On almost a weekly basis, the public is hearing news of fraud, embezzlement, money laundering, or some other type of white-collar financial crime. The increased need for forensic accountants id directly proportionate to the increasing amount of public accounting scandals. I am going to take a look at a case study of one of the first international fraud cases that spanned multiple continents, involved public officials, and eventually had vast implications for the accounting profession as a whole. Case studies were identified in the research discussed in Forensic Accounting: What is it? And How to be an Effective Forensic Accountant, identified case studies as an important tool for forensic accountants to further hone their skills.

The case study covers the Fund of Funds (FOF) fiasco beginning from the inception of Investors Overseas Services (IOS) in the 1950’s, which comparatively to today’s scandals is minor. Two parts were addressed while looking at FOF, one the perpetration of the fraud itself and then the charges brought its auditor.

Bernie Cornfeld, a salesman, incorporated IOS in Geneva, Switzerland in the mid 1950’s in order to capitalize untapped market of the mutual funds in Europe. Eventually, after growing through the use of web of foot salesman selling door-to-door, Cornfeld developed the idea of a mutual fund that only invested in profitable American mutual funds, thus powering the inception of FOF in 1962.  FOF quickly expanded and Cornfeld became notorious as “The Great Money catcher”, a name that he would rather quickly lose. FOF was used as a shell company for IOS in order to allow IOS to profit off of “Black Money”, money must be hidden and kept secret, especially profiting off of wars, revolutions, mutinies, and massacres in developing countries. Throughout the profits acquired by FOF and IOS, the sales commissions were surpassing the fees earned by the fund sales, so Cornfeld was essentially building a Ponzi scheme.

By the mid-1960’s, Cornfeld had had successful IPOs in Canada and Europe with IOS, and was on the hunt for a way to produce stronger financial statements to bolster stock prices. The hunt would bring together Cornfeld and John King, owner of King Resources and millionaire. King offered claims on oil drilling land in the Arctic, which after purchase by FOF were deemed entirely useless due to being completely underwater with sheets of ice shifting regularly. Here comes into play a very important aspect of this case, during the sale of the land, auditing firm Arthur Andersen & Co. (AA) represented both King and IOS, but more on that later. The purchase of the land was not reevaluated for the books, and AA was forbidden by FOF to verify the permits and surveys on which the value was based on. In a convoluted mess, King purchased the land back in conjuncture with some of his friends and board members in order to increase the value of the land, thus driving up the stock of FOF. From there IOS charged FOF a $10 million performance fee from FOF for increasing the value of FOF investments, but on the books FOF only made $600,000 from the sale. IOS attempted to claim the shift of $10 million from FOF to its own as profit, which alert market participants quickly noticed and grew concerned.

Investors began to redeem their shares in FOF, and within half a year the bottom had fallen out from IOS. King’s business was maintaining primarily on the investments in IOS, so he eventually fell into financial ruin and was jailed for making phony deals.

A troubled IOS fires Cornfeld and began searching for a replacement, so in came Robert Vesco. Vesco, by pretending to have large name insurance backers, conned his way onto the board of IOS. Vesco promised increases in stocks just by the association with him, but this never came to fruition. In fact, Vesco quickly came under the SEC radar for looting, fraud, and financial statement misrepresentation. Vesco jumped shipped quickly after and lived the rest of his life on the run. After the Vesco section of the fiasco, which spanned more than I’m going to cover, FOF sought legal action against Arthur Andersen, a standard move when a company is looking to recover lost assets because the auditor is typically the only entity left with any assets.

Here is the most interesting aspect of the case because society has seen many scandals similar to Funds of Funds, but not many had such a strong implications for ethical accounting. Arthur Andersen & Co was charged with fraud and breach of contract for its involvement in the FOF purchase. The jury found that Arthur Andersen had a legal and ethical obligation to report the discrepancies between the book value of the purchase versus the group cost, or AA needed to have resigned at least one account. The fact that AA did not attempt to make the discrepancies known or addressed allowed them to become liable. In the end, greed outweighed the morals and the Generally Accepted Accounting Principles were over looked for the sake of revenues.

Struach, Bruce A., and Sheila D. Foster. “Auditing Cases That Made A Difference: Funds of Funds.” Journal of Business Case Studies 8.5 (2012): 493-508. Print.