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Restructuring should begin with a forensic audit

A forensic audit at the start of the restructuring process should enable the company to uncover irregularities and take the right remedial measures.

What does a forensic audit have to do with restructuring?

Marcin Klimczak, Forensics Director at PwC Poland: The goals of these two processes overlap to a great extent. Restructuring is aimed at cutting out the unprofitable parts of the enterprise. And the source of inefficiencies is often abuses and irregularities, which are exactly what a forensic audit is designed to uncover. This is why a forensic audit can function as a kind of opening balance sheet, answering many questions that will be essential for the restructuring. Conducting such an examination at the outset generates synergies, saving time and cost. Restructuring really should not be attempted without a preliminary forensic audit.

How common are commercial abuses in Poland?

Marcin Klimczak: In a study of economic crime conducted by PwC, half of all firms admitted that they had been the victim of abuses. That only means that they were able to discover improprieties and were willing to talk about it. The scale of the problems is really much greater. Probably almost every company in Poland will be affected by lesser or greater abuses.

According to our study, one in five firms in Poland loses over PLN 15 million a year as a result of abuses, and one in three loses over PLN 3 million a year. Significantly, 22% of abuses are discovered by accident—not thanks to a whistleblower, mechanisms or procedures, but during the process of restructuring or a financial audit.

When should a company think about a forensic examination?

Dominika Stępińska-Duch, partner in the Business Crime Practice at Wardyński & Partners: Practically anytime an enterprise will be acquired or restructured. It should be an integral part of the standard audit conducted for an acquisition or restructuring. At the beginning the costs may be off-putting, but the potential savings can be much greater.

Marcin Klimczak: In many instances elements of a forensic audit can supplement or even replace elements of the restructuring process. By beginning with a forensic audit, we obtain indicators of how the enterprise should be restructured and what should be dealt with first. Such an audit is capable of identifying dishonest employees and business partners, and inflated or fictitious costs, at the outset.

Who is usually guilty of violations within a company?

Marcin Klimczak: In Poland it is most often high-level management. Over 50% of abuses identified in Polish firms are committed by managers, most often men aged 35–45, university graduates, who have been working at the company for over 8 years.

Dominika Stępińska-Duch: They feel sufficiently sure of themselves, and they know the mechanisms, but they also feel a certain amount of frustration that causes them to lose their solidarity with the company and to place their immediate personal advantage over the interests of the enterprise.

If someone is suspected of dishonesty, wouldn’t it be better to turn straight to the prosecutor’s office?

Dominika Stępińska-Duch: Filing a criminal complaint takes the case out of your hands. For the prosecutor, the good of the investigation takes precedence over the good of the enterprise or investor. But if we are acting in a forensic audit or internal investigation, we are in a position to control the information obtained and the flow of that information. If the forensic audit is conducted in cooperation between lawyers and a forensics firm, the information will be covered by attorney-client privilege and will not have to be released externally.

In business terms, a forensic audit is highly efficient. It allows abuses to be identified quickly, and measures to cure the situation can then be taken quickly and effectively. Potential criminal measures or involvement by the prosecutor’s office is secondary.

What are the most common violations?

Marcin Klimczak: The same ones that are analysed in the context of restructuring, in other words those affecting any and all assets of the company: theft of property, asset-stripping, improper contracts, preferential treatment of customers and suppliers, inflated prices for goods or services, fictitious external services, bribery.

What kind of companies should consider such an audit?

Marcin Klimczak: There is no company that is immune from abuses.

Dominika Stępińska-Duch: This applies also to companies in regulated industries. People are to blame for abuses, and people everywhere are pretty much the same.

Marcin Klimczak: While certain types of abuses are more common in certain industries, threats cannot be limited to a few fields, such as construction. We do forensic audits in companies from all industries.

Have you ever conducted an audit where you didn’t find anything wrong?

Marcin Klimczak: In fact the answer is no. We always find something.

Dominika Stępińska-Duch: They may be minor violations which do not justify commencing any proceedings, but departures from the procedures or some irregularities are always there.

Marcin Klimczak: Even if for reasons of reputation or business considerations the client is not interested in filing a criminal complaint, the consequences will include at least modifications to internal procedures, training, personnel changes, and a new approach to the issue of compliance. But there aren’t any projects which do not find sufficient reason to review the rules in force within the company.

Dominika Stępińska-Duch: Particularly if the rules are based on some historical events and are remnants from the early years of the post-communist transformation. In companies that have been functioning in a certain way for many years, it can be hard to explain to staff that some things are not right. It’s a question of mentality and a different way of thinking. Then the investigative process will include talks with the employees combining aspects of law and psychology.

How does such an audit proceed?

Dominika Stępińska-Duch: Actions are taken on two planes. We lawyers focus on analysis of documents and interviews. This is why the lawyers working on these audits typically have a background in criminal law, and are skilled at questioning witnesses and identifying evidence. The mechanisms are similar to those used in criminal proceedings. But that does not mean that a forensic audit must lead to filing of a criminal complaint. That’s a common misunderstanding.

Marcin Klimczak: We most often begin the investigation by identifying the key people who might know about irregularities or even be the perpetrators. The second element is securing the data that may be relevant for the detection process. This refers to financial data, but also any devices where data are stored: computers, pen drives, smartphones and the like.

The next element is analysis of key processes. It’s important to understand what processes are key for the specific enterprise, and the processes where there are loopholes that could be exploited. An increasingly important element of investigations is the analysis of large data sets. Big quantities of data are compared and the anomalies then stick out.

We had an example like that in the hotel industry. We compared room reservations against occupancy. There was one room that was never reserved but was always occupied. One of the staff had simply turned the room into a private apartment.

We did an audit for an investor in the construction business. The general contractor swore there were 200–250 people working on the site every day. Because construction was already behind schedule, the investor wanted proof that this was really the case. We checked the system for access to the construction site and of course it turned out that there weren’t nearly that many people actually working on the site.

Another major element of the investigation process is to analyse public sources of information which can reveal, for example, connections between employees and customers or suppliers. In one of the companies we studied, a warehouse worker turned out also to be the owner of a transport business, and through that firm he was personally providing transport services to his own employer—during working hours.

Doesn’t a forensic audit paralyse the operations of the company?

Marcin Klimczak: We try to make sure that we interfere with the current activity of the company as little as possible, but obviously you can’t admit someone from the outside and assume that it will not affect anybody or anything. But with years of experience, we know how to minimise it.

Dominika Stępińska-Duch: Every investigative procedure is preceded by hours of meetings, analysis, and process mapping.

Marcin Klimczak: We can of course enter the firm immediately if that is what the client wants. But most often we prepare in advance. Once we’re ready to step in, we can secure all the evidence and media we need within one day.

Dominika Stępińska-Duch: And without violating the privacy of employees, which is vitally important. Securing of devices that are used for both business purposes and private purposes must be handled by professionals using professional tools.

But I understand that the originals of the data carriers are seized for a moment?

Marcin Klimczak: Yes, but only briefly, and it is not perceptible in the scale of the company’s operations. It’s just a couple of hours, and can always be done over the weekend or at night.

So this is less burdensome than if the prosecutor’s office gets involved?

Dominika Stępińska-Duch: There’s no comparison. When the prosecutor steps in, it paralyses the work of the company regardless of how well prepared the company is. Theoretically the prosecutor should allow copies to be made of the data from the servers. But the prosecutor secures the originals and often does not return them. The prosecutor issues an order against which an interlocutory appeal can be taken, but before the court hears it the clock is ticking and the company is standing still. Often the staff do not think to make photocopies, and they turn over all original documents, including accounting records and entire files of correspondence, and then the company cannot function properly.

Marcin Klimczak: The law enforcement authorities typically stay at a company for several days and nights, preparing an inventory and notes of all documents. This takes a lot of time and has a poor impact on the atmosphere at the company. We come in, scan the same documents to make an electronic version, and leave.

Dominika Stępińska-Duch: Not only that, we also try not to interfere any more than necessary in the structure of the company. For example, we can meet with the entire management without interrupting the work of people in the lower ranks. But when the prosecutor enters, the process is often entirely uncontrolled by management.

How long does such a project take?

Marcin Klimczak: That depends on the client’s needs. Recently we conducted an audit in two and a half weeks, where normally it would take two months. But we were working 24 hours a day with a team of about 15 people. The client needed to take business decisions quickly, replace the managers, and enter the new production season with certain conclusions.

In your experience, how long can violations go on until they are discovered?

Dominika Stępińska-Duch: They can last for years—particularly in smaller places, where everyone knows each other and certain procedures cease to be viewed as abuses but are regarded as the norm. It is different in companies which were already restructured after the economic transformation. But it can still be years.

Can a company always be restored to health, or is it sometimes too late?

Dominika Stępińska-Duch: Where there’s a will there’s a way, but a forensic audit is probably the only tool that allows abuses to be fully exposed.

Marcin Klimczak: It is a bit like gangrene, where you can save the patient’s life but sometimes at the cost of an arm or a leg. It all depends on how far the disease has spread. But the difference between a company and the human body is that a company can always be revived by shifting its focus to other business areas and slowly making up for the losses.

Dominika Stępińska-Duch: The consequences for the client can be sad. Sometimes the client learns that abuses have been committed by people they trusted for many years—people who hold high positions in the company or who are responsible for a big chunk of the company’s business. It may seem impossible to remove them from the company. The effect of the audit may be dismissals, replacement of managers, or termination of contracts with major customers and suppliers.

What benefits does a company gain by deciding on restructuring using a forensic audit?

Marcin Klimczak: First and foremost it identifies and eliminates irregularities. It cuts inflated or fictitious costs. During the audit we always identify suppliers who are being overpaid, or forgotten contracts that continue to generate costs. The company can get rid of dishonest employees who not only harm the company themselves but also have a bad influence on others. Dishonest business partners, such as suppliers inflating their prices, can be purged. The company can also decide on entering new markets, because these procedures are often cross-border in nature. Another benefit for the client is time. Lots of business decisions can be taken much faster.

A huge advantage of a forensic audit is that it is done with an eye for the best interests of the client. If we discover only a minor problem, we don’t advise the client to follow measures that would force the company to withdraw from a lucrative market or worsen relations with a valuable customer or supplier. We can advise the client on how to eliminate the problem but not throw the baby out with the bathwater.

Interview conducted by Justyna Zandberg-Malec