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Fraud fighters

Demand for corporate investigators is on the rise as the battle against financial shenanigans heats up

Reactions were mixed when new regulations concerning IPO sponsors, proposed by the Securities and Futures Commission (SFC), took effect last month on October 1. Some lauded the strengthened guarantee that the revised rules give to investors. Others feared the deterrent effect of the tightened regulations on the growth of small and medium-sized enterprises looking to raise capital on the stock market.

One group that definitely welcomes the new rules, and the opportunities they present, is corporate investigators. Many rely on this group to do the “dirty work” of uncovering inventive attempts to mislead investors made by aspiring IPO listers. The new rules are expected to spur an increase in demand for corporate-investigation services not just from IPO sponsors, but also from law firms and other parties that have an interest in an IPO being done properly.

Steve Vickers, CEO of Steve Vickers and Associates, has handled a large number of exercises involving pre-IPO investigative due diligence in Singapore, Hong Kong, London and Tokyo. He says the key feature of the rule changes is that there is now even more of an emphasis on comprehensive due diligence.

“There’s a lot of emphasis on the Code of Conduct and the role of sponsors and their obligations, but the only thing with any solid teeth is the amendment to the existing Companies Ordinance, which now clearly states that sponsors have civil and criminal liability,” he says.

“People may grumble that due diligence costs more money. But do we really want these smaller listings in Hong Kong? I’m not so sure we do. We want quality listings. And if people are grumbling about having to spend some money understanding the nuts and bolts of a business, then I would question whether they are suitable at all.”

Vickers’ experiences in doing due diligence investigations for mergers and acquisitions – where acquirers tend to be a lot more careful – has taught him to apply similar care to IPO listings.

“The trouble with the IPO system and regime is that it’s perceived to be a bit like a pipeline by some in the securities industry – you put data in one end and you get an IPO out of the other. The key is to make sure that it doesn’t result in a brainless ‘tick the box’ process. The problems I’ve seen over the years have been horrible, where, for example, the real corporate structure of a business is very different from the prospectus. And then we’ve seen situations where material information has not been revealed or has been deliberately concealed,” he says.

While overall there seems to be a greater appreciation from investors that government regulators are stepping up anti-fraud efforts, there still seems to be a disconnection in terms of companies’ compliance efforts meeting the increased enforcement.

Big 4 accounting firm EY recently conducted a survey of 681 executives in Asia-Pacific on the subject. “Forty-eight per cent said their anti-fraud policies in place were good in theory, but didn’t work well in practice,” says Chris Fordham, managing director of fraud investigation and dispute services (FIDS) at EY.

About 60 per cent of the work at FIDS consists of reactive investigations, which involves allegations of fraud, corruption, money laundering, intellectual-property infringement or other regulatory issues.

“We’re a fact-finder at the end of the day. We provide our clients with information so they can make informed decisions about the issues confronting them,” Fordham says.

Proactive services, such setting up compliance systems and anti-fraud programmes, or helping with audit tests, take up about another 30 per cent of the team’s time. The remaining 10 per cent is devoted to assisting clients in litigation and arbitration.

Fordham was an accountant doing restructuring work in the 1990s before he shifted to forensic accounting when he came to Hong Kong 15 years ago. At the time, forensic accounting – which involves the collection of evidence in the form of financial data that can be prepared for potential or actual litigation – was not well known in the city.

“Compared to then, the expertise, knowledge and experience about forensic accounting has grown exponentially,” Fordham says. “The subject matter is reported often in the press, so we’re definitely seeing a greater appreciation about the value that forensic accounting can bring to clients.”

Despite his growing team of technology specialists, former law-enforcement officers, people with legal training, and others with audit and consulting backgrounds, Fordham says he is still behind his headcount plans for Hong Kong and China.

“We’re still recruiting heavily. It tends not to be not so much the qualifications of the individuals, but more the soft skills and general aptitude of the candidate that sparks our interest in them,” he says.

Meanwhile, some mid-tier investigative firms are creating alliances to integrate their services and maximise their capabilities in providing comprehensive and cost-effective solutions. Such is the case of Verity Consulting and MAWSL Consulting, two relatively young firms with a steadily growing history of successful collaboration.

Led by veterans in the investigation and intelligence fields, Verity offers a broad range of complex investigative services covering legal issues, insurance claims, digital forensics and commercial investigations. Founded by Kelvin Ko, a former member of the Royal Hong Kong Police Force and director of the commercial investigation department at Kroll Fact Finders, Verity has grown from 20 staff in 2009 to 50, and is still growing.

“We are looking for previous experience, but we also want fresh graduates that we can train,” Ko says.

Maidie Ku, founding principal of MAWSL, says that there are many ways in which fraud can be conducted, with the result usually being someone getting some form of unauthorised privilege. MAWSL’s strength is forensic accounting, which requires a combination of investigative skills, accounting knowledge and auditing techniques.

“Any transactions where people are probably getting some unauthorised privilege, that’s when we are hired to investigate,” Ku says. “Employee fraud can be done internally, by embezzling company funds, or externally, by colluding with outside parties such as in procurement kickbacks.”

As well as working with corporations, MAWSL also works with individual clients in civil and criminal cases, such as matrimonial or shareholders’ disputes.

“Since we are independent, we have no conflict of interests, so we can maintain our independence as we look at the facts and give an expert report about what we have found,” Ku says.

In addition to investigations, MAWSL also offers services covering risk management, due diligence and training. Ku believes that her firm offers a lot of advantages, even though it doesn’t have the resources of a Big 4 firm. “We are very experienced. There aren’t that many companies in Hong Kong that specialise in looking into fraud,” she says.

Other than a major in accounting, Ku is not finicky about the qualifications of the candidates which she recruits.

“I know some forensic accountants who are not really certified public accountants, but they have accounting knowledge,” she says. “The main thing is getting the right experience and a lot of exposure to fraud, plus having professional scepticism and a detective mindset. It is possible to gain the right experience by getting into audit firms that offer this kind of service.”