False Accounting: Basics

What is False Accounting? S.17 Theft Act 1968

False accounting is the dishonest altering, destroying, hiding, or fabricating of accounts records with a view to gain for oneself, or cause loss to another. It also includes providing misleading or deceptive documents, or omitting relevant documents when accounts information is requested.

This activity can arise in numerous situations, but perhaps most often occurs to either cover up something which has already happened, or to try and create an inflated position - for example to obtain credit, to inflate the price of shares, or to make a business seem more profitable than it actually is.

Concurring in the above practices, i.e. having knowledge that it is going on and allowing it, is also covered by the law. Ultimately, at the very top end of the scale, these are activities which can affect the valuation of a business by billions of pounds and even cause businesses to go bust.

Someone involved in making an entry in an account which could be misleading, false or deceptive in a significant way, or who leaves out something relevant from an account or other document, is treated as having falsified the document (or account).

A record or account does not have to be a document. A turnstile meter at a football stadium and a taxi meter may be considered records. A document or record need not be an account, as long as it has an accounting purpose. Loan proposal forms, for example, could be considered accounts.

Falsification can include the preparation of false accounts as well as the alteration of existing ones, and this is often a feature of false accounting cases.

The omission of material information from an account or equivalent can amount to falsification. So an employee whose task it is to record transactions, such as a till operator, may commit the offence. It is always necessary that the records were omitted dishonestly.

False Accounting by Company Directors, Company Secretaries, and Other Staff

Liability can extend to officers of a company for an offence committed by the company. This means that if officers of a company consent (or ‘connive') in the activity going on in the company, they may be guilty of the offence themselves. This can include managers and secretaries if the facts support it.

Of course, those who are qualified accountants and are accused of this offence may also be subject to regulatory proceedings for which a false accounting solicitor may be required.

Sentencing in False Accounting Cases

These cases are either way offences which can be dealt with in either the Magistrates' Court or the Crown Court although cases with any complexity will always be heard in the Crown Court. The maximum penalty in the Crown Court is 7 years imprisonment. For offences in the tens of thousands, prison sentences of over 2 years are typical. However, offences where there has been a loss of several hundred thousand pounds may result in sentences of around 3-4 years.

The Courts are required to apply sentencing guidelines to the circumstances of a case. As a rule of thumb, the potential length of sentence is dependent upon the extent of the financial discrepency and the harm which has been caused as a consequence. A false accounting solicitor may be able to give you free legal advice to better understand the principles behind sentencing.

Evidence and Strategy in False Accounting Cases

The first port of call in the preparation of false accounting cases must be to work out the true position of the accounts. In any complex case, a forensic accountant is usually necessary. The false accounting solicitor should request the accountant to conduct an investigation into the accounts. A report should then be prepared for the defence team which may be served on the prosecution and the court, depending on its contents.

The prosecution version of the true accounts position may be exaggerated and look worse for the client than it in fact is. By commissioning a proper analysis of the income, deposits, and outgoing payments in an accounts record and any corresponding bank accounts, a false accounting solicitor will be in a much better position to advise the client properly. In some circumstances it is necessary to include the client in this process, as there may be aspects of the accounts which do not make sense at first but can be easily explained and proved to be accurate with the client's help.

Just because in alleged false accounting cases entries may be missing from a record, misleading items are present, or key accompanying documents are missing, this does not always mean that the defendant or defendants are guilty. The 'errors' must be dishonestly carried out. Sloppy accounting is not and never will be criminal, and nor is incompetent accounting. Where genuine mistakes have been made, even if those mistakes may have benefited the defendant at someone else's expense, this does not mean that the defendant is legally guilty.

If the client says that he or she has made a mistake, it will usually be a matter for the jury to decide whether to give that person the benefit of the doubt that this was the case. The job of the false accounting solicitor acting in defence of the client will be to show all the circumstances surrounding the mistake or mistakes so that the jury can understand how it happened.

If a number of people are charged, and the allegation is that they all consented or were part of the falsification of accounts, then the prosecution must prove that each person had knowledge of the falsification for that person to be proven guilty. Of course, the managing director of a company might not know about all the workings of an accounts team. Similarly, a rogue manager may be acting on his or her own to win a deal through deception of a customer or investor regarding the accounts position, and this doesn't mean that all other managers or even accounts staff knew that something dishonest was going on.

A good false accounting solicitor may want to look in close detail at the nature of knowledge sharing in a company structure, the responsibility for different duties held by staff and company officers, and how the company was being run in reality on a day to day basis. This information, for which the client will often be the best resource, could prove invaluable in showing that the client could have been ignorant of any accounts discrepancies, and therefore innocent of any association with criminal behaviour.