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To be published in Middle East Consultant – February 2024 Edition

HKA Partner, Clare Lavin, recently spoke with Paul Godfrey, Head of Content of Middle East Consultant, giving an in-depth insight into Forensic Accounting and Commercial Damages in the Middle East.

Are there significant differences between the disputes you work on here in the GCC compared to those in other markets?

There are several notable differences. A fundamental one is how the parties to disputes in the Middle East are more inclined to go to arbitration or litigation. In other jurisdictions, there is greater use of alternative dispute resolution (ADR) options, such as adjudication in the UK.

In this region, it is sometimes possible to get the parties talking and explore mediation. Where some ‘middle ground’ can be found, it can lead to swifter settlement. But this tends not to be the preferred option as parties are more litigious. So, having worked for more than 12 years in the Gulf, I’d say I have been on the stand far more often than I would have been if practising in Europe.

Another difference is the diversity of the parties. Large-scale projects – from construction to product research and development (R&D) – almost invariably involve international partners and joint venture agreements. The GCC market attracts major players from around the globe. These partnerships combine essential local and international know-how, but if the project runs into difficulties, the differences in language and culture tend to fuel the fire of the dispute.

Arbitration centres in the region are developing to meet the needs of international parties. In addition, the separate system of local courts is also undergoing a radical transformation. Traditionally, all proceedings were conducted in Arabic, expert witnesses were court-appointed, and other experts only in an advisory role. We have seen an evolving role of international experts in local courts recently.

Our team includes Arabic speakers to reflect the diversity of our clients and workload. Given the increasing complexity of projects and disputes, local judicial reforms – such as allowing the use of foreign experts and English– can enhance clients’ confidence, and they are to be welcomed. The changes being rolled out seem positive from our experience so far in the UAE.

I’ve also been involved in commercial litigation work through the DIFC (Dubai International Finance Centre) courts. Again, my experience of its system of specialist courts and judges for different business sectors has been extremely positive, such as the flexible ways of conducting hearings, including the continuation of remote hearings.

What does your Early Case Assessment work involve? And can Forensic Accounting be applied proactively to manage risk, rather than just retrospectively when problems come to light?

An early assessment of disputed accounting treatments or damages – including lost profits or loss of opportunity, or indeed the interpretation of a contract – often paves the way to a negotiated settlement or mediation.

It’s true that much of our forensic work is reactive, responding to clients’ concerns when, say, a whistle-blower or internal auditor sounds the alarm, or irregularities are discovered in financial transactions or their reporting. In the construction sector, these investigations often focus on the procurement process, whether it’s transactions that were not conducted at arm’s length, overpricing or various forms of bribery and corruption.

Businesses may have different priorities, such as establishing a robust case for action against an employee, or correcting misrepresentations in company statements so the accounts show the true financial position.

Companies and other organisations do also – and should regularly – take a deep, hard look at their internal controls. We carry out fraud risk assessments. Many aspects of a business may need to be reviewed, but the finance function and procurement processes are usually critical. What checks and controls are in place for tendering? Is there third-party verification of supplier lists? Having identified gaps and weaknesses, we design and recommend a framework of measures to mitigate the fraud risks. The reality is these cannot be eliminated entirely, hence the need for regular reviews.

IPOs (initial public offerings) are also driving a more proactive approach in the region, where most companies have previously been reactionary. International investors also want to see best practice in internal controls and accounting practice before investing.

As well as early case assessment, we’re also being brought in earlier in some cases to provide expert determination (whether contractual or not or binding on the parties or not) that can pre-empt a long-running dispute so that the parties focus jointly on a successful completion or enable an ongoing relationship. The risks and costs involved in arbitration or litigation are another incentive to do this.

Is there a typical issue you encounter in the Construction sector as opposed to other sectors?

While many of my colleagues specialise in construction, HKA experts and consultants also have sector-specific knowledge across a spectrum of industries. Our Financial Accounting & Commercial Damages team works across all sectors – but we also bring industry experience and insights to bear.

Valuation of damages requires a robust assessment of the loss of profits or opportunity, for example. In construction this often arises from delays in completing an asset – recent cases have involved a shopping mall and a major oil and gas facility. We also help determine losses associated with contract breaches and terminations.

What we’ve found in construction disputes is that loss of profit is often not identified as a head of claim. The income lost – because, say, a hotel or residential development opens a year late – should be a separate head of claim so the assessment captures the full quantum of damages for the client. Hence, the added value of combining commercial and construction expertise in the same team.

Would better, tighter contracts make for an easier life in the Construction universe? What would be your recommendations for change and reform?

It’s notable that our latest CRUX Insight analysis of major construction and engineering projects shows that ‘contract interpretation issues’ was the third-highest ranking factor in claims and disputes across the Middle East. More than 28% of projects were affected, compared with around 17% in the rest of the world.

In my experience, most commercial disputes also tend to arise from the misinterpretation or breach of contracts We do encounter the misuse of technical accounting language. The terms are either wrong in themselves or in the context of the contract, causing issues over their interpretation. As forensic accountants, we have to unravel the wording to arrive at the true meaning and intention, and then advise on the appropriate treatment and/or impact of these to the client, from a contractual point of view or indeed the financial reporting implications.

Tell us something about your experience with arbitration centres such as LCIA, DIAC and ICC?

We act anywhere clients and their contracts require, and have provided expert witness testimony for all the major arbitration centres. Personally, I’ve been appointed as an expert in arbitration matters involving DIAC, DIFC-LCIA that was, and ICC, among other centres.

Our six-strong Financial Accounting & Commercial Damages team based in Dubai is growing, but we also operate as part of a cross-border group with 10 Partners – most with Middle East experience – and some 30 consultants.

We’re familiar with how the different seats of arbitration operate, but the prime concern is the client experience. Our regional centres are becoming more user-friendly as they adopt the best international practice and vie for clients’ confidence. It seems to be working in as much as SCCA (Saudi Center for Commercial Arbitration), for example, reports an increase in its caseload.

What are the factors that are most prized in an accounting expert witness?

Previously, lawyers needed to look outside of the region for accounting experts, and in some cases still do, but there are many more experienced experts within the Middle East now who have been in the region for some time. Also, some disputes do have a regional nuance that requires an understanding of the dynamics in Gulf states.

Having been long-established in the region – our firm has more than 15 years of experience on the ground in Saudi Arabia, for instance – HKA has built long-term relationships as trusted advisors. That position is underpinned by our ability to offer a comprehensive range of services, draw on a global network of expertise, and provide tailored support in whatever jurisdiction our clients sit.

Forensic accountants need to be technically strong. That means not only having the appropriate qualifications but also mastery of the basics, from ledger entries to tracing transactions, as well as accounting conventions. Our commercial work also requires a clear understanding of different valuation methodologies and when they should be used.

It’s essential too to have the confidence and capability to communicate often complex accounting principles in a way that’s easily grasped by non-accountants, be the clients, lawyers, or judges/arbitrators. It helps that our team reflects the diversity of corporate sectors and stakeholders we serve, speaking their language and factoring in the pitfalls and challenges in their markets and industries.

Being commercially minded can mean, especially when we are dealing with imperfect information, having to stand back and look at the bigger picture – and taking a different approach (to achieve a robust valuation, for instance) rather than the bottom-up, detail-based ways of working often expected of accountants.

How do you see the future of Forensic Accounting in the GCC?

As with construction projects, there is a general trend toward ever larger and more complex disputes in other sectors too. This is a challenge that demands the involvement of multiple experts to address the different facets of a claim. There are advantages when these services are joined up to provide a more coherent and integrated solution to clients.

Forensic accountants must also be equipped to tackle cross-border, international disputes as foreign investment and involvement grow in the Gulf’s expanding economies. Many investigations are commissioned into regional branches of global businesses, which we find are not following international best practice.

Economic diversification and business innovation will also give rise to disputes in new and emerging sectors.

We believe that HKA’s global experience, solid foundations in the Gulf, and multi-service offering puts us a strong position to serve these changing needs of our clients in the Middle East.

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