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The History of Forensic Accounting

While everyone knows how exciting the world of forensic accounting is…well, as far as accounting goes…most are not aware of the origins of the specialty nor some of its colorful past.

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With that in mind, let’s look at some fun facts regarding the cool history of early forensic accounting.

  • Origins date back to the time of the pyramids: As long ago as 3500 BC, Egyptian scribes were known as the eyes and ears of the ancient kings. They were the accountants of their day and were tasked with the accounting of the kingdom’s assets, as well as preventing and detecting fraud. Based upon what archeologists discovered in King Tut’s tomb in 1922, these accounting pioneers appear to have been successful.
  • The first known testimony was in the 19th Century: Forensic accountants regularly testify as expert witnesses in court cases, in support of both plaintiffs and defendants. The first known case of forensic accounting testimony was in the Canadian bankruptcy case of Meyer v. Sefton. Due to the nature and complexity of the evidence, the judge allowed the accountant who had examined the bankrupt estate’s accounts to testify. He took the stand in 1817.
  • Pre-Google Advertising: The earliest reference to the marketing of forensic accounting services occurred in an accountant’s advertising circular in Glasgow, Scotland. Young accountant James McClelland advertised his expertise in various classes of forensic-type work and arbitration support. The year was 1824.
  • Eliot Ness wasn’t Al Capone’s worst nightmare: While the Untouchables made life miserable for the infamous Chicago gangster during the prohibition years, it was a team of forensic accountants in the Internal Revenue Service led by Elmer Irey that finally succeeded in the downfall of Al Capone. Apparently, Capone forgot to declare the income derived from his ventures in bootlegging, gambling, prostitution and extortion. The original Scarface was convicted of tax evasion in 1931.
  • Coining the catch-phrase: The term forensic accounting was first published in an article titled “Forensic Accounting – Its Place in Today’s Economy”. The article stated that “during the war both the public and industrial accountant have been and now engage in the practice of forensic accounting”. Maurice Peloubet, a New York CPA, first used the term in 1946.
  • Classics never go out of style: In 1951, criminologist Donald Cressey published a theory he developed based upon his study and interviews done with people convicted of fraud and violations of trust. He stated that in order for embezzlement to occur, there must be three elements in place: 1) a non-shareable problem, 2) an opportunity for trust violation and 3) a set of rationalizations that define the behavior as appropriate in a given situation. While the term “Fraud Triangle” was developed later, Cressey will always be credited with its origin; and though attempts have been made to modify or add to the theory, the simplicity of the fraud triangle has endured the test of time – as well as being included in every forensic accounting PowerPoint presentation known to man.

While forensic accounting may have become more visible as a specialty in recent years, reflections on the past show that as long as there has been wealth and money, the threats of fraud and the resulting need for those to combat it have both existed throughout time and will continue to be around throughout the history ahead.

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