How Forensic Accountants Analyse Financial Evidence When Records Are Incomplete

Financial records are not always complete in a dispute or investigation. Documents may be missing, records may cover different periods, or accounting information may not provide enough detail to answer the financial questions raised by the case.

Incomplete records do not necessarily prevent financial analysis, but they can affect the scope, methodology and level of certainty that can be attached to the conclusions. A forensic accountant may need to identify what information is available, establish the limitations of the evidence and consider whether other records can provide relevant support.

This article explains how a forensic accountant may approach financial evidence when records are incomplete, with particular relevance to solicitors and legal professionals involved in disputes.

Why Financial Records May Be Incomplete

There are various reasons why a forensic accountant may receive an incomplete financial record set.

For example:

• Accounting records may no longer be available for older periods
• Bank statements may be missing for particular accounts or dates
• Management information may have been prepared inconsistently
• Source documents may not have been retained
• Records may be held by another party
• A business may have changed accounting systems
• Relevant transactions may not be separately identified in the accounting records
• Records may cover different periods or use different accounting bases
• Electronic records may be unavailable or difficult to retrieve

The reason for the missing information can be relevant to how the forensic accountant approaches the analysis.

The absence of a particular document does not by itself establish what happened to the underlying transaction or financial position. The available evidence needs to be considered in context.

Establishing What Records Are Available

The first step may be to establish what financial information is actually available.

Depending on the matter, this could include:

• Annual accounts
• Management accounts
• General ledgers
• Trial balances
• Bank statements
• Sales invoices
• Purchase invoices
• Payroll records
• Tax returns
• VAT records
• Contracts
• Customer and supplier records
• Budget and forecasting information
• Loan and financing records
• Electronic transaction data

A forensic accountant may compare different records to identify gaps, inconsistencies or periods that require further investigation.

For example, annual accounts may provide information about total revenue and costs without providing the transaction-level detail needed to analyse a particular period. Bank statements may then provide another source of financial evidence, subject to their own limitations.

Sterling Forensic's forensic accounting services include financial record review and analysis in the context of disputes and investigations.

Understanding the Financial Question

The approach to incomplete records will depend partly on the question the forensic accountant has been asked to address.

A missing bank statement may have different significance in a business valuation from a loss of profits calculation or a review of particular transactions.

Before analysing the available records, it can therefore be useful to establish:

• What financial issue is being considered?
• What period is relevant?
• Which entities or accounts are relevant?
• What information would ordinarily be expected?
• Which records are missing?
• What alternative sources of evidence may exist?
• Are there assumptions that need to be made because information is unavailable?

The purpose of the analysis should remain within the agreed scope of the instruction.

Using Alternative Sources of Financial Evidence

Where a particular record is unavailable, other financial information may sometimes provide relevant evidence.

Potential sources can include:

• Bank statements
• Tax returns
• VAT returns
• Payroll records
• Invoices
• Customer statements
• Supplier statements
• Contracts
• Payment records
• Accounting software exports
• Management reports
• Budgets
• Correspondence containing financial information
• Records held by third parties

These sources should not automatically be treated as interchangeable with the missing records. Their relevance and reliability will depend on the circumstances and the particular financial question being examined.

For example, a bank statement may demonstrate that a payment was made, but it may not by itself establish the accounting treatment of that payment or the commercial purpose for which it was made.

Reconstructing Financial Information

In some matters, the available evidence may allow particular financial information to be reconstructed.

A reconstruction might involve bringing together information from several sources to estimate or calculate a financial figure for a defined period.

Depending on the assignment, this could involve:

• Reconstructing revenue from available sales records
• Analysing payments through bank accounts
• Reconstructing particular expense categories
• Comparing accounting records with tax information
• Identifying transactions from multiple data sources
• Reconstructing financial performance for a particular period

The methodology should reflect the evidence that is actually available. Where a reconstruction depends on assumptions or estimates, those assumptions should be identified rather than presented as established accounting records.

Comparing Different Sources

Where more than one source of financial evidence is available, a forensic accountant may compare them to identify differences.

For example, the analysis might compare:

• Bank receipts against recorded sales
• Payroll records against accounting entries
• VAT returns against reported turnover
• Invoices against ledger entries
• Management accounts against statutory accounts
• Contractual payment terms against actual payments

Differences do not necessarily demonstrate an error or wrongdoing. They may arise from timing differences, accounting treatments, incomplete datasets or other explanations.

The significance of a discrepancy therefore needs to be considered in the context of the wider evidence.

Dealing With Missing Periods

Missing information may relate to a specific period rather than the entire financial record.

For example, records may be available for several years but missing for a number of months. In that situation, the forensic accountant may consider whether information from surrounding periods provides relevant context.

Depending on the purpose of the analysis, this could involve examining:

• Trading patterns before and after the missing period
• Seasonal variations
• Changes in revenue or expenditure
• Known business events
• Contractual changes
• Available bank transactions
• Other contemporaneous financial information

The relevance of surrounding periods will depend on the financial issue being examined. Historical patterns should not automatically be assumed to continue during a period for which records are missing.

Identifying Assumptions and Limitations

Incomplete financial evidence can require assumptions to be made.

For example, an analysis may need to assume that a particular cost continued at a specified level, or that a particular transaction had a certain financial treatment based on the available evidence.

Any material assumption should be clearly identified.

A forensic accountant may also explain:

• Which records were unavailable
• Which information was obtained from alternative sources
• Which calculations depend on assumptions
• Which figures are supported directly by documentary evidence
• Which areas remain uncertain
• How missing information affects the analysis

This distinction can help readers understand the difference between documented financial information and a figure derived from an analytical reconstruction.

Testing the Reliability of the Available Evidence

Incomplete records can make it particularly important to consider the reliability of the information that remains available.

Depending on the circumstances, the forensic accountant may consider:

• Whether records are contemporaneous
• Whether information comes from an independent source
• Whether different records corroborate one another
• Whether there are unexplained inconsistencies
• Whether the records cover the complete relevant period
• Whether accounting policies changed during the period
• Whether figures can be reconciled to other available information

No single factor necessarily determines whether evidence is reliable. The assessment will depend on the nature of the records and the financial question being addressed.

Incomplete Records in Loss and Damages Analysis

Incomplete financial records can present particular issues where the purpose of the engagement is to quantify loss.

A loss calculation may require historical financial information to establish a baseline against which actual performance is considered. If relevant records are missing, the forensic accountant may need to consider whether other evidence can support the calculation.

Potential evidence could include:

• Historical accounts
• Management information
• Sales records
• Customer contracts
• Order information
• Pricing records
• Bank statements
• Budgets and forecasts
• Industry or business-specific information

The methodology will depend on the facts of the particular claim.

Sterling Forensic provides loss and damages quantification, including analysis of loss of profits and other financial losses in commercial disputes.

Incomplete Records in Business Valuation

Incomplete financial information can also affect a business valuation.

A valuation may require consideration of historical earnings, revenue, costs, working capital and other financial information. If relevant records are unavailable, the valuation analysis may need to take account of the limitations in the underlying evidence.

Questions may include:

• Which historical periods can be reliably analysed?
• Are reported earnings supported by available records?
• Are there unexplained movements in revenue or costs?
• Can missing information be corroborated from other sources?
• Do assumptions need to be made about particular financial items?
• How might limitations in the evidence affect the valuation analysis?

The appropriate approach will depend on the valuation date, purpose, available evidence and other circumstances of the assignment.

Further information about Sterling Forensic's business valuation services is available on its website.

Incomplete Records in Financial Investigations

Where the assignment concerns particular transactions or suspected financial irregularities, missing records may create a different set of issues.

The analysis may focus on identifying transaction patterns from the records that remain available.

This can include:

• Reviewing bank transactions
• Tracing payments between accounts
• Comparing transactions with accounting entries
• Reviewing related-party transactions
• Identifying unusual payment patterns
• Examining supporting invoices and documentation where available

Where records are missing, the analysis should distinguish between what can be established from the available evidence and what cannot be determined.

How Limitations May Affect an Expert Report

Where a forensic accountant is instructed to prepare expert evidence, limitations in the underlying financial records may need to be explained in the report.

The report may need to identify:

• The information reviewed
• Material information that was unavailable
• Assumptions made because of missing evidence
• The methodology used
• The effect of any significant limitations
• Areas where the available evidence does not permit a definitive conclusion

The nature and extent of this discussion will depend on the assignment and the relevant procedural requirements.

Sterling Forensic provides expert witness reports for civil, family and criminal proceedings in England and Wales, where the instruction falls within its scope.

What Solicitors Can Provide When Records Are Incomplete

When instructing a forensic accountant, solicitors can help by identifying the known gaps in the financial evidence and providing information about the purpose of the analysis.

The instructions may usefully identify:

• The financial question to be addressed
• The relevant period
• Records already available
• Records known to be missing
• Documents expected from another party
• Relevant contractual or commercial information
• Other expert evidence
• Any known deadlines
• The required form of output

This can help the forensic accountant understand the evidential position before beginning the detailed analysis.

When Further Information May Be Needed

The initial document set may not always be sufficient to complete the requested analysis.

During the review, the forensic accountant may identify information that could be relevant to particular calculations or conclusions. Depending on the circumstances, this may lead to requests for additional records or clarification.

Additional information might include:

• Missing bank statements
• Detailed ledger entries
• Supporting invoices
• Payroll records
• Customer or supplier statements
• Contract documentation
• Financial forecasts
• Transaction-level data

Whether further information is necessary will depend on the scope of the instruction and the financial questions being considered.

A Structured Approach to Incomplete Financial Evidence

A forensic accounting review of incomplete records can generally be structured around several questions:

1. What is the financial question?
2. What records are available?
3. What records are missing?
4. Can relevant information be obtained from alternative sources?
5. Can the available evidence be reconciled or corroborated?
6. What assumptions, if any, are required?
7. What limitations remain after the analysis?
8. How do those limitations affect the financial conclusions?

This approach can help separate documentary evidence from reconstructed figures and assumptions.

Conclusion

Incomplete financial records do not automatically determine whether financial analysis can be undertaken. The appropriate approach depends on the nature of the missing information, the financial question being considered and the other evidence available.

A forensic accountant may review alternative sources, compare different records, reconstruct specific financial information and identify assumptions or limitations where appropriate. The resulting analysis should make clear which figures are directly supported by records and which depend on reconstruction or assumptions.

For solicitors, identifying known gaps in the evidence and clearly defining the financial questions can help establish the scope of a forensic accounting instruction. Sterling Forensic's approach to forensic accounting work includes review and analysis of financial records and identification of additional information that may be required.

This article provides general information only and is not legal or accounting advice. The appropriate treatment of incomplete financial records will depend on the circumstances of the individual matter, the available evidence and the scope of the forensic accounting.