History of Forensic Accounting
Forensic Accounting is the use of accounting principles and investigation techniques to ferret out fraud and theft. Forensic Accountants often testify in court and are instrumental in building legal cases. They also provide services in seven different legal areas; damages, antitrust, accounting, valuation, general consulting and analysis. The history of Forensic Accounting is long, but the field came into its own just in the last century.
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Early History
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Forensic Accounting dates back to the ancient Egyptian scribes who accounted for all of the Pharaoh's assets. These scribes were known as the "eyes and ears of the Pharaoh." However, it wasn't until 1817 that Forensic Accounting had its first day in court when an accountant was required to testify at a bankruptcy hearing. In 1824, a Scottish accountant advertised his legal accounting expertise, but the term Forensic Accounting had not yet been coined.
Forensic Accounting and the Mob
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In 1931, the IRS and FBI used accounting to convict mobster Al Capone. An arrest wasn't made until law enforcement built a tax evasion case utilizing accounting expertise. Frank J. Wilson was the agent charged with finding proof of tax evasion. Wilson sifted through millions of financial documents and found enough evidence for a conviction. Due to the Capone case, the IRS actually produced an ad campaign boasting "Only an Accountant Could Catch Al Capone."
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Forensic Accounting and the Lindbergh Kidnapping
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Frank J. Wilson continued to influence forensic accounting with his work on the 1932 kidnapping of the Lindbergh baby. By tracking the serial number of the gold certificates used to pay the kidnapper's ransom, he was able to trace and identify the perpetrators. Wilson's methodology on the Lindbergh case became a widespread practice in tracking and prosecuting financial crime. Wilson then went on to work for the Secret Service and created an educational program to fight counterfeit currency.
Recent History
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Maurice E. Peloubet is credited with developing the term Forensic Accounting in his 1946 essay "Forensic Accounting: Its Place In Today's Economy." By this time, Forensic Accounting had proven its worth during World War II, however formalized procedures were not in place until the 1980's when major academic works were published. During the O.J. Simpson trial, forensic accountants evaluated his assets impacting the damages awarded in the civil suit. Forensic Accounting has been pivotal in the corporate scandals of companies such as Enron, Tyco and Worldcom.
Professional History
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In 1992 the American College of Forensic Examiners was established with the American Board of Forensic Accounts starting in 1997. The Journal of Forensic Accounting, Auditing, Fraud and Taxation began publication in 2000. In 2002 the Sarbanes-Oxley Act established the Public Companies Accounting Oversight Board (PCAOB) which was charged with developing auditing standards, conducting investigations and ensuring corporate compliance. As a result of the Sarbanes-Oxley Act, there has been continuing emphasis on forensic accounting.
Types
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Forensic accountants are certified public accountants who have obtained additional certification as a fraud examiner or as a forensic accountant. They work in several different venues. Fraud detection and prevention is the largest field, but forensic accounting is also used in civil and criminal litigation such as divorces or bankruptcy, government work and even in detecting the financial footprint of terrorism.
Fraud Triangle
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Forensic accounting relies on the Fraud Triangle to find weak points in business processes and identify possible suspects in cases of fraud. It consists of three core concepts that together create a situation ripe for fraud; incentive, opportunity and rationalization. People must have the incentive and opportunity to commit financial fraud as well as the ability to justify it. Recent analysis has suggested adding a fourth concept to make a diamond: capability. Just because someone has the opportunity or incentive to steal, it doesn't mean that they have the capability to do so. For example, if someone doesn't understand how to do journal or ledger entries, they wouldn't know how to manipulate the numbers no matter what the incentive or opportunity.
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