1. The Past, Present, and Future(?) of Forensic Accounting
Professor Tim Louwers
CPA, CISA, CFF
James Madison University
New Orleans ACFE Chapter 2014 Annual Fraud Conference
November 7, 2014

2. Today’s Presentation The Past: The “Father of Forensic Accounting”
The Present: Some recent cases
The Future: Recent technological developments affecting our profession

3. The Beginnings of Forensic Accounting in the U.S.
Wilson enlisted in the U.S. Army when WWI began, but his eyesight was so bad that he couldn’t hit a target with his rifle. He failed his eye exam and was given an Honorable Discharge.
Wilson then tried to join the Canadian Army before seeing an ad for U.S. Treasury Department Criminal Investigators.
He became an Agent at the Intelligence Unit of the Bureau of Internal Revenue (later our beloved IRS).
Wilson was instrumental in both the conviction of gangster Al Capone as well as the conviction of Bruno Richard Hauptmann, the Lindbergh baby kidnapper/murderer.
Frank Wilson

4. Bringing Down Capone
Al Capone was a Chicago-based gangster who ran illegal speakeasies, bookie joints, gambling houses, brothels and breweries.
He also is alleged to have ordered the Saint Valentine’s Day Massacre (1929) in which 7 members of the rival “Bugs” Moran gang were lined up against a wall and machine gunned.
Investigators had difficulty finding anyone who would testify against Capone.

5. Bringing Down Capone
Wilson was hand picked for the Capone case because he was seen as incorruptible.
Although trained as a trial lawyer, his talents lay in forensic accounting:
“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.”*
“He was an expert at breaking down witnesses. His methods were often brutal.”*
He was so effective that Capone ordered a “hit” on Wilson and his family.
*From The Man Who Got Capone, by Frank Spiering

6. To obtain a conviction, prosecutors needed to prove unreported annual income in excess of $5,000.
Wilson found a coded general ledger obtained from a raided gambling casino that showed unreported profits of $20,000-$30,000 per day.
Using handwriting analysis, Wilson was able to identify the bookkeeper.
He next examined recorded deposits over $10,000 and was able to locate the courier who had deposited over $300,000 to an account linked to Capone.
Although Capone managed to find the jury list and bribe or coerce the jurors, the judge was able to swap juries at beginning of trial.
On October 17th, 1931, Capone was found guilty on five counts of tax evasion and sentenced to 11 years in prison.
Bringing Down Capone

7. The Lindbergh Kidnapping
On March 1, 1932, Charles Lindbergh’s 20-month old son was kidnapped.
The Lindbergh family received ransom notes requesting amounts ranging from $50,000-$100,000.
The family ultimately paid ransom of $50,000 consisting of bills and gold certificates.
The child’s body was found on May 12, 1932 in a shallow grave near the Lindbergh estate.

8. Wilson’s Forensic Accounting Techniques
Pioneered using marked currency.
Advocated the use of soon-to-be- expiring gold certificates in ransom.
Recorded serial numbers from ransom later used to identify Bruno Hauptmann as suspect.
Compared Hauptmann handwriting to ransom notes.
Conducted net worth and expenditure analysis and accounted for $49,600 of the ransom money ($14,600 found in wall of Hauptmann garage and $35,000 in expenditures traced to Hauptmann).
Bruno Hauptmann was convicted of murder and executed in 1935.

9. Wilson’s Later Service
After helping to expand IRS involvement in other criminal cases, Wilson was named Chief of the US Secret Service where he served from
The Secret Service’s mission is to protect the President and prevent counterfeiting.
While there, he implemented anti-counterfeiting measures (several of which are still in use today), including
“Know Your Money “Campaign
Money tracking
Later served as security consultant for the U.S. Atomic Energy Commission.
Passed away in 1970.

10. (In)Famous cases involving fraudulent documents
The Hitler Diaries (1983)
The Martha Stewart “Insider Trading” Case (2002)
City of Dixon (2012)
Peregrine Financial Group (2012)
New Orleans ACFE Chapter 2014 Annual Fraud Conference

11. Hitler Diaries (1983) “Old School” analysis “New School” Analysis
Three handwriting experts independently verified diaries’ veracity.
Stern magazine paid the equivalent of $6 million.
“New School” Analysis
Paper analysis
Ink analysis

12. Traditional types of document examinations
Handwriting comparisons
Alteration analysis
Folds, staple analysis
Indented writing analysis
Sequence of writing analysis
Typing defect analysis
Typewriter ribbon analysis
Ink analysis
Paper analysis
New Orleans ACFE Chapter 2014 Annual Fraud Conference

13. Horsing Around in Dixon
Admitting that she had funded her lavish lifestyle with city money, former Dixon, Il city comptroller Rita Crundwell (59) pled guilty to one count of federal wire fraud.
Over a 20+ year period, Crundwell stole over $50 million to finance her champion show horse farm.
Crundwell created 159 fictitious invoices purported to be from the 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.
Sources: Guilty Plea in $53 Million Public Theft, The Wall Street Journal, November 15, 2012, p. A3Fraud Case Spurs Show-Horse Sale The Wall Street Journal, September 11, 2012, p. A5

14. City of Dixon Fraud
A typical embezzlement scheme would involve creating a phony invoice for $350,000 (e.g., to the state for a sewer project). Rather than paying the state, a check would be deposited in a secret account and later diverted to purchase another show horse (in this case, Pizzazzy Lady).
To conceal the scheme, Crundwell picked up the city’s mail, including bank statements to prevent other employees from learning about her account. When she was away, she asked a relative or other city employees to pick up the mail and separate any of her mail, including the statements for the secret account, from the rest of the city’s mail.
Sources: Guilty Plea in $53 Million Public Theft, The Wall Street Journal, November 15, 2012, p. A3; Fraud Case Spurs Show-Horse Sale The Wall Street Journal, September 11, 2012, p. A5

15. Peregrine Falls From the Sky…
Excerpts from note found in Russell Wasendorf, Sr.’s car after his failed suicide attempt at Peregrine Financial Group’s corporate office:
“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 difficult decision: Should I go out of business or cheat? I guess my ego was too big to admit failure. “So I cheated, I falsified the very core of the financial documents of PFG, the Bank Statements.”
“…The forgeries started nearly twenty years ago and have gone undetected until now….”

16. How was Wasendorf able to fool regulators?
More excerpts from his suicide note:
“I was able to conceal my crime of forgery by being the sole individual with access to the US Bank accounts held by PFG. No one else in the company ever saw an actual US Bank 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… Using a combination of Photo Shop, Excel, scanners, and both laser and ink jet printers I was able to make very convincing forgeries of nearing 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 US Bank’s online portal. On US Bank side, I told representatives at the bank that I was the only person they should interface with at PFG.
“…When it became a common practice … to mail Balance Confirmation Forms to Banks and other entities holding customer funds I opened a post office box. The box was originally in the name of Firstar Bank but was eventually changed to US Bank.
“…When online banking became prevalent I learned how to falsify online Bank Statements and the Regulators accepted them without questions.”
Source: “Peregrine CEO's Dramatic Confession,” The Wall Street Journal, July 14, 2012, p. A1

17. How was Wasendorf finally caught?
The use of electronic confirmations helped discover fraud at PFGBest, a unit of Peregrine Financial.
Wasendorf had earlier refused to use an electronic form of confirmation until forced to use it by The National Futures Association, the company’s regulator. Confirmation.com, the service used for the electronic confirmations, discovered the fraud.
Brian Fox, founder of Confirmation.com said “We have seen this pattern several times since launching the service in resistance to our system is a red flag indicating fraud.”
Source: Audit Confirmations Helped Unmask Peregrine Fraud Accounting Today, July 23, 2012, M. Cohn.

18. Interviewing and Interrogation Today
True or False? If a person looks up and to the right (creative side of the brain) they are probably lying.
Created in the 1880’s, the polygraph measures changes in breathing, blood pressure, pulse rate and galvanic skin reaction (“sweaty palms”).
Polygraph validity have achieved rates of 80-95% for the kinds of tests used with specific issues, such as allegations in criminal cases.
While polygraph tests are commonly used in police investigations in the US, no defendant or witness can be forced to undergo the test.
“Cluster” analysis

19. Tomorrow(?): Neurocriminology
Using neural mapping to detect lies
When someone is telling the truth, the areas of the brain shown here in green become active.
If s/he is lying, the parts of the brain shown in red display even more activity.
Source: “Don't Even Think About Lying”, Wired, January 2006.

20. Brain “Fingerprinting” in Action
Terry Harrington (then 17 years old) was convicted of murdering a retired police officer in 1977.
In 2000, Harrington underwent “brain finger printing. His brain did not emit the expected 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 new evidence, the key prosecution witness recanted his testimony, providing successful grounds for reversal. 
In a recent study of New Mexico inmates, brain scans correctly predicted which prisoners were more likely to commit another crime once released.

21. Document Analysis Today Tomorrow(?) Handwriting experts
Indented writing analysis
Folds, staple analysis
Sequence of writing analysis
Typing defect analysis
Typewriter ribbon analysis
Ink analysis
Paper analysis
Tomorrow(?)
Computer forensics
Mobile forensics
Printer analysis
Electronic image analysis
Computer analysis of handwriting

22. Computer Handwriting Analysis
A computer science professor at SUNY--Buffalo subjected 1,500 writing samples to computer analysis.
In 96 percent of cases, the writer of a sample could be positively identified based on quantitative features of his handwriting such as letter dimensions and pen pressure.
New Orleans ACFE Chapter 2014 Annual Fraud Conference

23. Data Analysis Traditional data analysis Cutting edge data analysis
Structured data analysis (IDEA, ACL)
Gap analysis, sequence analysis, duplicate analysis, Benford’s Law
Cutting edge data analysis
Unstructured data analytics
Word mapping
Emotive content analysis
“webs”