Description
The purpose of this paper is to explore the origins of crime-related forensic accounting
methodology in the USA.
Accounting Research Journal
The past, present, and future (?) of crime-related forensic accounting
methodology
Timothy J . Louwers
Article information:
To cite this document:
Timothy J . Louwers , (2015),"The past, present, and future (?) of crime-related forensic accounting
methodology", Accounting Research J ournal, Vol. 28 Iss 1 pp. 4 - 9
Permanent link to this document:http://dx.doi.org/10.1108/ARJ -04-2015-0047
Downloaded on: 24 January 2016, At: 21:21 (PT)
References: this document contains references to 10 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 857 times since 2015*
Users who downloaded this article also downloaded:
J ames A. DiGabriele, Wm. Dennis Huber, (2015),"Topics and methods in forensic accounting
research", Accounting Research J ournal, Vol. 28 Iss 1 pp. 98-114http://dx.doi.org/10.1108/
ARJ -08-2014-0071
Paul Andon, Clinton Free, Benjamin Scard, (2015),"Pathways to accountant fraud: Australian
evidence and analysis", Accounting Research J ournal, Vol. 28 Iss 1 pp. 10-44 http://
dx.doi.org/10.1108/ARJ -06-2014-0058
Grace Mui, J ennifer Mailley, (2015),"A tale of two triangles: comparing the Fraud Triangle with
criminology’s Crime Triangle", Accounting Research J ournal, Vol. 28 Iss 1 pp. 45-58 http://
dx.doi.org/10.1108/ARJ -10-2014-0092
Access to this document was granted through an Emerald subscription provided by emerald-
srm:115632 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald
for Authors service information about how to choose which publication to write for and submission
guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as
well as providing an extensive range of online products and additional customer resources and
services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the
Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for
digital archive preservation.
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
*Related content and download information correct at time of
download.
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
The past, present, and future (?)
of crime-related forensic
accounting methodology
Timothy J. Louwers
School of Accounting, James Madison University, Harrisonburg,
Virginia, USA
Abstract
Purpose – The purpose of this paper is to explore the origins of crime-related forensic accounting
methodology in the USA.
Design/methodology/approach – The author describes how these early methods have evolved
through the use of technology.
Findings – The author also discusses the next generation of crime-related forensic accounting tools
and techniques which, although in limited use today, will grow to widespread use in the near future.
Originality/value – This viewpoint is a summary of a presentation made at the 3rd National Forensic
Accounting Teaching and Research Symposium held at the Queensland University of Technology on
February 10, 2014.
Keywords Forensic accounting, Financial crimes, Investigation
Paper type Viewpoint
The origins of crime-related forensic accounting in the USA can be traced back to the
ground-breaking methods used by US Treasury agent Frank Wilson to obtain
convictions of two of the most notorious criminals in US history: gangster Al Capone
and child kidnapper/murderer Bruno Hauptman. Many of the forensic methods Wilson
pioneered are still in use today, although technological advancements have allowed
forensic accountants to improve upon themas they track twenty-frst-century criminals
also taking advantage of technology.
The origins of forensic accounting in the USA
Caught up in the patriotic war fervor sweeping the country in 1914, Frank Wilson began
his career inauspiciously by volunteering to serve in the US Army during World War I.
Despite horrible eyesight (possibly presaging his accounting future), he was able to fool
the screening doctors by memorizing the eye chart. To his dismay (as well as those
supervising him), he was unable to fool anyone on the rife range however, and was
summarily granted an honorable discharge. After a failed attempt to join the Canadian
Army, Wilson saw a job advertisement for Criminal Investigators for the US Treasury
Department. The 16th Amendment to the US Constitution introducing a national income
tax was ratifed in 1913; the Bureau of Internal Revenue necessarily greatly expanded
soon after. Wilson quickly rose through the ranks to become an Agent at the Intelligence
Unit of the Bureau of Internal Revenue (later the Internal Revenue Service).
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1030-9616.htm
ARJ
28,1
4
Received26 April 2015
Revised26 April 2015
Accepted28 April 2015
Accounting Research Journal
Vol. 28 No. 1, 2015
pp. 4-9
©Emerald Group Publishing Limited
1030-9616
DOI 10.1108/ARJ-04-2015-0047
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Meanwhile in Chicago, Al Capone was developing a reputation as a ruthless
gangster, running illegal speakeasies, bookie joints, gambling houses, brothels and
breweries. Capone also is alleged to have ordered the 1929 Saint Valentine’s Day
Massacre in which seven members of the rival “Bugs” Moran gang were lined up against
a wall and brutally machine-gunned. Given his reputation for violence and vengeance,
law enforcement offcials had diffculty fnding anyone willing to testify against him.
President Herbert Hoover challenged several government agencies with bringing
down Capone, including the Bureau of Internal Revenue. Because of his reputation for
being incorruptible, Wilson was hand-picked for the Capone case.
Although trained as a trial lawyer, Wilson’s talents lay in forensic accounting. He
would spend hours going over coded ledgers seized in raids on illegal casinos.
According to one account, “He relished going back again and again over the same
documents, receipts, records – perhaps for the thousandth time – to indict someone, or to
compel him to testify” (Spiering, 1976).
Once he found a connection, often through meticulous handwriting analysis of the
coded ledgers, he was very persuasive in gaining the target’s cooperation. One
bookkeeper, initially unwilling to testify against Capone, was kept in custody for several
days until he became convinced that he might be killed simply based on the presumption
that he did talk. Similarly, a courier connected to large bank deposits fromillegal casinos
and who was used to a life of luxury was kept in roach-infested solitary confnement
until he agreed to cooperate. Through meticulous tracking of Capone’s money
laundering schemes, Wilson was able to eventually link the illegal gambling casino
profts to bank deposits, and ultimately to a cashier’s check endorsed by Capone himself.
Wilson’s investigation quickly caught Capone’s notice, and Capone ordered a “hit” on
Wilson and his family (Wilson, 1947a). After ensuring his family’s safety, Wilson
continued on the case and Capone was eventually found guilty on fve counts of tax
evasion and sentenced to 11 years in prison.
About four months later (March 1, 1932), the 20-month-old son of famous American
aviator Charles Lindbergh was kidnapped. From prison, Al Capone intimated that he
had knowledge of the kidnapping and offered to help in exchange for a reduced sentence.
From an informant within the prison, Wilson knew that Capone had no outside contact
and that the offer to help was just a ruse (Wilson, 1947b). Wilson contacted the
investigators in charge of the kidnapping investigation of this information, and his offer
to help in the investigation was accepted.
The Lindbergh family had received ransom notes requesting amounts ranging from
$50,000 to $100,000. Wilson suggested that the ransom money ($50,000, or about
$800,000 in today’s US dollars, was eventually paid) be composed of a mixture of bills
and soon-to-be-expiring gold certifcates, hoping that the use of the rare gold certifcates
might be conspicuous. Wilson also convinced law enforcement offcials to record serial
numbers from ransom notes (Wilson, 1947b).
Sadly, the child’s body was found on May 12, 1932, in a shallow grave near the
Lindbergh estate. The marked currency, however, led investigators to Bruno
Hauptmann, a German-born carpenter. Hauptmann had used a gold certifcate to pay for
gasoline, and a suspicious gas station attendant wrote down the car’s license plate
number. The license plate number led investigators to Hauptmann’s home where
$14,600 of the ransom money was found in a wall in Hauptmann garage.
5
Crime-related
forensic
accounting
methodology
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Wilson’s work did not end with Hauptmann’s identifcation. Wilson compared
samples of Hauptmann’s handwriting to those of the kidnapper, an analysis that jurors
found convincing. Hauptmann kept meticulous accounts, until the ransom was paid. By
using net worth analysis, Wilson was able to show that Hauptmann’s net worth was
around $5,000 at the time of the kidnapping (Wilson, 1947b). Although unemployed, he
had bought a new car, invested in the stock market (losing $9,000 in the process),
traveled extensively and sent his wife on a vacation to Germany. Wilson also conducted
expenditure analysis, tracing $35,000 in expenditures to Hauptmann, and accounting
for all but $400 of the ransommoney. Based on Wilson’s meticulous evidence collection,
Bruno Hauptmann was convicted of murder and executed in 1935.
After helping to expand IRS involvement in other criminal cases, Wilson was named
Chief of the US Secret Service, where he served from 1934 to 1944. While there, he
implemented anti-counterfeiting measures (several of which are still in use today),
including the “Know Your Money” campaign, and perfecting methods to track money
laundering. After a lengthy career in public service, Wilson passed away in 1970 at the
age of 83.
Crime-related forensic accounting today
Many of Wilson’s forensic accounting methods are still in use today, although they have
evolved over time, often augmented by technology. For example, no longer are
investigators required to pore over lengthy accounting records by visually scanning
them. Instead, data mining techniques using computer-assisted audit tools such as
IDEAand ACL allowsuch searches of thousands of structured records to be conducted
effciently and relatively effortlessly. Law enforcement now routinely uses marked
currency in its investigations. Handwriting analysis has evolved from an art into a
science; handwriting analysts are now certifed experts whose analysis is readily
accepted in courtrooms.
Just as technology has evolved to help fraud investigations, technology has also been
corrupted to aid criminals perpetuate their frauds. For example, recent frauds involving
the City of Dixon, Illinois, and Peregrine Financial Group (PFG) both used technology to
provide supporting documentation to conceal decades-long frauds. Dixon city
comptroller Rita Crundwell pled guilty to one count of federal wire fraud after admitting
that she had funded her lavish lifestyle with city money (Peters, 2012a). Using common
offce productivity software, she created 159 fctitious invoices purported to be fromthe
State of Illinois to show the city’s auditors that the funds she was fraudulently
depositing into a secret account were being used for legitimate purposes. Crundwell
stole over $50 million (USA) to fnance her champion show horse farm over a period of
two decades (Peters, 2012b).
Similarly, Russell Wasendorf, Sr, used everyday technology to perpetrate a fraud in
which he embezzled millions of dollars from customer accounts over a 20-year period.
Excerpts from a note found in car after his failed suicide attempt at PFG’s corporate
offce included the following (Bunge et al., 2012):
I have committed fraud. Through a scheme of using false bank statements I have been able to
embezzle millions of dollars from customer accounts at Peregrine Financial Group, Inc. For
this I feel constant and intense guilt. I am very remorseful that my greatest transgressions
have been to my fellow man […]. I had no access to additional capital and I was forced into a
diffcult decision: Should I go out of business or cheat? I guess my ego was too big to admit
ARJ
28,1
6
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
failure. So I cheated, I falsifed the very core of the fnancial documents of PFG, the Bank
Statements […]. The forgeries started nearly twenty years ago and have gone undetected
until now […]. Using a combination of Photo Shop, Excel, scanners, and both laser and ink
jet printers I was able to make very convincing forgeries of nearly every document that
came from the Bank. I could create forgeries very quickly so no one suspected that my
forgeries were not the real thing that had just arrived in the mail […]. I was also the only
person with online access to PFG’s account using USABank’s online portal. On USABank
side, I told representatives at the bank that I was the only person they should interface
with at PFG […]. I was able to conceal my crime of forgery by being the sole individual
with access to the USA Bank accounts held by PFG. No one else in the company ever saw
an actual USABank statement. The bank statements were always delivered directly to me
when they arrived in the mail. I made counterfeit statements within a few hours of
receiving the actual statement and gave the forgeries to the accounting department […].
When it became a common practice […] to mail Balance Confrmation Forms to Banks and
other entities holding customer funds I opened a post offce box. The box was originally in
the name of Firstar Bank but was eventually changed to USA Bank […]. When online
banking became prevalent I learned how to falsify online Bank Statements and the
Regulators accepted them without questions.
The use of electronic confrmations helped uncover the fraud. Wasendorf had earlier
refused to use an electronic formof confrmation until forced to by the National Futures
Association, the company’s regulator. Confrmation.com, the service used for the
electronic confrmations, unraveled the fraud (Cohn, 2012).
The future of crime-related forensic accounting
Research and technology have combined to improve crime-related forensic methods.
Advances include improvements in interviewing and interrogation methods,
handwriting analysis and data analytics. Some of these advances will be discussed
next.
With respect to interviewing and interrogation, the polygraph machine has long set
the standard for lie-detection methodology. Created in the 1880s, the polygraph machine
measures changes in breathing, blood pressure, pulse rate and galvanic skin reaction
(“sweaty palms”). Polygraph validity has achieved rates of 80-95 per cent for the kinds
of tests used with specifc issues, such as allegations in criminal cases. While polygraph
tests are commonly used in police investigations in the USA, no defendant or witness
can be forced to undergo the test. Although the polygraph is still used, cluster analysis
is used by intelligence offcers to improve upon the electronic lie-detecting technology.
While inclusion of behavioral cues is considered an improvement over the polygraph
technology, neurocriminology has emerged as a better method of telling whether
someone is lying or not.
Neurocriminology uses neural mapping to detect lies. When someone is telling the
truth, certain areas of the brain are active; similarly, other parts of the brain display even
more activity when someone is lying (Raine, 2013). Terry Harrington (then 17 years old)
was convicted of murdering a retired police offcer in 1977. In 2000, Harrington
underwent “brain fnger printing”. His brain did not emit the expected
electroencephalography (EEG) patterns in response to critical details of the murder.
Examiners interpreted the results to suggest that Harrington was not present at the
murder site, a conclusion corroborated by the fact that his brain did emit the requisite
patterns in response to details of his alibi. When confronted with this newevidence, the
7
Crime-related
forensic
accounting
methodology
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
key prosecution witness recanted his testimony, providing successful grounds for
reversal. Using similar technology, a recent study of New Mexico inmates using brain
scans correctly predicted which prisoners were more likely to commit another crime
once released (Raine, 2013).
With respect to handwriting analysis, a team of computer science professors at the
University of Buffalo subjected 1,500 writing samples to computer analysis (Srihari
et al., 2002). In 96 per cent of cases, the writer of a sample could be positively identifed
based on quantitative features of his handwriting, such as letter dimensions and pen
pressure.
Traditional data analysis consists of analyzing structured data using software
tools such as IDEA or ACL. Commonly used tests include gap analysis, sequence
analysis, duplicate analysis and Benford’s Law. Cutting-edge data analysis includes
techniques such as unstructured data analytics such as word mapping, emotive
content analysis and email “webs”.
Word mapping can be used to determine the frequency with which certain words
are used. This technique can be used to identify red fags for bribery under the
Foreign Corrupt Practices Act. Examples include terms such as “red box” in China,
“a cup of tea” in India or “a cup of coffee” in Brazil. Emotive content analysis was
pioneered by a Big Four frm which hired linguists to compile “dictionaries” of
emotions and to identify phrases related to those emotions. For example, a phrase
indicating secrecy might be “that thing we talked about last week”. Through
emotive content analysis, the “emotions” of a corporation are tracked over time via
the search of millions of emails for the use of these key phrases. Similarly, email
“webs” are ways of tracking communication between employees: thicker lines
indicate more contact/closer relationships. This methodology is useful to detect
conspiracies – who is involved in a fraud, and often more importantly, who is not
involved in the fraud.
Summary
In this viewpoint, I have described the beginnings of crime-related forensic
accounting methodology in the USA, illustrated with examples how the
methodology has evolved through the use of technology and predicted how the
methodologies will continue to evolve over the next decade. British naturalist
Charles Darwin noted that “t is not the strongest of the species that survive, nor
the most intelligent, but the one most responsive to change”. For forensic
accountants to be successful today, it is important not only to know history’s
lessons, but also to know how those lessons are evolving.
References
Bunge, J., Patterson, S. and Steinberg, J. (2012), “Peregrine CEO’s dramatic confession”, The Wall
Street Journal, 14 July, p. A1.
Cohn, M. (2012), “Audit confrmations helped unmask peregrine fraud”, Accounting Today,
23 July.
Peters, M. (2012a), “Guilty plea in $53 million public theft”, The Wall Street Journal, 15 November,
p. A3.
Peters, M. (2012b), “Fraud case spurs show-horse sale”, The Wall Street Journal, 11 September,
p. A5.
ARJ
28,1
8
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Raine, A. (2013), “The criminal mind”, The Wall Street Journal, 26 April, pp. C1-C2.
Spiering, F. (1976), The Man Who Got Capone, Bobbs-Merrill, Indianapolis, IN.
Srihari, S., Cha, S.-H., Arora, H. and Lee, S. (2002), “Individuality of handrwiting”, Journal of
Forensic Science, Vol. 47 No. 4, pp. 1-17.
Wilson, F. (1947a), “Undercover man: he trapped Capone”, Collier’s, 26 April, pp. 14-15, 80-83.
Wilson, F. (1947b), “Inside the Lindbergh kidnapping”, Collier’s, 10 May, pp. 18-19, 71-75.
Further reading
Silberman, S. (2006), “Don’t even think about lying”, Wired, 14 January.
Corresponding author
Timothy J. Louwers can be contacted at: [email protected]
For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: [email protected]
9
Crime-related
forensic
accounting
methodology
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
doc_490463806.pdf
The purpose of this paper is to explore the origins of crime-related forensic accounting
methodology in the USA.
Accounting Research Journal
The past, present, and future (?) of crime-related forensic accounting
methodology
Timothy J . Louwers
Article information:
To cite this document:
Timothy J . Louwers , (2015),"The past, present, and future (?) of crime-related forensic accounting
methodology", Accounting Research J ournal, Vol. 28 Iss 1 pp. 4 - 9
Permanent link to this document:http://dx.doi.org/10.1108/ARJ -04-2015-0047
Downloaded on: 24 January 2016, At: 21:21 (PT)
References: this document contains references to 10 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 857 times since 2015*
Users who downloaded this article also downloaded:
J ames A. DiGabriele, Wm. Dennis Huber, (2015),"Topics and methods in forensic accounting
research", Accounting Research J ournal, Vol. 28 Iss 1 pp. 98-114http://dx.doi.org/10.1108/
ARJ -08-2014-0071
Paul Andon, Clinton Free, Benjamin Scard, (2015),"Pathways to accountant fraud: Australian
evidence and analysis", Accounting Research J ournal, Vol. 28 Iss 1 pp. 10-44 http://
dx.doi.org/10.1108/ARJ -06-2014-0058
Grace Mui, J ennifer Mailley, (2015),"A tale of two triangles: comparing the Fraud Triangle with
criminology’s Crime Triangle", Accounting Research J ournal, Vol. 28 Iss 1 pp. 45-58 http://
dx.doi.org/10.1108/ARJ -10-2014-0092
Access to this document was granted through an Emerald subscription provided by emerald-
srm:115632 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald
for Authors service information about how to choose which publication to write for and submission
guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as
well as providing an extensive range of online products and additional customer resources and
services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the
Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for
digital archive preservation.
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
*Related content and download information correct at time of
download.
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
The past, present, and future (?)
of crime-related forensic
accounting methodology
Timothy J. Louwers
School of Accounting, James Madison University, Harrisonburg,
Virginia, USA
Abstract
Purpose – The purpose of this paper is to explore the origins of crime-related forensic accounting
methodology in the USA.
Design/methodology/approach – The author describes how these early methods have evolved
through the use of technology.
Findings – The author also discusses the next generation of crime-related forensic accounting tools
and techniques which, although in limited use today, will grow to widespread use in the near future.
Originality/value – This viewpoint is a summary of a presentation made at the 3rd National Forensic
Accounting Teaching and Research Symposium held at the Queensland University of Technology on
February 10, 2014.
Keywords Forensic accounting, Financial crimes, Investigation
Paper type Viewpoint
The origins of crime-related forensic accounting in the USA can be traced back to the
ground-breaking methods used by US Treasury agent Frank Wilson to obtain
convictions of two of the most notorious criminals in US history: gangster Al Capone
and child kidnapper/murderer Bruno Hauptman. Many of the forensic methods Wilson
pioneered are still in use today, although technological advancements have allowed
forensic accountants to improve upon themas they track twenty-frst-century criminals
also taking advantage of technology.
The origins of forensic accounting in the USA
Caught up in the patriotic war fervor sweeping the country in 1914, Frank Wilson began
his career inauspiciously by volunteering to serve in the US Army during World War I.
Despite horrible eyesight (possibly presaging his accounting future), he was able to fool
the screening doctors by memorizing the eye chart. To his dismay (as well as those
supervising him), he was unable to fool anyone on the rife range however, and was
summarily granted an honorable discharge. After a failed attempt to join the Canadian
Army, Wilson saw a job advertisement for Criminal Investigators for the US Treasury
Department. The 16th Amendment to the US Constitution introducing a national income
tax was ratifed in 1913; the Bureau of Internal Revenue necessarily greatly expanded
soon after. Wilson quickly rose through the ranks to become an Agent at the Intelligence
Unit of the Bureau of Internal Revenue (later the Internal Revenue Service).
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1030-9616.htm
ARJ
28,1
4
Received26 April 2015
Revised26 April 2015
Accepted28 April 2015
Accounting Research Journal
Vol. 28 No. 1, 2015
pp. 4-9
©Emerald Group Publishing Limited
1030-9616
DOI 10.1108/ARJ-04-2015-0047
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Meanwhile in Chicago, Al Capone was developing a reputation as a ruthless
gangster, running illegal speakeasies, bookie joints, gambling houses, brothels and
breweries. Capone also is alleged to have ordered the 1929 Saint Valentine’s Day
Massacre in which seven members of the rival “Bugs” Moran gang were lined up against
a wall and brutally machine-gunned. Given his reputation for violence and vengeance,
law enforcement offcials had diffculty fnding anyone willing to testify against him.
President Herbert Hoover challenged several government agencies with bringing
down Capone, including the Bureau of Internal Revenue. Because of his reputation for
being incorruptible, Wilson was hand-picked for the Capone case.
Although trained as a trial lawyer, Wilson’s talents lay in forensic accounting. He
would spend hours going over coded ledgers seized in raids on illegal casinos.
According to one account, “He relished going back again and again over the same
documents, receipts, records – perhaps for the thousandth time – to indict someone, or to
compel him to testify” (Spiering, 1976).
Once he found a connection, often through meticulous handwriting analysis of the
coded ledgers, he was very persuasive in gaining the target’s cooperation. One
bookkeeper, initially unwilling to testify against Capone, was kept in custody for several
days until he became convinced that he might be killed simply based on the presumption
that he did talk. Similarly, a courier connected to large bank deposits fromillegal casinos
and who was used to a life of luxury was kept in roach-infested solitary confnement
until he agreed to cooperate. Through meticulous tracking of Capone’s money
laundering schemes, Wilson was able to eventually link the illegal gambling casino
profts to bank deposits, and ultimately to a cashier’s check endorsed by Capone himself.
Wilson’s investigation quickly caught Capone’s notice, and Capone ordered a “hit” on
Wilson and his family (Wilson, 1947a). After ensuring his family’s safety, Wilson
continued on the case and Capone was eventually found guilty on fve counts of tax
evasion and sentenced to 11 years in prison.
About four months later (March 1, 1932), the 20-month-old son of famous American
aviator Charles Lindbergh was kidnapped. From prison, Al Capone intimated that he
had knowledge of the kidnapping and offered to help in exchange for a reduced sentence.
From an informant within the prison, Wilson knew that Capone had no outside contact
and that the offer to help was just a ruse (Wilson, 1947b). Wilson contacted the
investigators in charge of the kidnapping investigation of this information, and his offer
to help in the investigation was accepted.
The Lindbergh family had received ransom notes requesting amounts ranging from
$50,000 to $100,000. Wilson suggested that the ransom money ($50,000, or about
$800,000 in today’s US dollars, was eventually paid) be composed of a mixture of bills
and soon-to-be-expiring gold certifcates, hoping that the use of the rare gold certifcates
might be conspicuous. Wilson also convinced law enforcement offcials to record serial
numbers from ransom notes (Wilson, 1947b).
Sadly, the child’s body was found on May 12, 1932, in a shallow grave near the
Lindbergh estate. The marked currency, however, led investigators to Bruno
Hauptmann, a German-born carpenter. Hauptmann had used a gold certifcate to pay for
gasoline, and a suspicious gas station attendant wrote down the car’s license plate
number. The license plate number led investigators to Hauptmann’s home where
$14,600 of the ransom money was found in a wall in Hauptmann garage.
5
Crime-related
forensic
accounting
methodology
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Wilson’s work did not end with Hauptmann’s identifcation. Wilson compared
samples of Hauptmann’s handwriting to those of the kidnapper, an analysis that jurors
found convincing. Hauptmann kept meticulous accounts, until the ransom was paid. By
using net worth analysis, Wilson was able to show that Hauptmann’s net worth was
around $5,000 at the time of the kidnapping (Wilson, 1947b). Although unemployed, he
had bought a new car, invested in the stock market (losing $9,000 in the process),
traveled extensively and sent his wife on a vacation to Germany. Wilson also conducted
expenditure analysis, tracing $35,000 in expenditures to Hauptmann, and accounting
for all but $400 of the ransommoney. Based on Wilson’s meticulous evidence collection,
Bruno Hauptmann was convicted of murder and executed in 1935.
After helping to expand IRS involvement in other criminal cases, Wilson was named
Chief of the US Secret Service, where he served from 1934 to 1944. While there, he
implemented anti-counterfeiting measures (several of which are still in use today),
including the “Know Your Money” campaign, and perfecting methods to track money
laundering. After a lengthy career in public service, Wilson passed away in 1970 at the
age of 83.
Crime-related forensic accounting today
Many of Wilson’s forensic accounting methods are still in use today, although they have
evolved over time, often augmented by technology. For example, no longer are
investigators required to pore over lengthy accounting records by visually scanning
them. Instead, data mining techniques using computer-assisted audit tools such as
IDEAand ACL allowsuch searches of thousands of structured records to be conducted
effciently and relatively effortlessly. Law enforcement now routinely uses marked
currency in its investigations. Handwriting analysis has evolved from an art into a
science; handwriting analysts are now certifed experts whose analysis is readily
accepted in courtrooms.
Just as technology has evolved to help fraud investigations, technology has also been
corrupted to aid criminals perpetuate their frauds. For example, recent frauds involving
the City of Dixon, Illinois, and Peregrine Financial Group (PFG) both used technology to
provide supporting documentation to conceal decades-long frauds. Dixon city
comptroller Rita Crundwell pled guilty to one count of federal wire fraud after admitting
that she had funded her lavish lifestyle with city money (Peters, 2012a). Using common
offce productivity software, she created 159 fctitious invoices purported to be fromthe
State of Illinois to show the city’s auditors that the funds she was fraudulently
depositing into a secret account were being used for legitimate purposes. Crundwell
stole over $50 million (USA) to fnance her champion show horse farm over a period of
two decades (Peters, 2012b).
Similarly, Russell Wasendorf, Sr, used everyday technology to perpetrate a fraud in
which he embezzled millions of dollars from customer accounts over a 20-year period.
Excerpts from a note found in car after his failed suicide attempt at PFG’s corporate
offce included the following (Bunge et al., 2012):
I have committed fraud. Through a scheme of using false bank statements I have been able to
embezzle millions of dollars from customer accounts at Peregrine Financial Group, Inc. For
this I feel constant and intense guilt. I am very remorseful that my greatest transgressions
have been to my fellow man […]. I had no access to additional capital and I was forced into a
diffcult decision: Should I go out of business or cheat? I guess my ego was too big to admit
ARJ
28,1
6
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
failure. So I cheated, I falsifed the very core of the fnancial documents of PFG, the Bank
Statements […]. The forgeries started nearly twenty years ago and have gone undetected
until now […]. Using a combination of Photo Shop, Excel, scanners, and both laser and ink
jet printers I was able to make very convincing forgeries of nearly every document that
came from the Bank. I could create forgeries very quickly so no one suspected that my
forgeries were not the real thing that had just arrived in the mail […]. I was also the only
person with online access to PFG’s account using USABank’s online portal. On USABank
side, I told representatives at the bank that I was the only person they should interface
with at PFG […]. I was able to conceal my crime of forgery by being the sole individual
with access to the USA Bank accounts held by PFG. No one else in the company ever saw
an actual USABank statement. The bank statements were always delivered directly to me
when they arrived in the mail. I made counterfeit statements within a few hours of
receiving the actual statement and gave the forgeries to the accounting department […].
When it became a common practice […] to mail Balance Confrmation Forms to Banks and
other entities holding customer funds I opened a post offce box. The box was originally in
the name of Firstar Bank but was eventually changed to USA Bank […]. When online
banking became prevalent I learned how to falsify online Bank Statements and the
Regulators accepted them without questions.
The use of electronic confrmations helped uncover the fraud. Wasendorf had earlier
refused to use an electronic formof confrmation until forced to by the National Futures
Association, the company’s regulator. Confrmation.com, the service used for the
electronic confrmations, unraveled the fraud (Cohn, 2012).
The future of crime-related forensic accounting
Research and technology have combined to improve crime-related forensic methods.
Advances include improvements in interviewing and interrogation methods,
handwriting analysis and data analytics. Some of these advances will be discussed
next.
With respect to interviewing and interrogation, the polygraph machine has long set
the standard for lie-detection methodology. Created in the 1880s, the polygraph machine
measures changes in breathing, blood pressure, pulse rate and galvanic skin reaction
(“sweaty palms”). Polygraph validity has achieved rates of 80-95 per cent for the kinds
of tests used with specifc issues, such as allegations in criminal cases. While polygraph
tests are commonly used in police investigations in the USA, no defendant or witness
can be forced to undergo the test. Although the polygraph is still used, cluster analysis
is used by intelligence offcers to improve upon the electronic lie-detecting technology.
While inclusion of behavioral cues is considered an improvement over the polygraph
technology, neurocriminology has emerged as a better method of telling whether
someone is lying or not.
Neurocriminology uses neural mapping to detect lies. When someone is telling the
truth, certain areas of the brain are active; similarly, other parts of the brain display even
more activity when someone is lying (Raine, 2013). Terry Harrington (then 17 years old)
was convicted of murdering a retired police offcer in 1977. In 2000, Harrington
underwent “brain fnger printing”. His brain did not emit the expected
electroencephalography (EEG) patterns in response to critical details of the murder.
Examiners interpreted the results to suggest that Harrington was not present at the
murder site, a conclusion corroborated by the fact that his brain did emit the requisite
patterns in response to details of his alibi. When confronted with this newevidence, the
7
Crime-related
forensic
accounting
methodology
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
key prosecution witness recanted his testimony, providing successful grounds for
reversal. Using similar technology, a recent study of New Mexico inmates using brain
scans correctly predicted which prisoners were more likely to commit another crime
once released (Raine, 2013).
With respect to handwriting analysis, a team of computer science professors at the
University of Buffalo subjected 1,500 writing samples to computer analysis (Srihari
et al., 2002). In 96 per cent of cases, the writer of a sample could be positively identifed
based on quantitative features of his handwriting, such as letter dimensions and pen
pressure.
Traditional data analysis consists of analyzing structured data using software
tools such as IDEA or ACL. Commonly used tests include gap analysis, sequence
analysis, duplicate analysis and Benford’s Law. Cutting-edge data analysis includes
techniques such as unstructured data analytics such as word mapping, emotive
content analysis and email “webs”.
Word mapping can be used to determine the frequency with which certain words
are used. This technique can be used to identify red fags for bribery under the
Foreign Corrupt Practices Act. Examples include terms such as “red box” in China,
“a cup of tea” in India or “a cup of coffee” in Brazil. Emotive content analysis was
pioneered by a Big Four frm which hired linguists to compile “dictionaries” of
emotions and to identify phrases related to those emotions. For example, a phrase
indicating secrecy might be “that thing we talked about last week”. Through
emotive content analysis, the “emotions” of a corporation are tracked over time via
the search of millions of emails for the use of these key phrases. Similarly, email
“webs” are ways of tracking communication between employees: thicker lines
indicate more contact/closer relationships. This methodology is useful to detect
conspiracies – who is involved in a fraud, and often more importantly, who is not
involved in the fraud.
Summary
In this viewpoint, I have described the beginnings of crime-related forensic
accounting methodology in the USA, illustrated with examples how the
methodology has evolved through the use of technology and predicted how the
methodologies will continue to evolve over the next decade. British naturalist
Charles Darwin noted that “t is not the strongest of the species that survive, nor
the most intelligent, but the one most responsive to change”. For forensic
accountants to be successful today, it is important not only to know history’s
lessons, but also to know how those lessons are evolving.
References
Bunge, J., Patterson, S. and Steinberg, J. (2012), “Peregrine CEO’s dramatic confession”, The Wall
Street Journal, 14 July, p. A1.
Cohn, M. (2012), “Audit confrmations helped unmask peregrine fraud”, Accounting Today,
23 July.
Peters, M. (2012a), “Guilty plea in $53 million public theft”, The Wall Street Journal, 15 November,
p. A3.
Peters, M. (2012b), “Fraud case spurs show-horse sale”, The Wall Street Journal, 11 September,
p. A5.
ARJ
28,1
8
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Raine, A. (2013), “The criminal mind”, The Wall Street Journal, 26 April, pp. C1-C2.
Spiering, F. (1976), The Man Who Got Capone, Bobbs-Merrill, Indianapolis, IN.
Srihari, S., Cha, S.-H., Arora, H. and Lee, S. (2002), “Individuality of handrwiting”, Journal of
Forensic Science, Vol. 47 No. 4, pp. 1-17.
Wilson, F. (1947a), “Undercover man: he trapped Capone”, Collier’s, 26 April, pp. 14-15, 80-83.
Wilson, F. (1947b), “Inside the Lindbergh kidnapping”, Collier’s, 10 May, pp. 18-19, 71-75.
Further reading
Silberman, S. (2006), “Don’t even think about lying”, Wired, 14 January.
Corresponding author
Timothy J. Louwers can be contacted at: [email protected]
For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: [email protected]
9
Crime-related
forensic
accounting
methodology
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
2
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
doc_490463806.pdf