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How Forensic Accounting Brought Down Al Capone and Enron

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Submitted By tandypigott
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The "Enron scandal" and the fall of Al Capone had similar characteristics The "Enron Scandal means more than just a tale of accounting manipulation. It surpassed all other accounting frauds, because it was not just a matter of hiding losses, Enron led the pack of white collar crimes committed out of pure greed. The same could be said for Al Capone.

In the 1930,s Frank J Wilson was the man who spearheaded the campaign to convict Al Capon of tax evasion.
During prohibition Capone dominated the city of Chicago. He owned or controlled speakeasies, distilleries, brothels, gambling houses, nightclubs and horse and dog tracks. He eventually controlled politics throughout most of Illinois. It was Capon's greed for money and power that eventually brought him down just as it did Enron. A lot of the same techniques were used to achieve this.
Attempts by local and federal law enforcement agencies to build a racketeering case against him went nowhere, mainly because he bribed investigators, fixed judges and juries and intimidated(or eliminated) witnesses. He was very clever at covering his tracks. Elliot Ness and his squad of “Untouchables” tried to destroy the Capone Crime Syndicate with brute force which did not work. J Edgar Hoover refused to participate in the investigation.
Al Capon paid no income tax on his illegal income. Although Capone lived opulently and spent money lavishly, he never filed a tax return. To get Capone on income tax evasion, the government had to prove he had income in excess of 5,000 dollars,(the standard deduction at the time) federal tax agents estimated his annual income to be about 50 million.( Expert Witnessing In Forensic Accounting, CRC Press 2003)
With Enron the flood of allegations of fraud, conflicts of interest, Byzantine use of rules and footnotes and the startling revelations of document destruction that have attended Anderson’s auditing of Enron has truly put the accounting function in the public eye as never before. To many longtime critics of the accounting industry, the Enron debacle is a sad reminder that audits are capable of hiding weaknesses and propping up companies over long periods- sometimes with devastating results for employees, shareholders, bondholders, suppliers and other constituencies.(Copyright 2002 Financial Executives International)
The head of the Treasury assigned a 42 year old Frank Wilson one of his special agents in Baltimore, to go to Chicago with five other agents and build a tax case against Capon. Wilson was an aggressive investigator who was later commented on that he “fears nothing that walks” He will sit quietly looking at books for eighteen hours a day, seven days a week, forever, if he wants to find something in those books.
In Chicago, through the summer of 1930, Wilson and his agents examined close to 2 million documents and other evidence that had been seized in various raids on Capons establishments over the previous six years. To be able to show that Capone spent a lot of money would suggest to a judge and jury that he must have had some income. They questioned merchants, real estate agents, proprietors, hotel clerks, bartenders, and accountants, many of whom were overcome by fear and would not admit to any dealings with the gangster. The T-men analyzed phone records and investigated banks and credit agencies. They developed informers; tapped phones, seized evidence, and looked for weak points in Capons Empire.
Finally one night, around 1:00 Am., Wilson himself found three bound ledgers that seemed to be financial records of an enormous gambling operation. Now Wilson needed to find the bookkeeper who had made the notations that referred to Al Capon.
For three weeks, Wilson collected handwriting samples of every known associate of Capons in Chicago. Wilson personally tracked the bookkeeper a man named Shumay, found him at a dog track in Miami, and persuaded him to testify against Capone, first before the grand jury and then at trial, to the effect that a substantial amount of the proceeds from the gambling operation were intended for Capon in the years 1924-1926.
Capon’s trial was held in October 1931. He was confident that he would be acquitted until Judge Wilkerson switched juries with another courtroom down the hall. Wilson had learned that Capon had rigged the original jury. The new jurors were sequestered so that The Capone gang could not get to them. Capon was found guilty of tax evasion and received an eleven year prison sentence, plus fines totaling 250,000 dollars and 30,000 dollars in court costs.(D.L. Crumbley” Forensic Accounting: Older than you think “Journal of Forensic Accounting, July-December 2001

Enron was also brought down by forensic accountants that were able to scour the books and business transactions of the company and point out which corporate officials were behind whatever was going on. Just like Frank Wilson, Enrons accountants were the good guys that sniffed out corruption. They collected all the physical evidence that was used on the witness stand to convict Enron Executives. (Neeraj Aarora, 2002 Advocate for forensic accountants)
Whether it was the IRS, one of the first institutions to use the services of forensic accountants to bring down Al Capon; or the diligent forensic accountants that brought down Enron, forensic accounting is fast emerging as one of the premier fields in the “World of Accounting”.
In reading about the Enron scandal and the case against Al Capone, I found that the forensic warning signals were similar in both and are always present in any companies that are trying to swindle their investors and the public. I think this is a lesson that this was, and always will be a big problem and there will always have to be Forensic Accountants available to bring these to light.
1M.E. Peloubet, “Forensic Accounting: Its Place in Today’s Economy,” Journal of Accountancy, June 1946, pp. 458-462.
2Max Lourie, “Forensic Accounting,” New York CPA, November 1953, pp.
696-705. For more historical detail, see D.L. Crumbley, “Forensic Accounting:
Older than You Think,” Journal of Forensic Accounting, July-December 2001, pp. 181-202.
3Ann Shortell, “The New Crime Sleuths,” Maclean, June 30, 1986. If you are aware of an earlier use of the phrase, please send evidence to the authors.
4“Michael G. Kessler Cited as the First ‘Forensic Auditor’,” press release January
15, 2001, available at www.investigation.com/press/press14.htm.
5Zeph Telpner and Michael Mostek, Expert Witnessing in Forensic Accounting,
CRC Press, Boca Raton, FL, 2003, pp. iii-iv. For more historical detail, see D.L. Crumbley, “Forensic Accounting:
Older than You Think,” Journal of Forensic Accounting, July-December 2001, pp. 181-202.Neeraj Aarora 2002 (advocate writer for forensic accountants, Copyright 2002Financial Executives International “The Scandal of Enron ”Copyright 2002 Gale Group a Thompson Corporation Company

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