Building trust after Enron

Is your investment money any safer one year later?

Date published: 2008-02-25 1:36:42 PM

In 2001, a wave of corporate fraud crushed both the morale and savings of many investors around the world.

Almost overnight, people saw their life savings disappear. Retirement plans were shelved and many of us were left wondering, could this happen again?

While Réal Labelle, an accounting professor at HÉC-Montréal, can’t answer this for sure, his research team is addressing the issue of corporate accountability in our technology-driven economy.

“White collar crime is becoming more common and new information and communications technologies have a big role to play in this,” Labelle says. “We need to better understand how corporations work in this economy so that we can put in place checks and balances to reduce the risk of fraud.

One of the tools Labelle’s team is looking at is forensic accounting. An emerging field, forensic accounting combines the principles of financial analysis and investigation to detect the manipulation of financial statements, embezzlement, money laundering, tax evasion and other crimes that businesses commit to inflate profits and conceal debt.

“The fall of large companies like Enron and WorldCom has shattered the confidence of investors,” says Labelle. “Forensic accounting has a key role to play in restoring this confidence and ensuring strong corporate leadership.”

Working with the Canadian Institute of Chartered Accountants, the UN International Crimes Tribunal and several major Canadian accounting firms, Labelle’s team will dissect the governance and accounting practices that allow companies to manipulate, distort and hide information from their investors. They will then examine current forensic accounting practices in Canada and abroad to come up with techniques that will help detect white collar crime more quickly.

“This issue can’t be resolved in a vacuum,” Labelle notes. “When you take the case of Enron, for example, it’s impossible to consider its leadership issues without understanding the ‘ingenious’ accounting strategies that allowed this type of financial distortion to happen.”

Réal Labelle’s research on governance and forensic accounting is being funded by SSHRC’s Initiative on the New Economy program.