Forensic experts called in as frauds emerge in the downturn

'Small lies that get out of control’: KPMG hires specialist investigators at its corporate restructuring unit
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The Independent Online

Spiralling evidence of corporate fraud in Britain is forcing the City accountancy firm KPMG to bring in specialist forensic investigators for nearly all its restructuring assignments.

KPMG is thought to have hired a large number of specialists as the economic downturn has thrown up signs of fraudulent activity.

Philip Davidson, European head of restructuring at KPMG, said: "One of the features of the past few years has been corporate heads issuing very exuberant earnings promises and company valuations. What they are realising now is that the promises don't match the reality."

Mr Davidson added that fraud was most evident in company subsidiaries where pressure to perform had prompted workers to massage figures. "These aren't huge frauds, but rather small lies and manipulation of figures that get out of control," he added.

"Pressure to consistently perform means that what starts as a little problem can soon develop into something much, much bigger. 'People are covering up the gaps' is the best way to put it, and it often means that we are unable to ascertain whether or not the numbers are reliable."

While most of the Suare Mile suffers amid the dearth of corporate activity in the recession, which was officially confirmed on Friday, restructuring and administration specialists are prospering.

Leading firms enjoying the restructuring spoils include the so-called Big Four accountancy firms – KPMG, Ernst & Young, Deloitte and PricewaterhouseCoopers.

Meanwhile, Rothschild, Zolfo Cooper and Close Brothers are also spearheading restructurings at some of the UK's biggest companies.

KPMG's fraud warning comes ahead of a key meeting of the Business, Enterprise and Regulatory Reform Committee on Tuesday, where Stephen Speed, head of the Insolvency Service, the industry regulator, will be grilled over the issue of pre-packaged administrations, which have hit the headlines recently.

Pre-packs, where a buyer is lined up for a struggling business before it goes into administration, have been courting controversy recently, with the former Conservative shadow Business Secretary, Alan Duncan, describing them as often "commercially and morally unacceptable".

"The pain of recession is giving rise to some questionable practices whereby the owners of the business can shut up shop, shovel around the debt and then start again with old assets through a pre-packaged administration," commented Mr Duncan.

Industry experts expect that complaints linked to directors' activities while going through insolvency will surge in 2009. Last year the Insolvency Service received 4,037 complaints, a marginal increase on 2007.