By Donna Bailey Nurse
Illustration: by Joseph Salina
What’s old as the hills, digs up the proverbial dirt, but is still sexy and gaining in popularity? Forensic accounting modernized
Hear the phrase Public Enemy No. 1and chances are the image of Chicago’s notorious, bloody-minded mobster Al Capone springs to mind. So do visions of Capone’s nemesis, Eliot Ness, an agent with the Prohibition Bureau in the Dirty ’30s. Ness’s battle to overthrow the legendary criminal has earned him a permanent place in the annals of American crime fighting. Yet Ness was only one of a dynamic team responsible for terminating Capone’s career.
In fact, it was an accountant with the Internal Revenue Service, Elmer Irey, who played a key role in pursuing Capone for tax evasion. Irey — chief of the US Treasury Enforcement Branch and head of the IRS Special Intelligence Unit (formed in 1919 primarily to combat employee crime) — concocted false identities for two IRS agents so they could infiltrate Capone’s circle. After the agents located the incriminating books, Irey worked in tangent with government attorney George E.Q. Johnson to ensure Capone’s imprisonment.
Irey was, in effect, America’s first high-profile forensic accountant. He and his crack team of sleuths — dubbed “the silent investigators”— used their superior investigative and analytical skills to piece together an irrefutable chronicle of Capone’s financial malfeasance.
The forensic accountant designation — popular in the profession today — did not exist then. But forensics is an aspect of accounting that has been practised for centuries. Just as IRS officials worried in the early part of the 20th century about employee susceptibility to extortion, embezzlement and bribes (the very activities that continue to concern contemporary forensic accountants) there existed a preoccupation with just this sort of “employee” crime thousands of years ago.
Archaeological findings, dating between 3300 and 3500 BC, reveal the habits of the world’s first accountants, or scribes, in Mesopotamia and Egypt, who recorded commercial transactions onto damp clay tablets or papyrus. A scribe would, for example, enfold the original document in a thin clay envelope. If the outer tablet was tampered with later, it was cause for an investigation. Egyptian bookkeepers were careful to prepare meticulous records since any irregularities found by royal auditors was punishable by fine, mutilation or even death.
Likewise, during India’s Maurya period (321-184 BC) records indicate the inclination to go beyond accuracy and accountability, addressing issues of criminality. Kautilya’s Arthasastra, the earliest known treatise on accounting concepts, lists at least 40 different types of embezzlement. Kautilya also considers the punishment for accountants “failing in their duties, be it by deliberate fraud or incompetence, negligence, etc.”
Nineteenth-century Scotland introduces us to the official chartered accounting profession — and it was during this time a familial relationship evolved between solicitors and accountants. The two groups frequently belonged to the same associations and most solicitors offered clients accounting services or, when necessary, hired accounting experts. Like forensic accountants today, accountants then incorporated the duties of expert financial witnesses into their general services rendered. An 1824 circular announcing the accounting practice of one James McClelland of Glasgow promises he will make “statements for laying before arbiters, courts or council.” Legal work comprised a good portion of the early accountant’s job. It might even be said accounting at times took a back seat. When in 1854 the Edinburgh society of accountants petitioned Queen Victoria for a royal charter, it took pains to draw attention to the relationship between accounting and law: “The business of the Accountant is not confined to the department of Actuary,” the petition read, “it also ranges over a much wider field in which a considerable acquaintance with the general principle of law is quite indispensible.”
But by the early 20th century, chartered accountants had increased their accounting services and court appearances shrank to a fraction of their overall business.
Rather than a new specialty within accounting, modern-day forensics represents a return to accounting’s roots. In Canada, the fall of Atlantic Acceptance Corp. in the mid-1960s became one of the first court cases to remind the public and the corporate world of the value of forensic accountants.
In the 1950s and early ’60s, Atlantic Acceptance built itself into one of Canada’s largest and most respected finance firms. It boasted 105 small loans offices and 35 sales finance offices across the country. The company collapsed in June 1965 with $150 million in receivables outstanding. The debacle spawned a Royal Commission inquiry as well as a number of lawsuits.
Tedd Avey, partner with Kroll Lindquist Avey — and a pioneer of forensic accounting in Canada — recalls the Byzantine details of the scandal. “Atlantic Acceptance was one of the first cases in which forensic accountants were used to present evidence in a Canadian court,” he says. “The enormous complexity of the financial documents — dozens of companies were either implicated or impacted — made the situation difficult for people to grasp. But the forensic accountants were able to take a roomful of complicated financial documents and boil them down. The evidence came to life through a series of charts and simple explanations.”
Since the mid-’60s, when a handful of Canadian law-enforcement departments launched anticorruption squads, police have invited forensic accountants to act as expert witnesses. Who can forget the astonishing murder trial of Helmuth Buxbaum, a Komoka, Ont., millionaire convicted of arranging the murder of his wife on a roadside in July 1984? Witnesses testified that Buxbaum, a cocaine addict with an insatiable appetite for young prostitutes, was desperate to do away with a wife he found dull and unattractive.
Crown attorneys, however, insisted Buxbaum’s bankbook was as seminal to the case as was his marriage bed. It proved that in the year and a half leading up to the murder, nearly $2 million had slowly disappeared from Buxbaum’s bank account without a trace. An accountant testified that Buxbaum had recently taken out a $1-million life insurance policy on his wife. Prosecutors believed he wanted to use the policy as a means of replenishing his own diminished funds. Although Buxbaum denied to the end hiring drug dealer Robert Barrett as a hit man, records of a series of banking transactions confirmed his guilt to the jury’s satisfaction.
The numbers of forensic accountants did not begin to swell until the early ’80s, when the losses brought about by recession encouraged the major firms to open forensics divisions. In the latter part of that decade, the designation started to earn recognition when the Association of certified Fraud Examiners was established in Austin, Texas, in 1988 — a significant moment, claims North Dakota State University forensic accounting professor Thomas Buckhoff. “It recognized the need for verifiable educational standards in the areas of fraud-detecting, investigation and protection,” he explains. Four years later, in 1992, the American College of Forensic Examiners was founded. In Canada, the first group of accountants to enter the forensic and investigative accounting program at the University of Toronto’s Rotman’s School of management or the École des Hautes Études Commerciales in Montreal is expected to graduate in 2003.
Today’s forensic accountants expect a corporate crime wave — fueled by ever more astonishing technological advances — to provide them with steady employment well into the foreseeable future.`
By definition, forensic accounting is “the application of financial, accounting and investigative skills, to a standard acceptable by the courts, to address issues in dispute in the context of civil and criminal litigation,” according to Ivor Gottschalk, CA·IFA, CBV, a partner with Grant Thornton’s Forensic Accounting & Investigative Services in Toronto. More specifically, forensic accountants are often involved in qualifying losses in such areas as contract disputes and investigating fraud allegations.
But of course the investigation of white-collar crime — money laundering, employee fraud, securities violations and the like — constitutes the forensic accountant’s favourite beat. The specialty gives rise to strange bedfellows, drawing intrepid former law enforcers into partnerships with buttoned-down fiscal types. At KPMG’s Investigation and Security Inc. in Toronto, for instance, former RCMP commissioner Norm Inkster and Derek Rostant, an accountant with a background in insolvency files, form the backbone of the team. “People with law enforcement experience bring along their surveillance and interviewing skills,” Gottschalk explains, “as well as their understanding of human frailties.” Gottschalk’s forensic accounting team includes a criminologist to help companies develop internal policies that dissuade employees from rationalizing acts of fraud. Also, in conjunction with lawyers, they assist businesses to comply with complicated legislation, such as the Proceeds of Crime (money laundering) Act. Computer professionals, capable of retrieving and analysing personal computer files, comprise an essential element of any forensic accounting team.
The surge in the past two decades in forensic accounting worldwide — virtually every major accounting firm contains a forensics division — is due, partly, to an explosion of white-collar crime. But it is also a consequence of the economic, political and technological complexity of our times. Nothing illustrates this more clearly than the September 11 terrorist attacks. In addition to the devastating human loss, it left hundreds of businesses on the brink of financial destruction. About half the companies situated in the towers lost the bulk of their records.
Accountants have been instrumental in spurring New York back to economic health. Forensic teams from such firms as Andersen and Deloitte & Touche have been helping businesses compile basic information to file preliminary insurance claims. Then the real work begins as forensic accountants attempt to recreate from scant evidence payroll records, expense accounts and the costs of machinery and furnishings. Sometimes an employee’s credit card may turn up clues. At other times accountants endeavour to re-enact the events leading up to the expenditure by arranging the evidence recovered in chronological order.
There is another aspect to the World Trade Center story: forensic accountants are tracing the financing for the brutal attacks. Says Buckhoff: “Terrorists are very successful at raising funds for bombs and weapons, and forensic accountants are trying to find out where that money comes from. They often look at charitable entities that are sometimes used as shelters for the purpose of getting money to terrorists. It’s a kind of reverse money-laundering scheme. Terrorists take clean money and make it dirty, instead of the other way around.”
Experts say technology has made it easier to commit white-collar crimes. “It used to be that supervisors walked around on payday handing out cheques,” Buckhoff says. “Now a common computer fraud consists of an employee creating a phony worker, then having very real paycheques deposited into an account.”
At the same time, believes Avey, technology has made it easier to capture white-collar criminals. “We used to have to go in search of particular documents during an investigation,” he says. “Now we just pick up the suspect’s PC. Paper you can destroy, but with computers there is always a smoking gun. You never know how many copies of a document are out there.”
KPMG’s Rostant agrees. He welcomes sophisticated new computer software that quickly illustrates the complex relationships between a dozen or more individuals — programs that make it possible for forensic accountants to map out a twisted money trail. “We can now process huge amounts of information and produce meaningful reports for the courtroom in short order,” he says. “With these programs we no longer have to go through the time-consuming process of proving our methodology.”
Ultimately, though, it may be a new corporate attitude, freshly minted for the millennium, that explains an increased acceptance of the forensic accountant. “There was a time,” Rostant says, “when internal fraud carried a stigma. It suggested to outsiders that management wasn’t doing what it should. But [people] have come to see corporate fraud as a growing social problem. Suddenly, it seems companies everywhere are coming out of the closet.”
Donna Bailey Nurse is a freelance writer in Toronto.