Disputes and financial irregularities: How can you make the most of opportunities?

Disputes and financial irregularities: How can you make the most of opportunities?

There might not be a quick fix for the industry but there are some key opportunities for those who look out for them. Here we outline a few of these and how to make the most them.

Revisit an insurance claim for business interruption loss of profit 

Now might be a good time to initiate or revisit an insurance claim for business interruption loss of profit. Initial resistance from insurers has been mitigated by the recent success of a test case in the Supreme Court, and successful claims for fortunate policyholders with the right coverage can be made, but the devil is in the detail. Discussing with your broker/legal advisers whether there is a valid claim under policy wording will be essential, as some policies will still not provide cover.  

There are some issues which are highly relevant to the hotel industry that remain to be clarified and tested, including whether the number of occurrences of loss might give rise to multiple limits of loss, ie limits for each hotel rather than the umbrella organisation holding the policy. It will be interesting to see how this plays out.

Hoteliers should be aware that most policies are prescriptive in the formulation of the claim, with income and costs to be defined in the policy and which may not be the same as those used to report gross profit. Thorny issues include the treatment of Government aid such as furlough payments and business rates relief.

A robust claim will be supported by relevant historical data, which is even more important with the welcome news that the Supreme Court has enabled policy holders to challenge insurers’ attempts to focus on profit in the periods immediately prior to closure where demand may have already been impacted and profits depressed.

Finally, don’t assume that insurers will get the calculation right, or even in accordance with the policy when they respond to a claim.

Acquire quality assets for your hotel portfolio

Some hotel businesses simply won’t have the resources to continue to trade and might exit the market altogether which, as the sector comes out of lockdown, means there will be new opportunities for buyers/investors with a war chest to acquire quality assets for their portfolio.

It should be noted that rushing into a deal without the right protection in the sale and purchase agreement (SPA) might mean the deal you were expecting is not what you get.

Key accounting clauses which can impact the transaction include accounting definitions, consideration terms, warranties and indemnities, and deal mechanisms such as completion accounts, earn out accounts and ’locked box’ arrangements. A forensic review of the SPA will help address some of the risks and protect your interests. Completion accounts or earn-out account disputes are common because the final figures are not as expected and warranty disputes are most common in uncertain market conditions. In a market where a boom in bookings post-lockdown could have unforeseen consequences for a buyer in an earn-out deal, getting the mechanism and the wording right could make a big difference to the price.

Carry out fraud risk assessments

Of course, exceptional times also create the wrong type of opportunities, fraud being one. As it emerges from the restrictions, the British hotel sector is expected to experience, at least in the short term, a surge in demand, and chaotic trading conditions often create opportunities for fraud. Employee proximity to the hotel’s financial and operating systems and possibly their interaction with guests and suppliers makes the hotel sector especially vulnerable.

The financial and reputational risks are high and can be catastrophic if not addressed head on. We recommend that owners and operators carry out a fraud risk assessment to identify and address any vulnerabilities in preparation for re-opening operations. It will not only mitigate the risk of fraud, but having a fraud risk management framework that aligns with an organisation’s culture and strategic objectives also forms a crucial part of a recovery plan if an organisation does becomes a victim.

To start a proactive risk assessment process you may want to consider whether COVID-19 has made your business more vulnerable to corporate fraud.

If you think that any of the issues identified in this article might apply to your hotel business, take a look at our simple flow chart which might help you work out what to do next and where out forensic accountancy team might be able to assist.


CONTACT:

Helen Hancock
Principal - Forensic Accounting Services
Tel: +44(0)7800 682626
Email: helen.hancock@bdo.co.uk

Stephen Peters
Partner - Forensic Accounting Services
Tel:+44(0)207 893 2790
Email: stephen.peters@bdo.co.uk