Forensic accounting has a rich and varied history in the United States and beyond, serving in valuable roles within local and federal law enforcement, in corporate finance, and even with private investigators. From analyzing and reviewing records to assisting in court once a case has been built, the forensic accountants are incredibly important. As the popularity of the position grows, so does a forensic accountant’s utility. In fact, some of the greatest and most interesting financial fraud cases of all time have been solved only through the involvement of a trained forensic expert.
The Enron Scandal
Jeffrey Skilling – Mugshot
The Enron scandal may be one of the most prominent securities fraud cases in American history. Between the mid-1980s and 2001, Enron’s accounting team worked in conjunction with executives to hide millions of dollars in failed projects and debt.
After the company’s stock plummeted from over $90 to $1 in the course of a year, the SEC opened an investigation. With careful review of financial statements by the SEC’s forensic accountants, Enron’s creative accounting techniques, like hiding debt in partnerships, inflating stock price and debt rating, and misrepresentation of financial records, were exposed. CEO and COO Jeff Skilling was convicted of numerous felony charges and is serving 14 years in prison, reduced from 24 years after several of the charges against him were reversed. Former CEO Kenneth Lay originally was found guilty on 10 counts of securities fraud and other related charges, but passed away before his imprisonment. After his death, a U.S. District judge vacated the conviction against Lay.
The WorldCom Fraud
WorldCom was a telecommunications company that saw growth and success throughout the 1990s. However, after a proposed merger with Sprint was shut down by the U.S. Justice Department and the overall decline of the industry in 2000, the company found itself struggling to stay afloat. As the situation worsened, executives turned to fraudulent accounting methods in an attempt to disguise the reduction in earnings in order to maintain current stock prices.
In 2002, auditors working inside the WorldCom organization began to examine the company books for signs of fraud. After months of work, they discovered over $3.8 billion in fraudulent entries, most notably booking line costs incorrectly as capital expenditures and inflating revenue through fake unallocated revenue accounts. Upon discovery, the board’s audit committee was notified and the SEC was alerted. After paying out millions of dollars in penalties, WorldCom was forced into bankruptcy and today operates as MCI Inc, a subsidiary of Verizon.
The AIG Scandal
The American International Group, Inc. fraud took place over of six months, spanning from December 2000 to March 2001. In December, AIG entered into a series of fraudulent transactions with Gen Re Corporation in order to create a false reinsurance policy to increase the appearance of loss reserves on AIG’s balance sheet.
AIG’s fraudulent activities were unearthed in a series of both state and federal investigations into the transaction and subsequent activity. These claims led to an SEC investigation and trial in which AIG was found guilty of accounting fraud based on the fraudulent transactions unearthed by forensic experts. As a penalty for defrauding investors and analysts and violating SEC policies and GAAP, AIG was fined $100 million and was required to disgorge gains of $700 million in attempts to make amends with investors.
When it comes to fraud, there is no asset more valuable than the forensic accountant. These dedicated professionals have been a critical part of major fraud cases in the United States and around the world, using their skills to put white collar criminals behind bars. While accounting may not seem like a traditionally exciting job, forensic accountants have the ability to investigate serious crime, working hand in hand with the legal system. What could be more exciting than that?