Graeme Berry says forensic accounting is key to resolving business interruption claims
Business interruption (BI) loss is all about the hypothetical: the art of putting a value on a company's daily operations, revenues and relationships, at the time when those operations are in crisis, if not in ruins.
Quantifying how the damage of a fire, flood or accident affects an organisation can be hard enough. But often, if a business is to recover and recoup the loss it has suffered, that quantification has to take place fast.
No wonder then, that the skills of accountants, and more specifically, forensic accountants, are increasingly being used to help resolve BI claims, using analytical tools more commonly associated with disciplines like profit forecasting.
As modern global businesses are growing in complexity and scale, they are relying on increased interaction with suppliers and customers. This means that a significant interruption can ricochet up and down a supply chain.
If a problem occurs, a team with expertise in BI insurance and forensic accounting can quickly assess and settle a claim.
Getting in and getting up to speed quickly can often help mitigate costly delay and disputes, especially when there are large volumes of data to be managed.
Understanding the fundamentals of the economic impact of an interruption is only possible once a business's normal operations are analysed.
Here, we often match a traditional loss adjuster with a forensic accountant, who, working in tandem with industry experts, can swiftly get under the skin of a company.
Good communication and management of information, expectations and cashflow, together with timely identification and handling of issues, are key to effective claims management.
In many ways, the term "business interruption" is a misnomer. Often the emphasis is on finding a way to keep a firm going.
An example of this is a global telecoms business. It suffered a major interruption when a main component supplier ran into difficulties.
The potential loss was estimated to be well in excess of £140m, mainly because of the production bottlenecks that were expected to ensue, and the consequent loss of market opportunity. The presence of forensic accountants in the claims team reassured those paying the claim that the assumptions on which the loss estimate was based were validated.
On other occasions, claims management ensures the vital flow of cash continues, keeping the business itself afloat. This is particularly key if the business relies on a single customer. A fire at a specialist bakery recently raised a £15m BI claim.
The priority for management was to focus on keeping the largest customer happy. Its reliance on constant product development meant that focusing on its single most important customer would result in the loss of other client leads, which could have been exploited if the business had been functioning as normal.
While we ensured that all interim claims were properly supported and paid quickly, another important stream of work was to assess the likely impact of these losses in sales opportunity, investigating pre-fire investment plans and decisions to assess the likelihood of new product launches and potential.
Effective management is at the heart of a settlement and often requires a team of brokers, loss adjusters, accountants, industry experts and sometimes lawyers to work together to assess the impact of a major loss. Damage can often impact on many different elements of a business, with varying consequences.
In the wake of a storm, a telecoms business, for example, was rapidly able to relocate some of its functions off-site, while other elements were fixed and more vulnerable to long-term loss.
Only through detailed understanding, smart financial modelling and trend analysis by forensic accountants, who understood the business, could the claim be assessed. This took into account historic sales volumes and process, as well as seasonal and longer-term factors affecting likely profitability.
Forensic accountants are commonly called in when suspicious claims are filed. They can investigate potentially fraudulent incidents through close examination of the accounts.
In the case of a claim by an electronics business, the supporting documents were initially faxed over to the insurer. Closer examination revealed inconsistent and irregular invoice numbering, indicating forged documentation.
Sure enough, the originals had been fabricated with the aid of scanning and high-quality printing equipment.
In another incident, the banking records pointed to a possible motive for making a fraudulent claim. A business panicking at the prospect of collapse might try to save itself from a deteriorating relationship with bankers by arranging a "malicious attack".
These banking records are usually inaccessible and rarely disclosed as a matter of course, and it pays to have team members with litigation experience who know which buttons to press.
Traditional forensic accountancy skills can also be used in competition-mapping to help draft mitigation plans that include compensation packages for a business's customers.
The investigation of a fire at a health club led our forensic experts to swap their grey suits for lycra - all in the name of accurate economic assessment, you understand. They posed as potential new members at rival local clubs to see what a claimant needed to do to avoid permanent loss of its own membership and income.
Business interruption loss, therefore, is not all about flames and flood. Sometimes an emergency can occur by a delivery disaster at a supplier or the threat of competition.
Whatever the cause, qualified experts need to be brought in as soon as possible to assess and help mitigate the damage. How a business reacts to a disaster in the first few hours and days will determine whether it survives and at what price.
Ensuring the right blend of skills are put in place - surveyors, forensic accountants, industry experts, lawyers, brokers and adjusters - will help ensure the delivery of the insurance promise to customers. IT
' Graeme Berry is director of forensic services at PricewaterhouseCoopers