According to Andrew Beattie, writer for Investopedia, the first recorded case of financial fraud can be traced to 300 B.C. and a merchant named Hegestratos. Hegestratos took out an insurance policy on a yet-to-be delivered shipment of corn. His plan was to scuttle the ship, collect the insurance and sell the corn. Unfortunately for him, Hegestratos’ crew discovered him in the act of sabotaging the ship, and he drowned after being chased off the deck.
The nature of financial fraud has certainly changed with historical circumstances. The establishment of the U.S. Stock Market, for example, can be directly attributed to a man named William Duer. Duer was a member of the Continental Congress, and a respected businessman in 18th-century New York. He was also America’s first insider trading criminal. Duer speculated on stocks in the New York Bank, unfairly using his connections as Secretary of the Board of the Treasury to gain advantage on these trades. Unfortunately, although he made a lot of money, he incurred even greater debt. The bubble burst in the Panic of 1792, and Duer spent the rest of his years in debtors’ prison.
Where There Is Money, There Is Fraud
While the mechanisms of fraud change, human nature does not. Where there is money, there is fraud. Often, a fraud investigation is the only tool law enforcement has for stopping an entire criminal enterprise. When famous bootlegger and gangster Al Capone was finally incarcerated, it wasn’t for murder or racketeering, but for tax evasion. His bookkeepers Leslie Shumway and Fred Reis were integral in bringing down Capone’s empire.
Modern forensic accountants are on the front lines of investigating and prosecuting financial crimes, using state-of-the-art computer programs and good, old-fashioned detective work. Southeastern Oklahoma State University provides an overview of forensic accounting as part of its accounting MBA track. Rather than producing professional forensic accountants, these courses are designed to give managers a top-down view of the fields of fraud and fraud prevention.
The Cost of Financial Crimes
Such an approach is necessary for 21st-century businesses. The Association of Certified Fraud Examiners estimates that a full 5 percent of any company’s revenues is lost to fraud. The median cost for each of these incidents is around $150,000. And that is just the average. More than 23 percent of fraud cases resulted in losses of over $1 million, and the ACFE’s study found that the total loss across their study amounted to $6.3 billion.
With numbers such as these, it makes sense for managers to be aware of the scope of the problem and measures to catch or prevent fraud in their organizations. Managers with forensic accounting experience are in demand, as these skills prevent enormous losses for companies. No matter the industry, there is fraud. As the examples above show, humans will find ways to game the system. Fortunately, forensic accountants can stay one step ahead with proper training.