‘For every Texas, there’s been a Rotherham’

Now he is warning that with a recession tightening its grip, North-East businesses could become easy targets.

Lindsay Parker reports.

MICHAEL GRAYSON calls them his “war stories” – and he has plenty of them. In his role as a forensic accountant, he’s seen the spectrum of human emotion; the requisite mix of betrayal, tears, regret, anger and deceit.

His investigations have led to him catching a company director who wildly embellished his expenses while working for a multi-million-pound company, and saving a client £300,000 when he proved a sub-contractor was overcharging for the work he was carrying out. He saved another client (who was buying a multi-million pound kitchen and bathroom business) a staggering $25m after investigating the company’s final accounts and suggesting an adjustment of the figures.

He has worked for national banks, major airlines, local authorities, hospitals, FTSE 100 companies and assessed the assets of divorcing couples. And his job has taken him across the world – although there have been less glamorous environments too.

“I’ve worked anywhere from a big 50- storey building in Texas to a stable in a back office, so for every Texas there’s also been a Rotherham,” says Michael, who leads a team of four forensic accountants at the Durham offices of Clive Owen & Co LLP.

“Basically, if you like to get up in the morning and know what you’re going to do next, forensic accounting isn’t for you. You could end up working anywhere and you’ve got to be able to start with a blank piece of paper and fill it from nothing, and some people don’t like that.”

Michael was working for PricewaterhouseCoopers in Leeds when he was seconded from assurance to the forensic services department. As well as investigating fraudsters, he provided evidence for complex commercial disputes, which he continues to do in his role as director of forensics at Clive Owen & Co LLP, a business advisory and accountancy firm based in Darlington.

One particular case, in November 2006, took him to Dubai. He was asked to investigate a dispute between a minor and major shareholder of a company that provided security services in Iraq.

“There had been an arrangement that one of the shareholders would buy out the other at a certain date for a multiple of the earnings,” he says.

“It just so happened that the earnings had reduced drastically by that date. We had to investigate the whole business to understand why the earnings were as low as they were.

Some of it was to do with America stopping funding, so turnover was down, but there were a lot of things going through the accounts to get earnings down, small things such as bad debt provisions and additional drawings out of directors’ accounts.

The big hinger was a director’s loan out of the company to another shareholder.

It wasn’t unusual to do that, but it knocked the earnings right down.”

As a forensic accountant, Michael has the ability to follow a trail through to the nth degree until he finds his “wow” moment, or the “hinger” part of a case. With his extensive experience, a major part of his work at Clive Owen is teaching companies how to be proactive against fraud by identifying areas of the business that will leave them open to crime. And his advice is more pertinent than ever given the recession.

“Companies are at their most vulnerable from fraudsters in times of economic downturn, because all their employees are under pressure, but there are ways to keep the fraudsters at bay,” he says.

When Michael works with clients in their offices, he gets them to look at areas where they could be targeted.

“The most common response we get when a fraudster has been caught is, ‘I can’t believe I was so stupid’,” he says.

“But these people may have been with them from the very beginning, such as a trusted employee who has helped build the business up, and business owners don’t have the benefit of knowing what to look for. We say to them if you were going to be a victim of fraud, this is where it would happen.”

For every fraud, he says, there needs to be an opportunity for it to take place combined with external pressure and a desire from the individual, such as wanting a better lifestyle, or not being able to afford to pay the mortgage.

The most vulnerable companies are those that have started out small and grown quickly, because they don’t have the systems in place to protect themselves.

“That’s why it hurts so much and why there’s so much emotion in fraud,”

he says. “How do you feel if someone you have trusted from the moment you set up your company, who has helped you build it up, suddenly steals money from you?”

Fraud often follows a typical pattern, he says. In the beginning, fraudulent acts can be quite random. It may be they spotted an opportunity and were desperate enough to steal a small amount.

“They probably feel very guilty,” he says. “Then they realise they can get away with it and can improve the way they do it. They can defraud the company for quite a while. But eventually they tend to get complacent and don’t cover their tracks. That’s when you look to catch them out.”

Many of his cases have come to light by people making mistakes or by whistleblowers. Michael and his team will often follow up on suspicions that have been raised. The most common areas they are asked to look at are expenses, payments to creditors, payroll and petty cash.

“If there is a suspicion, there is pretty much always fraud there,” he says. “In the past, I’ve taken part in midnight raids on the computer side of things, downloading employees’ PCs overnight so the employee has no idea that we’ve been in. Top technology companies now can image your computer remotely without you even knowing it.”

But forensic accounting is more than investigating the paper trail left by fraudsters.

Michael also provides expert witness testimony in cases from personal injury claims to divorce settlements; helps resolve disputes – forensic arguments for assessing loss of profits claims etc – and reviews all manner of contracts.

In one case involving a prestigious stud farm in the North-East, Michael led an investigation into financial mismanagement that was used to defend a claim of unfair dismissal. The stud manager had been hiring out his steeds for a bit on the side at a knock-down price. Working from a back office in a stable, Michael had to completely rebuild the stud’s financial data and work around incomplete records. But he got the evidence he needed.

“Most cases never end up in court, they usually end up settling,” he says.

“The most rewarding part of the job is finding that clincher argument in disputes and gaining a happy outcome for a client after going up against other accountants.

“In fraud cases, it’s about uncovering the evidence to prove what they’ve done. They often just burst into tears and start confessing the world.

Most of them are middle-aged blokes trying to sustain a lifestyle they can’t afford.

“If it’s a trusted employee, their bosses can be really upset, or simply angry and grateful to us for identifying it. They can also be defensive, saying, ‘I can’t believe I let this happen’. It can be a very emotional time.”

But not all fraud is committed by the socalled little people. One chief executive of a multi-million-pound business used a company credit card to fund his lavish lifestyle.

“I think he didn’t believe he would get caught,” says Michael. “He didn’t own the company, so it was ridiculous the amount he was spending.”

The majority of cases end with a dismissal rather than police involvement. But some companies want to prosecute, setting an example to others. Michael’s evidence will then be used in court.

The most effective fraudsters, however, are those that will never be found out, stealing money by stealth from under the noses of the very people who trust them.

“It could be Betty in payroll; it could be any one of your staff,” says Michael. “Most companies are exposed and it’s not their fault, sometimes they’re just unlucky. The best frauds are conducted on a spider’s web of deceit. But there are steps you can take to combat fraud – and in these times of growing financial turmoil, companies need to be aware that they could be the next target and get help before it’s too late.”

Top ten tips for beating the bad guys

1) Examine the areas you are most likely to haemorrhage cash.

2) Is anyone living beyond their means?

3) Does anyone have a gambling problem?

4) Is there someone who never takes holidays?

5) Does anyone get in early or work late without doing any more work?

6) Does anyone have complicated systems that only they understand? Make sure there are always two people who understand the role.

7) Know where your money goes and know your business. Some financial directors and even chief executives don’t know what their people do exactly and are too scared to show it to their staff.

8) Carry out spot checks to find any errors in accounting. Trace your ledger book to the source.

9) Check your payrolls each month. Have any new names been added?

10) Bring in a forensic accountant to give your business a health check.