Uncovering Missing Information in Liquidation – A Forensic Accounting Perspective
In today's digital economy, data has quickly become one of the most valuable assets for businesses. With that value, however, comes significant complexity and responsibility, especially in the context of mergers, acquisitions and other corporate transactions. Data and privacy due diligence is no longer secondary consideration — it is quickly becoming a critical component of deal-making.
The consequences of underestimating data and privacy due diligence can be severe. In recent years a major deal in the technology sector was compromised by revelations of massive data breaches affecting billions of user accounts that had occurred prior to the transaction, and ultimately led to a reduction of hundreds of millions of dollars in the purchase price. Similarly, the importance of thorough due diligence was emphasized by the UK data protection regulator after a significant acquisition in the hospitality industry uncovered a prior data breach affecting half a billion customers. The consequences were substantial, involving a hefty financial penalty and potential reputational issues. While such high-profile cases have dominated headlines over the years, these cases highlight the need to thoughtfully consider data and privacy risks during transactions to prevent costly issues and safeguard long-term business success, regardless of scale and sector.
When a company enters liquidation, the duties of the liquidators extend far beyond identifying and realizing assets or settling liabilities. They will also need to investigate the causes of the company’s collapse and assess whether any potential misconduct by the former management contributed to the failure of the company. In some cases, the liquidators may even initiate litigation against potential wrongdoers on behalf of the company.
To discharge these duties, the liquidators require access to accurate and complete records in order to validate creditors’ claims and to gather evidence to support possible legal action. At first glance, this information gathering process may appear straightforward. However, in practice, it is often anything but. Records left in the office are often incomplete, either due to improper record keeping leading up to the liquidation or due to deliberate removal or destruction. Moreover, critical knowledge often resides with individuals such as former directors, who may be unavailable or unwilling to cooperate.
These challenges create significant obstacles to gathering sufficient information for asset recovery and assessing potential legal action. Forensic accountants can play a vital role in providing valuable support in uncovering missing documents or information, formulating a hypothesis on potential wrongdoing, quantifying its impact, and developing potential arguments for discussion with legal counsel.
This article outlines several practical approaches from a forensic accounting perspective to uncover and identify missing assets, reconstruct records, and uncover information during liquidation.
Approach 1 – Step Into the Legacy Accounting Process to Identify Missing Documents
Often at the time when liquidators take control of a company, the accounting records are outdated or incomplete. One effective technique for identifying missing documents is to step into the shoes of the legacy accounting team and ask: What would we have done if we were in their position? By adopting this mindset, forensic accountants can replicate the accounting workflow and develop a logical way to locate the missing records. In these situations it is useful to consider:
How would the missing document fit in the legacy accounting process?
To address this question, forensic accountants will need to first understand the company’s legacy accounting process and the documents that were prepared or attached at each process. Mapping out this process helps to pinpoint where a document should have been generated, collected, or filed.
For example, if the forensic accountants are searching for a particular loan agreement, they can begin by identifying the point in the process where this document would typically appear. If they know it would be attached as a supporting document to an approval form, the forensic accountants can then locate the relevant approval documents for the period and examine them for the missing loan agreement.
How would the missing document have been filed or named?
The organization and naming of files often reveal the workflow habits of the legacy accounting team and provide valuable clues when searching for information that appears missing.
For example, it will be useful to examine the directory structure and document arrangement within the legacy file storage system. This includes assessing whether systematic folders were created for recurring processes, such as monthly closing folders for consolidating all relevant documents. File name conventions also offer clues. Small details, such as the use of dates, transaction references, or standardized prefixes can help narrow the search for missing records.
How would the missing document have been prepared?
If a document cannot be recovered, despite thorough searches, the next step may be to reconstruct it by replicating the workflow of the legacy accounting team. This begins with understanding the company’s accounting cycle in detail—what documents were generated at each stage, who prepared them, and how they were filed or attached to supporting records. By retracing these steps, forensic accountants can recreate the workflow in which the missing document would have been produced.
Approach 2 – Hypothesis Building and Verification
Liquidators often need to understand historical transactions that come with incomplete, vague, or ambiguous descriptions. In these situations, simply collecting available documents may not be enough, as the rationale behind a transaction may not be immediately apparent from the records alone. To bridge the gap, forensic accountants can assist by developing and testing hypotheses to explain the purpose or context of such transactions and then verifying them through supporting evidence.
Formulating a hypothesis – This process begins with a careful examination of the attributes and surrounding context of the transaction in question. This includes considering the circumstances under which it occurred, its timing, and the double entry accounting treatment applied. These observations form the foundation for constructing a meaningful hypothesis.
For instance, the way the transaction was recorded, such as whether it was posted to an intercompany account, an expense line item, or a capital account, may provide clues about the underlying rationale for the use of funds. Through systematic analysis of these factors, forensic accountants can identify the most plausible explanation for the transaction.
Verifying a hypothesis – After formulating the hypothesis, the next step is to verify whether it is supported by available evidence. Verification typically involves reviewing email communications, internal approvals, meeting minutes, and accounting records.
For example, if the hypothesis suggests that an adjustment recorded in the intercompany balance was intended to be debt in nature, forensic accountants can examine the single and consolidated financial statements of the relevant entities to see how the adjustment was ultimately presented. In addition, email communications or meeting minutes discussing the purposes of the funds may provide confirmation to substantiate the hypothesis.
Approach 3 – Business Intelligence
There are instances where no evidence can be identified from Approach 1 and Approach 2 as set out above. This is because in many liquidation cases, defendants may have taken deliberate steps to conceal assets prior to the commencement of proceedings. These efforts often involve the use of offshore entities, complex ownership structures, nominees’ arrangements, or layered transactions. As a result, such assets may not appear in the books and records recovered by the liquidators.
In these situations, forensic accountants can assist in identifying valuable evidence by way of conducting business intelligence. Business intelligence is the process of undertaking a detailed external investigation with the aim to identify potential information associated with a target. It usually involves two levels of investigation:
- Level 1 – Open-source searches: searches of publicly available information, including corporate registries, litigation databases, property records, regulatory filings, media reports, and online platforms
- Level 2 - Discreet enquiries and surveillance: targeted, nonpublic inquiries undertaken through discreet human intelligence channels, including interviews with individuals who may have knowledge about the target, as well as physical or digital surveillance where appropriate and legally permissible.
For example, if interviews with former employees reveal that a former director may have acquired real estate in the US, a forensic accountant could approach this lead in a staged manner:
Step 1 – Open-source property search
Using the individual’s name and relevant personal identifiers, the forensic accountant can conduct a property search through county property databases to identify assets recorded under the target’s name.
Step 2 – Discreet enquiries
If the initial search and other sources indicate that additional properties may exist, forensic accountants can make discreet enquiries with individuals familiar with the target, such as neighbors, associates, or local business contacts to gather further intelligence.
Step 3 – Surveillance (if warranted):
Surveillance may be used to observe the target’s movements and routine. This can reveal the existence of properties or assets that are not traceable through public records. For example, in one case, surveillance identified that a target was regularly visiting a property and upon further property search, the property was found to be held under a trust. Because the property was owned by a trust, it was not discoverable via name-based public searches. Without surveillance, this asset would have remained undetected.
Summary
Forensic accountants can assist in uncovering missing information in liquidation by adopting different approaches. By stepping into the legacy accounting process, forensic accountants can logically trace and reconstruct missing documents based on how they would have originally been created, filed, and used. Where documents are incomplete or ambiguous, developing and verifying hypotheses helps clarify the purpose and context of historical transactions. In cases where records have been deliberately withheld or assets concealed through complex structures, business intelligence techniques enable investigators to uncover information that lies outside the books and records. Together, these approaches equip liquidators with a robust framework to identify hidden assets, address gaps in evidence, and support potential recovery actions and legal claims.
