been largely overlooked in recent years with the focus being more on digital forensics.

In the INTERPOL questioned documents review (2019-2022) it was stated that, “for many crimes, such as financial and economic crimes, identity-based crimes, and national security, forensic handwriting/document examination is key to resolution.”  I foresee that an increased awareness will result in the authentication of signatures on critical documents being requested more frequently and at an earlier stage in proceedings.

Imagery, both moving and still, is being recorded in exponential amounts and many cases now involve imagery of some sort. With the emergence of AI and deep fakes, the need for forensic image analysis will increase proportionally.