How Forensic Accountants Unpicked One Of The Biggest Frauds In History

Posted on Thursday, November 17, 2022 by Lydia SinclairNo comments

One of the most important areas for accountancy recruitment is in the specialised field of forensic accounting.

forensic accountant is, broadly speaking, an accounting professional who specialises in issues that have legal consequences, which typically include fraud cases, insurance claims, divorce settlements and cases of negligence.

It can sometimes involve intense and comprehensive investigation, such as in the case of the Enron bankruptcy, one of the biggest frauds in the history of business.

The structure of Enron was somewhat obtuse, and under the leadership of CEO Jeffrey Skilling not only used every method of accounting fraud possible but also invented some new methods in what later turned out to be a way to deliberately obfuscate customers and investors.

The most famous tactic it used was the move from a more standard accounting method typical in the natural gas business Enron was known for to mark-to-market accounting.

Mark-to-market is commonly used for determining the value of investment portfolios as it accounts for the fluctuations in the value of a company’s assets rather than historical cost accounting, which focuses purely on its initial cost.

However, with Enron, the first company that was not a financial firm to adopt mark-to-market accounting, they used MTM to list their profits as projected numbers rather than actual figures, leading to misleading reports when the projected deals fell through and resulting in losses that were obfuscated.

An infamous example of this was a deal between Enron and Blockbuster Video to develop an on-demand entertainment service in 2000, years before widespread broadband internet made such an infrastructure feasible.

Enron continued to claim profits on this deal even after Blockbuster withdrew, and with the help of special purpose vehicles, helped the company overstate earnings and hide losses and debt through other partnerships.

This would start to unravel in 2001, with the stock falling from a peak of $90 per share to pennies, and eventually the evidence obtained by forensic accountants would lead to Jeffrey Skilling receiving 24 years imprisonment (later reduced to 14 years).


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