Expert Review of Financial and Economic Activity

The ICLC experts have experience in carrying out financial due diligence in various situations:

• change of owners, and / or the head, and / or the chief accountant in order to get understanding of the current state of affairs;
• in anticipation of a tax audit to estimate tax risks and receive recommendations for their mitigation;
• as part of a bankruptcy procedure in order to establish signs of fictitious / premeditated bankruptcy, assess the circumstances of bringing controlling persons to subsidiary liability;
• within the framework of relations between a contractor and a customer (investor) in order to verify fulfilment of contractual obligations in the interests of the latter;
• in case of doubt about the competence of the accounting staff and / or the chief accountant;
• in other cases when an independent opinion of professionals in various financial issues is required.

Consider the following three cases

Case 1: Efficiency of using funds

Background
The owner of the yacht marina (harbour) has doubts that all available funds are used by the general director in the interests of the company.

Tasks

1. To carry out financial due diligence for the last three years in order to examine the costs for their reasonableness and relation with the primary activity of the company.
2. To analyze the company’s cash flows to get understanding of their allocation, opportunities for investing available funds.

Result
As a result of the comprehensive study of the company's activities, verification of operations, inspection of primary documents and interviewing employees by the ICLC experts, it was revealed that the company:

• incurred expenses for maintenance of the assets used in the activities of other companies controlled by the general director;
• provided services to the companies related to the general director without collecting receivables with their subsequent write-off;
• paid for the third parties’ services in the interest of the general director’s companies;
• disbursed loans to the related parties on the terms and conditions different from the market ones. Besides, some borrowers were knowingly insolvent.

The ICLC experts calculated the amounts of financial losses, including potential tax risks, and lost profits (the income that the company could receive by depositing available funds). The company owner received the grounds for claiming against the general director.

Case 2: Unjustified Tax Benefit

Background
Cosmetics retail network pursued an aggressive tax policy at the stage of formation and promotion of products in the market, including using tax burden reduction schemes being developed by the tax authorities, which caused serious concerns of the general director; An independent opinion and grounds were required for discussion with the owners of the need to restructure the holding and build new business processes.

Task
Conduct an analysis of the de facto activities of the group and their mutual settlements in order to estimate the risk of claims of the tax authorities for obtaining unjustified tax benefit.

Result
In the course of due diligence the ICLC experts revealed the following.

• The company organized fictitious document flow with the key supplier of the goods, the indirect signs of which indicate relation of the companies. The supplier does not have any organized recordkeeping, and no documentary evidence of production is available, also, relations with one-day companies are revealed.
• A part of the company’s turnover is withdrawn through the controlled individual entrepreneurs that apply the simplified taxation system and have all signs of interdependence with the company (usually used by the tax authorities in the cases of business splitting), such as relations between the parties on the terms different from the standard commercial ones, absence of a unified system of orders and a recruitment system, servicing by the same credit institution, maintenance of accounting in the single accounting system 1C.

The experts calculated the amount of tax risk, gave recommendations for its reduction, as well as proposals for restructuring. The general director took the decision to revise the business model and agreed it with the owners.

Case 3: Subsidiary Liability

Background
The owner of a construction company was brought to subsidiary liability within the bankruptcy procedure. In order to protect his interests in court, an independent financial due diligence of the company’s activities over a number of years was required.

Tasks

1. To identify the circumstances that resulted in the company’s inability to discharge the creditors' claims in full.
2. To determine the presence of intent in the owner’s actions (omissions) aimed at causing material damage to the property rights of creditors.

Result
In order to solve the set tasks, the ICLC experts:

• carried out a profound analysis of the specific nature and structure of the company’s activities with regard to the economic situation in the Russian Federation, impact of the economic events on activities of the company, its key partners and the construction sector as a whole;
• reviewed income and expenses of the company over time, the key contracts, including in order to reveal transactions against the interests of the company, or those not typical for its activities;
• assessed the measures taken by the management and the owner of the company to improve the financial state.

The experts concluded that there were no signs of intent to inflict damage on the company, its property, the interests of creditors, as well as signs of unfair behavior in the actions of the owner of the company, indicated the presence of objective reasons for deterioration of the financial state of the company. By virtue of the experts’ report and professionally developed line of defense by the ICPC lawyers, the court ruled in favor of our client.