Financial Fraud: Early Occurrences

Jennifer French

Financial Fraud: Early Occurrences

Jennifer French CPA, CGMA, Principal

In working closely with a variety of audit clients over the years, I have noted that fraud is a topic that relates to any entity, no matter the industry it operates in or the size of its operations. So in 2021, I plan to write a series of articles that addresses fraud in some manner.

To “kick-off” this article series, I chose to begin researching early instances of fraud. Most people have the misconception that fraud is something that did not occur on a regular basis until modern times. On the other hand, the perception is that in present times, with increased legislation and oversight, additional auditing standards, and significant technological advancements, fraud schemes would be few and far between.  This is definitely not the case, as the methods of perpetrating fraud have evolved over the years alongside our technological advancements. Following are three early instances of fraud noted during my research.

The first documented case of financial fraud that I could find goes back to the year 300 B.C. and is a type of insurance fraud.  There was a Greek sea merchant Hegestratos, who sought to insure his ship and cargo so he took out an insurance policy, which was a type of loan, on the cargo that he was to deliver via his ship. This was known during those times as bottomry, which is when a merchant borrowed money on the basis that when the ship arrived at its destination and delivered the cargo, the proceeds received from the delivery were used to repay the policy. When taking out this policy, he had no intentions of delivering the cargo, which in this specific instance was corn. He planned to set sail without the corn, then he would sink his boat, keep the proceeds of the loan, and afterward sell the corn “on the side”, and keep those proceeds as well. Needless to say, he failed miserably. When attempting to sink the boat, he drowned trying to escape his crew and passengers when they realized what he was up to.

Per further research, I found where Ulysses S. Grant, a renowned Civil War Hero, and former United States President attempted to help his son succeed in business and became a victim of fraud.  He not only invested his personal funds in his son’s business venture but also obtained a personal loan from William Vanderbilt.  His son’s business partner ended up defrauding him of approximately $100,000. In order to repay William Vanderbilt, he relinquished his personal effects, including his uniforms, swords, medals, and other memorabilia from the war. He was broke when he passed away in 1885.

In 1920, the original snowball system, or Ponzi-scheme, was committed by Charles Ponzi.  He was originally from Italy and became a con artist in both the United States and Canada. His Ponzi-scheme deprived investors of up to $20 million within an eight-month period. Prior to this, there were a few other documented Ponzi-schemes. One occurred in the 1880s where Sarah Howe initiated a Ponzi-scheme termed the “Ladies’ Deposit”.  However, the ones prior to Charles Ponzi did not receive the recognition that his did, as none reached this dollar magnitude.

Over the years, Hollywood has capitalized on producing movies, documentaries, and television series based on the premise of fraud. Below, I’ve listed ten you may be interested in viewing.

  • Catch Me if You Can (2002) – based on a true story of a con artist
  • McMillion$ (2020) – Documentary series about the McDonalds Monopoly game scam 
  • The Accountant (2016) – a freelance accountant that works for dangerous organizations
  • Enron: The Smartest Guys in the Room (2005) – biggest fraud of modern times
  • All the Queen’s Horses (2017) – based on actual theft of a city comptroller from Dixon, IL
  • Inside Job (2010) – Fall 2008 global financial meltdown
  • The Wolf of Wall Street (2013) – based on the true story of a stock-broker
  • The Other Guys (2010) – forensic accountant investigates a permit violation and stumbles into corporate fraud
  • Trading Places (1983) – deals with insider trading for personal benefit
  • White Collar (2009-2014 TV Series) – a con artist works as a consultant for the FBI

Over the next few months, I plan to address the top financial statement fraud schemes, including those related to revenues, accounts receivable, inventories, property plant and equipment, nonprofit organizations, governmental entities, and employee benefit plans. It should prove to be both an interesting and educational article series.