Forensic accounting finally takes centre stage in audit reforms

Audit failings blamed for collapse

The Conservative Party’s Manifesto set out the party’s aims for audit reform within the following statement: “We are also strengthening the UK’s corporate governance regime, and will reform insolvency rules and the audit regime so that customers and suppliers – and UK taxpayers – are better protected when firms like Thomas Cook go into administration. We will also carefully study the results of the ongoing investigation into its collapse.”

Sir Donald Brydon’s review dated December 2019

On 18 December Sir Donald published his 138-page report into audit reform.  His terms of reference were set by the Government at the beginning of the year and included the ambitious aim of “seeing the UK at the forefront of corporate governance internationally. This includes maintaining a leadership position internationally in terms of the evolution of the audit”.  

Sir Donald’s report also includes over 60 other wide ranging and ambitious recommendations, including strengthened standards for auditors, more responsibilities for company directors and additional powers for shareholders and stakeholders to influence audit.   

Sir Donald proposes that the new generation of auditors should be trained in forensic accounting and in fraud detection.  So, while the higher standard will require auditors to approach their work with suspicion rather than just scepticism, by targeting their work using their forensic accounting skills perhaps we will have better outcomes without increasing fees prohibitively.

The Business Secretary’s priorities

In her editorial for my Institute’s newsletter, Economia, just before Parliament was dissolved in November, the Business Secretary, Andrea Leadsom, asserted that:

“Reform will cover not just the function of the regulator, but also the purpose and function of audit itself. It will include proposals on the function and oversight of audit committees and new internal control arrangements within our great British businesses – key lines of defence against poor corporate governance. It will also include proposals on the responsibilities of boards and directors – who need to build trust in the business activities that they lead. And reform will also look at how both investors and regulators can better hold companies and their auditors to account. All of those factors must be assessed and weighed together, so that the whole package is coherent and effective.”

She ended be stating her aims to be: “I want to see the UK leading the world in the next phase of improvements in corporate governance and audit reform.”

The challenge ahead

There has always been an “expectation gap” between what the public expected and what auditors delivered. Like many accountants, I spent my early years as an auditor before concluding that adding forensic accounting skills to my toolbox would allow me to make a much greater contribution in business.  While I applaud the introduction of forensic accounting training for auditors, and the need for them to approach their work with suspicion rather than mere scepticism, introducing these changes will require huge effort by regulators, trainers and the new firms themselves.

Some of Sir Donald’s recommendations may be implemented relatively early but others, such as creating a separate audit profession with its own governing principles, standards, and professional qualifications is a big step, and will take time to implement, and require a lot of work with the inevitable cost falling on business. 

In our interconnected world, any changes introduced in the audit of major UK companies will need to be mirrored in other major economies if UK auditors are to be able to meet these new standards.  The UK will need to encourage the accountancy professions in other countries to adopt these proposals as well.

In addition to Sir Donald Brydon’s review, the Business Secretary has three other major reviews on various aspects of the profession to address – the future of the Financial Reporting Council (Sir John Kingman), reform of the audit market (Competition and Markets Authority) and the future of audit (the Department for Business, Energy and Industrial Strategy’s own Committee).

The Business Secretary certainly has her work cut out if she is to implement these ambitious aims in the next 12 months.  As always, the devil will be in the detail and I suspect we will see more limited reform within this timetable, leaving the more ambitious aims for another day.

Charles Lazarevic

20 December 2019

Is the Lands Tribunal demanding more persuasive business valuation evidence?

Compensation is payable following compulsory purchase of land and businesses

Major UK infrastructure projects require compensation for compulsory purchase of land and businesses

I recently attended Francis Taylor Building’s annual compulsory purchase legal update seminar.  Richard Glover QC chaired the afternoon seminar and presented the session on business extinguishment compensation, which was a philosophical but highly thought provoking look at the Lands Tribunal’s latest business loss compensation decision, a case in which I gave evidence.   

Filling in the evidential gaps

Intriguingly he started by describing recent research by Peter Carruthers (, a Professor of Philosophy, who concludes that judgments, decisions, intentions and goals are not tied to sensory experiences and never figure in working memory or become conscious. Professor Carruthers points out that we only ever recognise our decision-making from what does become conscious, such as visual imagery and the words we hear ourselves say in our heads.  As such, Carruthers concludes that conscious thought, judgment and volition are all illusions.

Drawing on Carruthers’ research, Richard contrasted the recent decision with how the Tribunal decided business extinguishment compensation before the Optical Express case.  This is partly because it now involves evidence from forensic accountants and partly due to the volume of, often conflicting, empirical evidence that is now much more readily available.  Richard suggests the Tribunal is now left to “fill in the evidential gaps”, which is where Carruthers’ conclusions becomes relevant.  

Charles Lazarevic

A leading expert on compensation following compulsory purchase

Having presented the background, Richard went on to describe the wide range of conflicting evidence that was presented in the latest Lands Tribunal valuation decision on business extinguishment, a £10 million claim by Welcocks Skips Limited ( in which I gave expert evidence

Richard contrasted this case with a typical business valuation case twenty years ago, Klein v Transport for London [1996], where the Tribunal simply adopted three years’ purchase based on custom and practice. 

Is the Tribunal now demanding more persuasive evidence?

One particular interesting lesson one can draw from the Welcocks Skips case is the Tribunal’s conclusion that when deciding between conflicting comparables, evidence from those with personal knowledge would be required in order to favour one potential “comparable” company transaction over another.  While expert evidence was provided by the Acquiring Authorities’ waste specialist, the Tribunal concluded this was not sufficiently compelling to favour certain transactions and that it is unreasonable to draw conclusions solely from accounts and publicity material.  In my view this decision sets a new benchmark for the evidence that will be required by business valuers in future.

Considering the considerable controversy surrounding the low level of compensation currently being offered by HS2 following compulsory purchase, perhaps the Tribunal had in mind the hundreds of potential cases that could be lining up to file claims on Britain’s flagship infrastructure project.

My firm are leading experts in quantifying compensation following compulsory purchase. For further details click here.

Charles Lazarevic

6 November 2019

#compulsorypurchase #businessvaluation #HS2

Charles Lazarevic appointed Treasurer of the British Friends of Harvard Business School

Charles Lazarevic, appointed Treasurer

We are pleased to announce Charles’ appointment as Treasurer of this charity and to the Investment Committee.  Over the last year he has reorganised the charity’s administration and investments in line with current governance requirements.

This UK registered charity was set up in 1991 to raise scholarship funds to enable less well-off British students to attend HBS as well as to facilitate donations to the School.  

The Charity also recently appointed Sir Harpal Kumar to serve as Chair from 1 January 2020.  He succeeds Sir Bruno Schroder and Sir Cyril Taylor as the two most recent Chairmen.

Currently about 5 scholarships are awarded annually to enable British students with a financial need to attend this world-leading business school, drawn mainly from those working in the UK public or not-for-profit sectors.  The scholarships are awarded in conjunction with the prestigious US-UK Fulbright Commission.  All recipients have to commit to returning to the UK at the end of their 2-years MBA studies to use their knowledge to help grow and develop British institutions and businesses.

Further details are available at:

High standards of expert evidence support London’s pre-eminence as the global dispute resolution centre

If there was any doubt, the first London International Disputes Week 2019 (#LIDW2019) certainly demonstrated why London is the premier centre for major dispute resolution by showcasing the impressive range of legal and support skills available here. 

My own professional interest as a frequent expert witness on damages was particularly drawn to Mr Justice Roth’s keynote address in the final session of the week on Competition Disputes.  Competition cases require extensive use of expert evidence and Mr Justice Roth’s address set out the tools and sanctions on experts in recent cases such as the three interchange disputes, BCMR, PayTV v Sky Sports and Britned disputes. 

Mr Justice Roth speaking to a room of international lawyers and expert witnesses with an interest in competition disputes
Mr Justice Roth’s Keynote address

Mr Justice Roth, a Justice in the Chancery Division of the High Court of England and Wales and President of the UK Competition Appeal Tribunal described the framework that has evolved in England for securing impartial expert witness evidence, starting from the principles which Mr Justice Cresswell had laid down in his judgment in The Ikarian Reefer ([1993] 2 Lloyd’s Rep. 68 shipping case. 

He mentioned the increasingly common practice of instructing experts to meet before they prepare their first reports to agree the scope and thus avoid addressing irrelevant issues.  He went on to describe how useful the tribunal recently found asking experts to present a “teach-in” at an early stage of the hearing in Britned Development Ltd v ABB [2018] EWHC 2616 (Ch).  This practice will become even more important as Judges conduct more concurrent expert evidence (better known as “hot-tubbing”) sessions, a process he recognised created much more work for Judges but did shortened the overall hearing. 

At this point it is worth quoting from The Honourable Mr Justice Marcus Smith’s Judgment following the costs hearing in the Britned case, where he observed that:

“the interchange between the experts and the battle between their different approaches, I found (as I hope the Judgment makes clear) incredibly useful. I do not consider that I would have been able to reach so clear a conclusion regarding Mr Biro’s approach had I not had the benefit of understanding why Dr Jenkins’ approach was flawed. The manner in which the experts’ views were tested in the crucible of cross-examination was very helpful indeed.”

In Mr Justice Roth’s view these developments, when combined with the courts willingness to criticise experts in their public judgments (as demonstrated above) and, in extreme cases to report them to their professional body, are a sufficient threat to ensure that experts present evidence impartially.   

He also mentioned developments in tailored proportional disclosure rather than simply mechanically applying standard disclosure, which include using Redfern Schedules and Scott Schedules, such as in the air cargo anticompetition case.  He also referred to new ways of assessing aggregate damages and their distribution in collective actions, which shows how London’s courts are responding to the changing nature of large-scale litigation.

Mr Justice Roth closed by suggesting these strengths means that Brexit will not make London any less attractive as a place for settling major international disputes, in spite of attempts by other countries to attract business by setting up English speaking courts.

Having acted as an expert since before the Woolf reforms in 1999, I have seen these rules gradually develop thanks to various working parties and committees of practitioners.  I share Mr Justice Roth’s opinion that London has a comprehensive set of tools designed to ensure that courts and tribunals can rely on robust and impartial expert evidence. 

Charles Lazarevic

31 May 2019

Does kissing an expert witness suggest too close a relationship?

Readers will not need reminding that an expert’s duty is to help the court on matters within their expertise and this duty overrides any obligation to the person from whom experts have received instructions or by whom they are paid (CPR 35.3 and CrPR 33.2).  As one would expect, the expert is required to approach their work with total independence (PD35 2.1). 

The kiss

This requirement was brought into question at the trial of a Mr Mick Wills at Wellingborough Magistrates Court last year. Having been accused of illegally hunting a fox with dogs, the expert evidence for the prosecution was provided by Professor Stephen Harris, a self-described vulpophile and one of Britain’s leading authorities on foxes and a longstanding opponent of fox hunting.  It was reported to the Judge that a prosecution witness had kissed the expert witness when they met just before court.  When challenged, Professor Harris’s explanation for this behaviour was that he merely knew the lady and had not seen her in 20 years!

Judge Daber’s reaction on being told

On being informed of this incident, Judge Daber took a rather stern view of this incident, concluding that: “If a relationship exists between a proposed expert and the party calling that expert which a reasonable observer might think is evidence of bias, then he must be excluded on the grounds of public policy. Justice must be seen to be done.”

Kissing the expert witness
Has this expert witness compromised his independence?

The judge’s response to this rather unusual event should remind experts and those appointing them to take great care to avoid even the appearance of being too close. 

Those promoting the inquisitorial system’s approach to expert witness will say this case reinforces their argument that experts should always be appointed by courts or tribunals.

Experts must be seen to be unbiased

From my own experience of long and complex court and arbitration hearings, experts are often required to attend many days of evidence and to work extremely closely with those appointing them and their legal team in order to share their opinions on a broad range of evidence within their expertise.  One consequence of such a close working relationship is that an outside observer could interpreted the familiarity between the expert witness and those appointing them as implying bias. Indeed I have seen expert evidence dismissed by an arbitrator merely because the witness entered, sat with and left with the legal team each day. To the tribunal the expert witness appeared to be a member of the legal team and so an advocate for their client’s case.

In order to avoid even the appearance of bias the cautious expert should remain slightly aloof from the party that appointed them. This could include even entering the tribunal room separately and throughout the hearings sitting slightly apart from the party that appointed them.  Perhaps they should even go as far as to stay in different hotels and have their meals separately? All this should be designed to reassure the tribunal that the expert was approaching the work and evidence with total impartiality.

Why not share your experiences?

If readers have come across other examples of expert evidence being excluded for small indiscretions, and how this appearance of bias can be avoided, I would like to hear about them and the consequences for the case.  Please drop me a line.  I look forward to hearing from you.

Charles Lazarevic

27 May 2019