Posted: 08 / 08 / 2024
Relevant Case Studies
Warranted Financial Statements – Understated Costs
On a previous post-transaction dispute matter, it was alleged that costs had been entirely omitted from the accounts for the target entity. This had the effect of:
- incorrectly understating the costs of the target business;
- incorrectly overstating the profit / earnings of the target business; and
- as a result, overstating the calculation of the purchase price.
One issue in relation to this matter was that the warranted accounts for the relevant period were management accounts, and on that basis, were more susceptible to manipulation.
We were involved in a significant investigation exercise, to review the available information and reconstruct the accounting records from patchy disclosed documents.
In doing so, we established that a large volume of costs had indeed been omitted. These represented amounts being held on the balance sheet as recoverable, which in fact had already been agreed with the customers as a write off. In this case, the sales teams which had agreed the write offs had kept records of these outside of the accounting system. The result of this was that the accounts deliberately excluded a material expense for a write off of bad debts.
Breach of Warranties in Relation to Laws and Regulations
We were instructed to provide initial advisory services in relation to a post-transaction dispute which reached a settlement.
Following a transaction, sales of the main product for the target company were suspended on a major platform, which alleged that the target company was not compliant with the relevant laws and regulations in order to sell that specific product in that jurisdiction. As a result, the buyer made a claim against the seller in relation to the alleged loss in value, based on an alleged breach of warranty.
We were required to consider the impact on sales, and therefore the impact on profits. An important consideration was factoring in the period of time during which the product would be off the market, given that this had a material impact on overall quantum.
We then calculated the damages suffered, comparing the “warranty true” and “warranty false” values.
Where we are able to assist
We are able to assist in quantifying the damages suffered, or responding to a calculation of damages provided by the other side of the dispute.
We can assist at a pre-action phase, prior to proceedings being issued, or acting as an expert witness in relation to current litigation matters.
Contact
Mark Strafford, Head of Civil Forensic Accounting
