Artificial Intelligence for Audit, Forensic Accounting, and Valuation

CHAPTER 13Forensic Accounting

HORRIFIED BY THE INSENSITIVITY and deceit, the business world was left with deep scars from the Bernie Madoff scandal. Harry Markopolos, the analyst who caught and reported Madoff's fraud, observed and calculated the numbers and realized that it was mathematically impossible for Madoff to deliver the numbers that he was reporting. Nearly 20 years later, Markopolos analyzed the financial statements and other publicly available information of GE and GE's value chain partners and peers, and then in mid‐August of 2019 issued a report accusing GE of falsifying financial statements. According to Markopolos, GE was hiding $29 billion in long‐term care insurance liabilities, and it will turn out to be “a bigger fraud than Enron.” A forensic accounting firm named Forensic Decisions PR LLC drafted the report. Markopolos's claims shook the markets. GE's stock plunged more than 10%. As time passed, jittery and nervous investors slowly began regaining confidence in GE. At the time of the accusation, GE board and audit committee were packed with senior executives in finance, governance, and audit. The company handled the onslaught with elegance and survived by showing that Markopolos's analyses were not based upon facts.

The whole GE saga was strange for many reasons. First, the accuser, one accountant, challenged a legendary Fortune 100 company, an American icon. Second, GE stood its ground and eventually prevailed. Third, within a matter of a few weeks, it ...