June 2014 Issue
When companies enter into mergers, acquisitions, joint ventures or any sort of corporate deal, it is often assumed that this process is a win-win situation for all parties. However, this is not always the case. The success of any M&A activity can in fact be a double-edged sword, and the sense of joyous congruity is often short-lived. These non-harmonious feelings can drift or surge into legal action that very often ends up in a bitter, long-running (not to mention, expensive) court battle.
There are many things that can be done to try and avoid this. In terms of forensic technology, there are two main processes that can be actioned in order to tackle these problems. The first takes a preventative approach, and the second seeks to preserve the position at the time of the deal for all parties involved.
The importance of due diligence
During corporate deals, a large amount of effort is focused on due diligence – trying to provide the parties seeking to acquire, invest or merge with an independent, a verified view of all entities in question. Due diligence, at a minimum, will include a high level of accounting activity that seeks to confirm valuations, income streams and expense commitments amongst other things. Sometimes it takes on a reputational or compliance angle, especially with legislation such as the Bribery Act potentially having extreme effects.
Analysing accounting data
Due diligence of accounting data can be viewed differently by looking to identify any unusual patterns or transactions from a potentially fraudulent perspective. Before performing this sort of analysis, it is important to ensure that all data is captured and then normalised to ensure that transactions are consistently and completely analysed.
The analysis can take on simple forms, such as checking for payments of round-sums, looking for payments to entities in high risk countries or can be linked to politically exposed people or identifying payments to entities before or around key contractual dates or authorisation limits. Although, it can also take more advanced and complex forms, such as Benford’s Law. This looks for unusual frequencies of transactions with the same leading digits and also statistical clusters and outliers that seek to identify transactions that are statistically deviated from the norm.
Investigation of internal communications
In addition to this more enhanced review of accounting data, there are other data sources that can be revealing, especially email data. Although getting agreement to access this data in a due diligence guise, before a transaction has been completed can be challenging, the benefits can be profound.
Being able to search and analyse the email communications between key senior executives within an organisation can often be very revealing. Relevant key words can be searched for alongside other more generic warning signs. Sentiment analysis can also be used in order to determine the attitude of the email sender, with respect to some topic or the overall context of an email. A deeper insight can be gained into the information being provided in reviewing the results of these searches and analyses. The findings can then be used to enhance further avenues of the investigation.
Studying historical datasets
Preserving the digital state of key systems and computers at the time of the transaction can provide some interesting findings. This enables, if necessary, all parties to maintain or have access to a copy of the data from these systems months or years later in a state where they have not been contaminated by subsequent management actions or decisions. This is a relatively inexpensive exercise, which is designed to simply preserve the key systems by quarantining back-ups of key network-based systems. For example the accounts system, key individual’s email server data and key departmental shares. This exercise also takes forensic images of key local devices used by key individuals, such as their computer and smartphone.
This approach allows for analysis to be performed in the future on an historical dataset. The analysis can be aimed at the accounting data to re-analyse the data from a quantification perspective based on reality rather than assumption, or looking to quantify the effect of specific business practices that subsequently turn out to be suspicious or under scrutiny.
However, the approach can also be used to search local devices for evidence of potential wrongdoing that has subsequently come to light or is alleged. This can include analysing how a machine was used to communicate, for example, searching for remnants of messages read, as well as the details of messages in the inbox from web-based email systems. Analysing chat messages can also be very revealing – including those of corporate chat systems. This analysis can span the use of Skype, Facebook, iChat and Yahoo Messenger.
Revealing bad practice
Relevant documentation can also exist related to potential wrongdoing. This can, but may not be, a ‘live’ file on the system, therefore it is equally important to search for deleted material.
This can be achieved through two processes. Firstly, by seeking to recover and carve deleted files so that historic documentation can be searched and viewed. Secondly, by analysing any Windows artefacts in order to identify files that may have been present on the computer, or other devices. This relies upon Windows recording information about documents that the user is generally unaware of. For example, the creation of LNK files when files are opened, irrespective of their location; and MRU (Most Recently Used) lists in the Registry that record the last files that were opened in a certain application (for example Word or Excel).
With corporate activity continuing to show signs of recovery and following the economic crisis, stakeholders are going to be even more focused on the success of their business activity. Detailed analysis of relevant documentation, communication and accounts data can not only help detect potential issues before the transaction completes, but also helps preserve an untainted position if the worst does happen.
Phil Beckett is managing director at Proven Legal Technologies. He can be contacted on +44 (0)20 7015 5370 or by email: pbeckett@provenlt.com.
© Financier Worldwide
BY
Phil Beckett
Proven Legal Technologies