WK 8-Case 6: Frenkel's Forensics: John Frenkel Qualified As An Accountant in 1978, and He Has Always

Wk 8- Case 6: Frenkel’s Forensics: John Frenkel qualified as an accountant in 1978, and he has always
been interested in forensic accounting. He established his company in the United Kingdom in 2001, and
since 2006 he has focused almost exclusively on forensic accountancy services. A forensic accountant uses a
combination of legal, investigative, and accounting skills in order to analyze often complex financial data.
The services offered by the company spread across personal injury claims, business valuations, commercial
disputes, fraud and tax investigations, computer forensics, and data analysis.
Some of the investigations have revealed the surprising lengths that some individuals go to in order to carry
out fraud. In one case, a business that had suffered from the flooding of their factory claimed $8 million
from their insurers for business interruption. They had already received $880,000 on account. The forensic
accounting report revealed that the actual loss was only $640,000. Tax investigations are often complex,
particularly when dealing with overseas entertainers or sports personalities who visit the United Kingdom. It
is the responsibility of the company making the payments to the non-UK resident to deduct tax and make
payments to HM Revenue and Customs.
The amount of tax that needs to be deducted is incredibly complex. In one case, the promoter of a U.S. rock
band would have had to withhold $64,000 from a total of $320,000 that would have been payable to the
band. This represented 20 percent taxable income payable to revenue and customs but did not take into
account any other costs that the band would incur as a result of their tour. As a result, after forensic
accounting, the tax liability was reduced to $45,000. In a similar case, an overseas Formula 1 driver who
visited the country to compete in the British Grand Prix was to be paid $400,000 plus bonuses and image
rights. Thanks to forensic accounting, HM Revenue and Customs were willing to reduce the tax demand of
$160,000 (some 40 percent) to 6.9 percent, or $27,500.
Accounting scandals seem to peak during difficult economic periods, likely as a result of heavier financial
pressures. This has been a boon for specialist forensic accountants, who can offer their services to help
prevent and detect attempts to cheat the system. If income tax investigations are complex, then fraud in
value-added tax (VAT) in the United Kingdom can be even more baffling. VAT is levied by the government
on transactions carried out by businesses. The system effectively requires the company to collect it on the
government’s behalf from payments received from customers, set against VAT actually paid by the company
when they purchase products or services. The balance is then due to HM Revenue and Customs.
In one particular case, Frenkel investigated what is known as a carousel fraud. In effect, a series of parallel
companies are set up, the same goods are passed among them, and the VAT paid is reclaimed by each of the
companies—but no VAT is paid to HM Revenue and Customs. In this case, HM Revenue and Customs were
trying to recover $24 million from a senior member of staff for one of these companies.
The forensic accounting process involved looking at accounts going back six years. As a result of the
findings, huge errors were uncovered, and this client’s actual liabilities proved to be $480,000. According to
PricewaterhouseCoopers’ Global Economic Crime Survey published in 2018, 49 percent of businesses
globally were victims of economic crime over the previous two years. Some 48 percent of those victims
reported asset misappropriation, and 29 percent were victims of procurement frauds.
Bribery and corruption affected 29 percent of the businesses, cybercrime in its various guises affected 26
percent, and business misconduct affected 31 percent. The highest levels of fraud were in Africa (62
percent), North America (54 percent), and Eastern Europe (47 percent). Two types of fraud have become so
prominent that they have been measured as separate frauds in their own right for the first time: consumer
fraud and business misconduct. Consumer fraud largely impacts on financial and retail businesses. The
report went on to describe the typical internal fraudster: he is male, between 31 and 40 years old, most likely
a graduate, and has worked for the company for over six years. The key areas stated in the report were
intellectual property, bribery and corruption, and cybercrimes.
Question: What factors do you think are most important in protecting your business against fraud? Also,
what ethical issues for accountants, if any, are involved in the decision to investigate a suspected case of
fraud in a business’s accounting activities?
ETHICS: CORPORATIONS UNDER THE MICROSCOPE: The Situation Working as a partner in an

accountancy firm means regular and reliable work. Recently, you’ve been looking at a slight career change
and you’ve been reading about forensic accounting. The Dilemma To begin with, the switch is partial. You
work with your regular clients four days a week and take on forensic accounting jobs for the fifth working
day of the week. Pretty soon, you begin to realize that some of your clients are not being as truthful and
transparent as they should be in a financial document.
The discrepancies might not be noticed by a casual reader, but you can see that there are significant
problems, and you would not sign off on the accounts as being accurate. The question is, what do you do
about it? You talk it over with your business partner. She is of the opinion that if you are uncomfortable with
the client, then you should tell them that you aren’t prepared to act for them in the future.
Either that, or you should pass them over to her, and she will tell them that there is a problem with their
accounting information. Something is telling you that you need to take more drastic action. You feel
complicit and do not want to be associated with fraudulent behavior, but you have known some of the clients
for a decade.
QUESTION: What are the ethical issues in this situation? Also, what do you think you should do in this
situation?

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Wk 8- Case 6: Frenkel’s Forensics: John Frenkel qualified as an accountant in 1978, and he has always

ETHICS: CORPORATIONS UNDER THE MICROSCOPE: The Situation Working as a partner in an

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