Following vs Tracing in Forensic Accounting: Navigating Asset Recovery and Evidentiary Preparation
Key Takeaways for Litigators & Claimants:
- Following pursues the exact same asset as it transfers between parties; tracing tracks the value into substitute assets or commingled funds.
- Tracing unlocks high-value equitable remedies, including constructive trusts, equitable liens, and claims against substituted real property or investments.
- To minimize investigative fees and prevent dissipation, clients must secure unedited, complete bank statement runs (.CSV and PDF) and preserve transaction metadata immediately.
When funds vanish due to director embezzlement, commercial fraud, or undisclosed marital asset transfers, legal practitioners often advise their clients to "trace the money." However, in law and forensic accounting, there is a fundamental distinction between following and tracing.
While often used interchangeably in casual conversation, these terms represent distinct evidential processes. Selecting the correct approach determines the nature of the claim a lawyer can plead—whether a personal claim for damages against an insolvent wrongdoer or an equitable proprietary claim securing actual assets.
1. The Legal Benchmark: Foskett v McKeown
The definitive distinction between following and tracing was articulated by Lord Millett in the landmark House of Lords authority Foskett v McKeown [2001] 1 AC 102 (widely applied across Australian jurisdictions):
"Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old."
Neither following nor tracing is a standalone cause of action or remedy. Rather, they are evidentiary processes by which a claimant demonstrates that an asset or value currently held by a recipient belongs to, or was derived from, the claimant.
2. When to Use Following vs Tracing
When Following Applies
Following is deployed when the asset retains its original form. If a company cheque of $100,000 is transferred to a rogue director, who then hands that exact cheque to a related entity or deposits it into a clean, unmixed account, the forensic accountant is following the same specific property through successive recipients. Following ceases the moment the asset is converted into a different form or mixed with other funds.
When Tracing Applies
Tracing is required when the character of the asset changes. If the misappropriated $100,000 is used to acquire shares, purchase machinery, buy cryptocurrency, or pay a mortgage deposit, the money no longer exists in its initial state. Tracing allows the forensic accountant to demonstrate that the value inherent in the claimant's original funds is now embodied in the substitute property, enabling equitable remedies like a constructive trust or an equitable charge.
| Feature | Following | Tracing |
|---|---|---|
| Core Subject | The identical physical or electronic asset. | The financial value embodied in a substitute asset. |
| Impact of Substitution | Stops once converted into another asset class. | Continues across conversions (e.g., Cash → Crypto → Real Estate). |
| Handling Commingling | Inapplicable once funds are blended in a bank account. | Applies accounting allocation rules (e.g., Clayton's Case, Lowest Intermediate Balance Rule). |
| Primary Legal Remedy | Common law recovery of specific chattel or money had and received. | Equitable proprietary relief: Constructive Trust or Equitable Lien. |
3. The Mechanics of Tracing in Commingled Accounts
In modern commercial litigation and matrimonial disputes, wrongdoers rarely keep misappropriated capital separate. Funds are deposited into operating accounts, mixed with legitimate business revenue, or combined with personal savings. In these scenarios, forensic accountants apply specialized equitable tracing rules:
- The Rule in Re Hallett's Estate: Where a fiduciary mixes trust money with their own funds and subsequently draws money out, equity presumes the fiduciary spent their own money first, preserving the trust funds in the remaining balance.
- The Lowest Intermediate Balance Rule (LIBR): A critical limitation on equitable tracing. If misappropriated funds are deposited into a mixed account and the balance subsequently falls to $10,000 before other deposits are made, the claimant's equitable proprietary claim is capped at $10,000—even if the account later rises to $500,000. Subsequent deposits are not treated as replenishing trust money unless an explicit intention is shown.
- The Rule in Re Oatway: If the fiduciary withdraws money from a commingled account to purchase an appreciating asset (such as real estate or securities) and subsequently dissipates the remaining account balance, equity presumes the withdrawal was made using the claimant's funds, allowing the claimant to trace into the acquired asset.
4. What Clients Should Consider When Preparing Evidence
The success of a tracing exercise depends heavily on evidentiary integrity. Gaps in banking records break the chain of tracing, leaving claimants with an unsecured personal claim against a potentially insolvent defendant. Clients and instructing solicitors should consider the following steps when assembling their brief:
1. Obtain Unbroken, End-to-End Statement Runs
Do not provide isolated transaction slips. Forensic accountants require complete, unbroken bank statement periods across every account involved in the chain. Missing even a single monthly statement creates an evidential black hole that can defeat the lowest intermediate balance test.
2. Request Electronic Data Formats (.CSV / OFX / QIF)
While certified PDF copies are required for court admissibility, securing digital CSV or Excel exports directly from online banking saves substantial professional fees. It eliminates manual data entry, enabling the forensic accountant to ingest and reconcile thousands of lines immediately.
3. Secure Concurrent Subpoenas / Freezing Orders
Tracing often reveals that funds have transitioned through multiple intermediate accounts or corporate shells. Instructing solicitors must be prepared to issue discovery notices or freezing orders (Mareva injunctions) swiftly as preliminary tracing results identify new destination accounts.
4. Collect Transaction Context & Authority Proof
Gather corresponding loan agreements, board resolutions, email trails, or accounting ledger memos that accompanied each withdrawal. This establishes whether a transaction was authorized, a loan repayment, or an unauthorized diversion of proprietary funds.
Need Forensic Asset Tracing or Following Assistance?
AuditTrace Forensic Accountants is an agile, senior-led practice operated by a qualified Chartered Accountant, serving legal practitioners, commercial enterprises, and family law clients across Australia. With offices in Sydney and Brisbane, we deliver structured two-phase tracing investigations and court-admissible expert witness reports without large-firm overheads.