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FORENSIC ACCOUNTING – NEW RULES AND OPPORTUNITIES
Conference Hilton Hotel, Sydney 11 March 2011 Chartered Accountants – Business Valuation and Forensic Accounting Special Interest Groups

The Hon. Michael Kirby AC CMG

CHARTERED ACCOUNTANTS BUSINESS VALUATION AND FORENSIC ACCOUNTING SPECIAL INTEREST GROUPS CONFERENCE, HILTON HOTEL, SYDNEY, 11 MARCH 2011

FORENSIC ACCOUNTING – NEW RULES AND OPPORTUNITIES
The Hon. Michael Kirby AC CMG

PRESENT WHEN THE TIDE RUNS OUT Forensic accounting is a comparatively new specialty within the old and distinguished world of accounting. Of course, there has always been a role for professional accountants in litigation of various kinds. Particularly so in contested taxation cases and in claims for damages, brought by companies or individuals, who needed to rely on accountants to demonstrate the likely losses or defaults occasioned by a breach of statute or a civil wrong.

Still, the role of forensic accountants has enlarged in recent decades because of a number of factors. One is the far greater ease with which fraud can be perpetrated in the digitised world. explained it1: “The main difference between [the 1930s] and our own time is that digitisation of the cash flow in a business has made it easier to move money from one place to another with a few clicks of the 

As Allan Watt has

Justice of the High Court of Australia (1996-2009); President of the Institute of Arbitrators & Mediators Australia (2009-10); Board Member, Australian Centre for International Commercial Arbitration (2010-); Member, Arbitration Panel, International Committee for Settlement of Investment Disputes (World Bank) (2010-). 1 Allan Watt, “Digital Crumbs Show the Trail”, National Accountant (April/May 2010), 25.

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mouse. From behind a computer screen or another electronic device, many users feel a sense of anonymity. Communication is faceless, indiscretions can be swept under the rug and onto a USB thumb-drive, documents are easily deleted and data can be stored in hidden folders or sent between private email addresses.” The expression “white collar criminal” was devised by Professor Edwin Sutherland in the years immediately following the Great Depression on the 1930s. The recent global financial crisis 2008-10 (GFC), which has caused profound economic changes in most western countries2, has also seen an escalation in instances of intra-corporate wrongdoing to accompany the “climate of redundancies, pay freezes and pay cuts”. Ironically, it has been the GFC that both stimulated internal misconduct and ensured the exposure of wrongdoing “at a burgeoning and unprecedented rate”3. It was the investment guru Warren Buffett who declared4: “It‟s only when the tide runs out that you learn who‟s been swimming naked.” A fraud investigation partner with KPMG Forensic in London, Hitesh Patel, observed recently that: “The tide [of the GFC] is still making its way out”. He expects more wrongdoers to be exposed before the world economies fully recover. The type of fraudulent activity detected by Mr. Patel involves not only wrongdoing by individuals, but also by businesses themselves, as they came under growing financial pressure. As he put it: “Company bosses falsely inflate sagging profits and lesssenior executives inflate their sales figures to keep much needed bonuses”. Australian experts in forensic accounting also describe the 2

M.D. Kirby, “Welcome to the Real World” *the GFC+ (2009) 32 University of New South Wales Law Journal 338. 3 M. Laurence, “Fraud Capture. Forensic Accounting Experts Expect Already Record Corporate Fraud Levels to Rise as the Economic Downturn Continues to Bite”, Intheblack, July 2009, 22. 4 Ibid, 22.

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way that the GFC had “lifted the lid on an orgy of fraudulent conduct”. At once, the GFC can be seen as “exposing existing frauds but [also] ignite[ing] an outbreak of new activity”5.

If this strong language seems to smack of journalistic excess, one has...
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