In the aftermath of the Peregrine Financial Group fraud, many wondered how it could have happened and how forensic accounting works after a fraud occurs.

On June 20, John Lothian News president and editor-in-chief Jim Kharouf moderated a panel at the Women In Listed Derivatives (WILD) event on forensic accounting with John Hague, financial services industry leader with McGladrey and Christen Morand, senior manager, Ernst & Young.

He sat down with both separately to ask about the accounting space today and how forensic accounting digs into fraudulent cases. Morand talks about the three categories of fraud that her team at Ernst & Young investigate – asset misappropriation, financial misstatement and bribery and corruption. Her team investigates the who, what, when, where and how of fraud at companies, a process that can take a week to more than a year. She discusses why investigations are lengthy and what can get in the way.

Hague discusses classic auditing functions as well as new rules via Dodd-Frank that gives the Public Company Accounting Oversight Board (PCAOB) oversight of the auditors of broker dealers. This is a major change for auditors in the financial services industry, and means that the PCAOB will look at the auditing firm’s accounting practices and procedures.

Both say that fraud is usually committed by those who have the ability, the motivation and the “rationalization in their minds that it is okay.” Hague points out that in the high-profile cases of Bernie Madoff and Russ Wasendorf Sr. at Peregrine Financial Group, each CEO had control over the information on the company balance sheet. Both also had small accounting firms working with them, which can be a red flag.

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