From E. F. Hutton 1980s ad, “When Hutton talks…” Photo from The Retrosite.com.
The brokerage company was famous for a 1980s ad campaign, “When E.F. Hutton talks… people listen.” E.F. Hutton became famous for something else. It was complicated, it was company-wide, and it went on for three years, until they were found guilty of thousands of counts of fraud involving millions of dollars.
The fraud was for kiting.
A Special Type of Fraud
Check kiting is a type of bank fraud that occurs because banks and merchants extend credit on customer checks, when they don’t know whether the customer has enough funds in the other bank. Criminals could open two bank accounts, then write checks between them, covering each bad check with another bad check.
Journal entries are the backbone of accounting records. Despite the shift from quill pens to wi-fi chips, from clay tablets to vellum sheets to a blinking data entry screen, the accountants have always had to keep track.
Reducing Eggs Payable
Historians generally saw the ancient cuneiform notations as some of the earliest examples of writing–and accounting–in the world. The large-scale management of taxes, grain allotments, and army rations for the burgeoning Sumerian and Egyptian empires took a lot of tablets.
But local farmers had to keep track on their own, so researchers think that “primitive” bookkeeping, even based on barter, would have still included writing in a ledger. A neighbor might agree to take three chickens in exchange for a bag of seed when the harvest is completed. Or, suppose another neighbor made a sturdy cabinet for the kitchen in exchange for a year’s worth of eggs.
There would still need to be journal entries:
Bought one sack of seeds : Three chickens payable to Farmer Jones Bought one kitchen cabinet: Year’s supply of eggs to Farmer Kozlowski
Then, one of the kids had to be sent over every day to Kozlowski with the day’s supply of eggs, while someone would make the daily journal entry. Because if something happened to the parties in the transaction mid-year, Mrs. Kozlowski would want to know that she was still owed 183 eggs. On your books, that would be sitting as eggs payable.
Enough of the accounting philosophy, let’s talk about something more fun. Fraud!
If accounting is as old as the hills, so is fraud. If you recall my post about Clay Balls a few days ago, you may remember that they were storage for tokens carried by tax collectors. The tokens were stored inside hollowed balls to “prevent tampering.” In other words, tampering–tax collectors collecting a few of the tokens to barter for their own purposes–was already a common practice in 3000 B.C.E. Where there are tax collectors, there are corrupt tax collectors, apparently.
Oops! My Warehouse Burned Down…Insurance Fraud
There was also ancient insurance, and with that came ancient insurance fraud. Ancient merchants purchased “bottomry” contracts (now there’s a word!) in Babylon as early as the third millennium BCE, as did Hindus, Greeks, and others. A trader would get a loan for his cargo and pay an extra fee for insurance, with the interest on the loan also helping cover the loss. When the ship came in, if he defaulted on the loan, the insurer would keep the cargo.
Design from antikytheramechanism.com.
The Greek merchant Hegestratos decided to try an end run around his bottomry contract, in 360 BCE. He had received a cash advance and figured to keep it–and the corn–and claim an insurance loss. He put the corn in secret storage and sailed the ship, but empty. However, there were other passengers on the ship, and they were not too keen when they noticed him trying to scuttle the empty vessel. They chased him off, and he drowned. So much for early insurance fraud!
