Journal of Forensic & Investigative Accounting
Senior Editor:  D. Larry Crumbley
Editor: Tanweer Hasan
 
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Journal of Forensic & Investigative Accounting

Senior Editor
D. Larry Crumbley

Louisiana State University
Department of Accounting
3106A Patrick Taylor Hall
Baton Rouge, LA 70803
Phone: 225-578-6231
Fax: 225-578-6201
dcrumbl@lsu.edu

Editor
Tanweer Hasan

Roosevelt University
430 S. Michigan Avenue
Chicago, IL 60605
Phone: 847-619-4886
Fax: 847-619-4852
thasan@roosevelt.edu


Volume 3: No. 1, January-June, 2011

Table of Contents

Abstract: Determining the aggregate worth of marital property is an important task when representing dependent spouses during divorce proceedings. The “funding” spouse has a significant incentive to understate both their income as well as their assets. This article provides a systematic approach to reviewing tax returns with the objective of discovering hidden assets which were not properly disclosed on the marital financial statement. Additionally, the article provides a framework for reviewing the reasonableness of the level of business income used to value business assets.

Keywords: Divorce, Undisclosed, Alimony, Support, Tax Return.


Abstract: White-collar crime is financial crime committed by upper class members of society for personal or organizational gain. White-collar criminals are individuals who tend to be wealthy, highly educated, and socially connected. They are typically employed by and in legitimate organizations. This paper presents results from a survey of chief financial officers in Norway on prevention of white-collar crime. Influencing through compliance of code of ethics, and auditing and controlling are the preventive measures suggested by respondents, where accounting is an important part of audit and control.

Keywords: Financial crime, chief financial officer, survey research, forensic accounting, corporate compliance.


Abstract: Generally accepted auditing standards require that the auditor assess the likelihood that the financial statements are materially misstated during the planning stage of the audit. Research indicates that auditors have limited experience with financial statements that are materially misstated due to fraud. Research in psychology suggests that, when faced with a novel, difficult, or ill-structured problem, individuals may use analogical reasoning as a problem-solving tool. An individual who uses analogical reasoning to solve a problem (the target analog) attempts to retrieve from memory a similar problem encountered or solved in the past (the source analog). Based on the perceived similarity of source and target, characteristics of the source may then be mapped to the target in an attempt to make inferences about the target problem and its solution. In this study, I test four hypotheses using practicing auditors to examine the influence of surface and structural similarity features on analogical transfer in the context of the auditor’s assessment of the risk of fraud.

Results of the study indicate that auditors assess surface similar source analogs as more similar to the target than structurally similar source analogs. In addition, the auditors exhibited higher levels of recall of the surface similar source analog than the structurally similar source analog, and found the surface similar source analog to be more useful in assessing fraud risk in the target than the structurally similar source analog. Finally, results indicate that auditors transfer knowledge regarding the assessment of the overall risk of fraudulent financial reporting from a surface-similar source fraud risk assessment to a target fraud risk assessment. As expected, auditors did not exhibit transfer relating to the overall risk of fraudulent financial reporting when provided with a structurally similar source analog. Auditors did not transfer knowledge from the surface similar source to the target regarding the audit planning response to the fraud risk assessment.

Keywords: Analogical reasoning, knowledge transfer, fraud, fraud risk.

Data Availability: Data is available from the author upon request.


+ Tax Evasion, National Cultural Dimensions and Other Country-Structural Metrics
    • Thomas M. Porcano
    • George T. Tsakumis
    • Anthony P. Curatola
Abstract: This study analyzes the relation between tax evasion, national cultural dimensions, and four country-level variables (the public institution index, the macroeconomic index, the microeconomic index, and the technology index, all taken from the World Economic Forum 2000-2006) that provide a measure of a country’s economic strength and sustainability. The results show that the variables underlying tax evasion behavior are different depending on a country’s level of economic development, suggesting that governments may need to tailor their tax evasion policies toward their country’s cultural, economic, and/or institutional characteristics. Further, the results show that developed economies are driving a significant negative relation between masculinity and tax evasion, while developing economies appear to be driving a significant positive relation between uncertainty avoidance and tax evasion. The results also suggest that developed economies are driving a significant negative relation between technological innovation and tax evasion, perhaps because countries with more developed economies (and greater technological innovation) are better equipped to battle tax noncompliance.

Keywords: Hofstede, national culture, tax compliance, tax evasion.


+ Fraudulent Financial Reporting: An Update on SEC Investigations
    • Antoinette Lynch
    • Stephanie Bryant
    • Jacqueline Reck
Abstract: This study examines trends in fraudulent financial investigations conducted by the Securities and Exchange Commission (SEC), over the time period 1997-2005. Our sample contains 343 firms in which the Securities and Exchange Commission (SEC) alleges 1,117 instances of fraudulent financial reporting. We find company size, on average, larger in the post-Sarbanes Oxley period than in pre-Sarbanes Oxley period. When comparing the current study to prior studies, we find that while manufacturing, healthcare, and technology continue to be industries plagued with financial fraud, there is a decline in fraud within the financial service and banking industry. While revenue, asset valuation, and disclosure fraud continue to be dominant forms of fraud, revenue fraud represents a smaller percentage than prior research. Additionally, top management’s involvement in fraudulent financial reporting continues to be a problem. Auditor litigation is shown to be associated with SEC investigations. Thus, these findings have implications for not only regulatory bodies who continue to establish and implement provisions to improve audit effectiveness and corporate governance, but also auditors. Auditors should adjust their audit procedures to take the findings of this study into account.

Keywords: SEC Investigations, AAER, Fraud, Fraudulent Financial Reporting Data.

Data Availability: Data used in this study are available from public sources.


+ Detecting Fraud in the Organization: An Internal Audit Perspective
    • Priscilla Burnaby
    • Martha Howe
    • Brigitte W. Muehlmann
Abstract: Fraud constitutes a significant problem for many organizations. Its effects range from monetary costs to reputational loss. With the added impetus of recent regulations, the implementation of an effective anti-fraud program is a priority for most companies. To establish the basis for the effectiveness of controls and procedures designed in the anti-fraud program, a comprehensive fraud risk assessment should be performed and the program should be periodically reassessed. The Institute of Internal Auditors’ (IIA) Practice Guide, IPPF - Internal Auditing and Fraud states that the organization’s internal audit activity is often called upon to play a pivotal role in the development and evaluation of anti-fraud programs. This study examined the perceptions of internal auditors based on a survey instrument that collected data on the top fraud risks that internal auditors believed threaten their organizations and the procedures they perceived to be most effective in detecting those frauds. In response to The IIAs’ Global Technology Audit Guide, Fraud Prevention and the Detection in an Automated World, the study also examined internal auditors’ use of various business intelligence tools. The survey participants also shared the skills that they considered to be most important for detecting fraud. These skills were mapped to The IIA’s Internal Auditor Competency Framework.

Keywords: Fraud risks, International Professional Practices Framework, intelligence tools, asset misappropriation, corruption, and tools and techniques.


Abstract: There is no reference to the auditor’s responsibility for fraud detection in the auditor’s internal control report (ICR) format prescribed by the Public Company Accounting Oversight Board (PCAOB). This study examines whether including a reference to the auditor’s responsibility for fraud detection, will improve users’ perceptions about the report with respect to its readability, reliability, and auditor liability. The study uses data obtained from MBA students in a field experiment conducted in 2008. Analyses indicate that compared to the PCAOB prescribed internal control report, an ICR format incorporating the auditor’s fraud detection responsibility substantially improves users’ perception of readability without exposing auditors to a higher degree of auditor liability. Regulators and researchers in audit communications may find the results and methodology used in this study useful.

Keywords: Fraud Detection, Sarbanes-Oxley Act, Public Company Accounting Oversight Board, Internal Control Report Format.


Abstract: We investigate the extent to which nonprofit organizations report zero administrative expense in their IRS Form 990s and whether such failure implies distortion of program expense and inflation of efficiency ratios greater than that caused by nondisclosure of fundraising expense. We find that NPOs report zero administrative expense significantly less often than they report zero fundraising expense, but that those which report no administrative costs generally exhibit significantly higher distortion of their program expense, implying material inflation of their efficiency ratios. Further tests indicate that NPO size is also a significant predictor of the extent to which program expense is distorted, but state-imposed audit requirements do not appear to impact the degree of distortion. Overall, results suggest that the subset of nonprofits that reports zero administrative expense deserves greater donor skepticism, more IRS scrutiny, and additional research consideration.

Keywords: Nonprofits, administrative expense, efficiency, Benford’s Law.

Data Availability: The nonprofit data used for this study was purchased from the National Center for Charitable Statistics and is proprietary. Small amounts of proprietary data were also purchased from Guidestar.


Abstract: Fraud can occur in any institution and in any industry. Healthcare funding is unique from all other industries in the United States primarily because the “customer” or patient rarely directly pays for the services rendered in a medical setting ranging from a quick doctor’s office visit to a lengthy hospitalization. The uniqueness of healthcare billing provides a window of opportunity for a unique type of fraud and this is the focus of this paper. To understand the fraud that occurred by Tenet Healthcare Corporation, Diagnostic Related Groups (“DRG’s”) are defined and explained as to the billing implications for Medicare sponsored patient billings.

Cressey’s fraud triangle is applied to the real case of Tenet using the historical financial statements and stock market prices of the corporation. While litigation is still pending in California and Texas, the case against Tenet in Florida provides insight into the actions of the managers of Tenet Healthcare Corporation that resulted in significant financial penalties.

Keywords: Health Care Fraud, Cressey’s Triangle, Diagnosis Related Groups.


What are some of the purposes that universities serve?
They help society when economies curve.
They create human capital so humanity can advance
And have living conditions which are frequently enhanced.

Do societies spend their time AK-47’s making,
Or are they more likely educational courses to be taking?
This does not mean just memorize and regurgitate.
Rather, it implies that one should think and create.

A well-educated populace might realize what economists say is true.
TANSTAAFL. There ain’t no such thing as a free lunch for me or you.
If we want to consume, someone must produce it first
Or there is nothing to satisfy our hunger or our thirst.

Entities of all sorts in productive activities engage,
Providing goods, services, and jobs somewhere on the world stage.
To do this, they must have available resources
Whether delivered electronically, by mail, by truck, or by horses.

Unfortunately, some bad actors exist out there
Who at those resources continue to stare.
They want those resources for themselves to keep,
Without anybody else so much as making a peep.

Stealing? Oh, no, it is just sharing with me
What those folks ought to have already given naturally.
I see a way to help them out by just taking it now
Instead of waiting for who knows long how.

I deserve it. They should give it to me. Besides, the big shots
Always keep getting their lots and lots
Without sharing what is available with the rest of us.
They take the private jets. We take the bus.

In auditing, about the fraud triangle we speak.
Incentive or pressure, opportunity, and ability to rationalize when internal controls are weak
Mean it is more likely that someone will steal,
Thus giving himself a five-finger deal.

If universities teach this as part of what they do
So that auditors know what to look for, and who,
Then perhaps there will be fewer frauds of misappropriation
In such an educationally interested nation.

Alternatively, if it is people with guns who run the place,
Then productive people will not want the situation to face.
If they can, to some other country they will move
Where good enforcement of sensible laws their lives improve.

Having said all this, what does it mean?
It means that auditors can be seen
As working behind the scenes, yet improving how people live.
See how much the accounting profession has available to give?

* Michael M. Grayson is chair of the Department of Accounting and Finance at Texas A&M University - Kingsville.


    • Dr. Donald L. Ariail, CPA, CFF, CVA*

What’s this thing called integrity?
You can’t see it,
  But without it,
    One’s not viewed as upright.

You can’t hear it,
  But without it,
    Words do not ring true.

You can’t smell it,
  But without it,
    The stench of fish pervades

You can’t touch it,
  But without it,
    A handshake does not suffice.

With all it entails: veracity - justice - ethics - character,
  You must have it
    And always cherish it.

Don’t let your integrity get worms!

* The author is at Southern Polytechnic State University.

The Annual Fraud and Forensic Accounting Conference

The annual LSU Fraud & Forensic Accounting Conference will be held on July 11 and 12, 2011 in Baton Rouge. One of the speakers is Michael Hudson, the author of "The Accounting Monster." Other speakers are Don Rabon, Will Fleenor, Elliott Leary, Kelly Pope, Edward Simmons, Joe Koletar, Mark Shirley, Greg Fee, Ronald Durkin, and Jeff Aucoin. For more information about the 2011 Annual Fraud & Forensic Accounting Conference: http://www.bus.lsu.edu/academics/accounting/events/FF2011.asp

The Anyone Can Whistle Tour

Anyone Can Whistle Tour -- www.whistleblower.org -- is a series of high profile campus/community engagement events and learning tools that shines a light on the phenomenon of whistleblowing. The Tour, sponsored by the Government Accountability Project and the Oscar winning film company Participant Media, will feature live appearances by notable whistleblowers and use film, art and popular culture, and dramatic simulations to build awareness of the importance of whistleblowers and their protection. By reaching young adults at universities, law schools, journalism programs, and business schools, the Tour will model change-makers who have risked everything, and helped create a path for those who face comparable professional dilemmas.

Advertise in the JFIA

Would you like to advertise in this journal? Full page ad is $300. Half page ad is $150. Contact Larry Crumbley (dcrumbl@lsu.edu). Checks to be made out to Journal of Forensic and Investigative Accounting and sent to Larry Crumbley at 3106A Patrick Taylor Hall, Dept. of Accounting, L.S.U., Baton Rouge, LA 70803.



Books Received

Creative Accounting, Fraud and International Accounting Scandals
Michael Jones, editor, 2011, 550 pp
John Wiley & Sons
wiley.com
 

From the South Sea Bubble to Enron and Parmalat, business scandals have a long and varied history which continues into the present day. As accounting is central to the success or failure of any business, so creative accounting has always played a key role in these scandals, reflecting the extremes of how numbers can be manipulated to deceive or even defraud.

This monograph explores the role of accounting, particularly creative accounting and fraud in business scandals from around the world. It features a collection of 13 chapters by international authors, which detail accounting fraud and scandals in both developed and developing economies including Australia, China, Germany, Greece, India, Italy, Japan, Netherlands, Spain, Sweden, UK, and US.

To enhance the international perspective even further, a series of case studies, contributed by accounting experts, is also included.

This unique, global perspective on accounting scandals provides the background for discussion on the role of powerful individuals, the motives and methods of management who are complicit in these scandals and the failures of internal control and external auditing, as well as the long term impact of business scandals on the regulatory environment.

One of the few books on this subject, its accessible treatment of this relevant topic is fascinating reading for a wide audience. It also provides a highly useful reference for professional accountants and business people worldwide and students taking courses in forensic accounting and fraud, as well as providing more general background for most accounting courses.

Crime and Corruption in Organizations
R.J. Burke, E.C. Tomlinson, C.L. Cooper, 2011, 361 pp
Gower Publishing Limited
Wey Court East
Union Road
Farnham, Survey GU9 7PT
England

Although increasing attention has been paid to it, there are no signs that crime and corruption in organizations is decreasing, so if you’re a manager or government policy maker, and your mandate is to reduce crime and corruption, where do you start?

The international authors of this book fill a critical need to address such a prevalent and costly topic with a detailed analysis of the risks associated with crime and corruption in organizations. They examine the causes and consequences, and the choices we face in our efforts to eradicate these social maladies. They focus on the risks to individuals and organizations surrounding criminal and corrupt acts, with an emphasis to the psychological, behavioral and organizational factors supporting such behaviors. Finally, they explore the phenomenon of crime and corruption across a diverse array of organizational settings (ranging from public to private, for-profit to non-profit) and occupational categories (for example, police officers, physicians, accountants, and academicians).

The constant barrage of scandals publicized by the media demands ‘front burner’ attention dedicated to stemming this tide. Accordingly, this book turns to prominent researchers employing their talents to produce more ethical organizations. The result is the most up-to-date thinking on both classic (for example, cognitive moral development) and novel (for example, moral attentiveness) approaches to crime and corruption, as well as scientifically-grounded approaches to reducing illicit behavior in organizations.

A New Framework for Investigating and Managing Business Fraud
The Guide to Investigative Business Fraud
Ernst & Young, 2009, 324 pp.
AICPA
New York, NY 10036-8775
 

This book provides a clearly defined framework for approaching a fraud investigation. This comprehensive resource was developed by the fraud investigation team at Ernst & Young. The chapters are written by subject-matter experts and may be read individually as reference guides for specific topics or together as an overview of a fraud investigation.

This book will enable you to examine the principles and techniques that guide the experts through a fraud investigation and answer these questions:

  • How do experts examine and work a fraud case?
  • How do they reason and make decision at critical times during an investigation?
  • How do they evaluate a case and interact with colleagues?
  • How do they handle preventative antifraud programs?

Feature of this book include:

  • Fraud experts share their veteran, practical knowledge
  • Tools and techniques address new fraud schemes and challenges
  • A threaded case study shows how fraud investigation principles can be applied in practice.
  • Two-color interior highlights concepts keys to understanding how business fraud works.
The Monster
Michael W. Hudson, 2010, 266 pp.
Henry Holt & Company
175 Fifth Avenue
New York, N.Y. 10010

The mortgage mess is back into the news with Ben Bernanke saying that federal regulators are looking intensively at bank forclosure practices. The New York Times in a November, 2010 editorial said that the regulators are behind the curve, which is exactly what this author points out “how a gang of predatory lenders and Wall Street Bankers fleeced America and spawed a global crisis.” More than 2 million home owners are in danger of losing their houses as a result of predatory lending.

This book is a best practice manual or roadmap for fraudsters in the mortgage and banking industry. Every forensic accountant or valuation expert should read this book to develop the skeptical attitude needed today. Michael Hudson provides a history of the rise and fall of the subprime mortgage industry through stories of both Ameriquest Mortgage and Lehman Brothers.

The sales force at Ameriquest watched the movie Boiler Room as a training film to learn how to pitch overpriced deals to home owners. On page one Mark Grover places two sheets of paper against the window and used the light streaming through to trace a signature from one page to the other.

Glover’s co-workers used scissors, tape, Wite-out, and a photocopier to fabricate W-2s. They would “paste the name of a low-earning borrower onto a W-2 belonging to higher-earning borrower, and like magic, a bad loan prospect looked much better. Their office break room, dubbed the “Art Department,” had all the tools they needed to manufacture and manipulate official documents.

But they needed pigeons or home owners to con. So the greedy salesmen memorized a detailed sales Track (short for A Loan Officer’s Track To Run On). They were taught to meet the borrower at least three times, by leaving at least twice and reintroduce themselves each time they returned. Does this sound like an automobile dealership? The loan officer wanted to be a friend and a problem solver.

Step 8 in the Track was the Mortgage Savings Presentation (e.g., called the monster) which is the genesis of the book’s title. They tried to persuade reasonably educated borrowers that by paying higher fees and interest the borrower actually saved money – which, of course, was entirely misleading.

I enjoyed the so-called “Whoop’s Techniques.” If a borrower had an annual income of $ 56,000, for example, the loan officer instead reports it as $ 66,000. So if someone in underwriting caught the discrepancy, the loan officer could explain that it was a typo – a simple error. There were little internal controls because Hudson writes that when consumer complaints came in, the regulators generally erred on the side of shielding the institution. During this time period, the loan terms could include 12 to 20 points. Loan officers would not give the customers the federal truth – in lending disclosure form.

Gloria and John obtained a loan from FAMCO on their two-flat apartment building to pay-off some credit-card debts. They found out too late that FAMCO had rolled a $ 19,500 origination fee into their $ 118,000 loan.

When Mr. O read through his loan paperwork the loan carried an adjustable rate that started at 14.5%, never went down, but could climb as high as 20.5%. The cash he was told he would get was gone. “No problem. You have three days to rescind. Go ahead and sign and I’ll fix it.” Mr. O could not get anyone on the phone for the next three days.

So million of people received adjustable rate loans, and these loans were then securitized. Apparently, you could securitize almost anything. The individual mortgages were bundled together into a mortgage pool which is held in trust as collateral for a mortgage-back security. These securities were then sold to participants in a secondary market. Many of the loans were to less-than-stellar credit. For a short history of the subprime meltdown, see “The Fuel that Fed Subprime Meltdown,” Investopdeia.

Throughout the book and especially on page 163, Hudson illustrates the fraud triangle - motive, opportunity, and rationalization. There were no controls. Loan officers would look for “rubber stamp” appraisers. When Roland Arnall tried to stop this “you dial a guy until you find a guy,” one top executive suggested penalizing offenders as follows: employees who were involved with fraud on five or more loans would be fired; employees involved in fraud on fewer than five loans would get a warning and keep their jobs. These loan officers were making huge salaries with little chance of being caught, so they rationalized their unethical and possibly illegal behavior.

The one major criticism I have is that the author makes little mention of the bad guys in this disaster: Fannie Mae, Freddie Mac, Bill Clinton, and other Democrat politicians who pushed for these risky loans to be made, and the prime culpable – the borrower. Early in the book he only says “the subprime market did not cause the U.S. and global financial meltdown by itself. Other varieties of home loans and a host of arcane financial innovations – such as collateralized debt obligations and credit default swaps – also came into play.”

The Anatomy of Fraud and Corruption: Organizational Causes and Remedies
T. Brytting, R. Minogue, V. Morino, 2011, 268 pp.
Ashgate Publishing Company
Suite 420
101 Cherry Street
Burlington, VT 05401-4405  

The authors’ main focus is not to support fraud investigators, but primarily this book has three other target groups. Firstly, ‘Bystanders’: those who witness, suspect or feel what is going on. The authors think you are the key people when it comes to detecting fraud and corruption. Unfortunately, you might also be fraudsters in spe if you don’t watch out for warning signs. Their aim is to increase our awareness of the risks and our knowledge to deal with them. Secondly, ‘Designers of Organization’: both organizational culture and structure are crucial ingredients in the complex process that eventually leads to fraud and corruption. Their ambition is to make readers understand how corruptive organizational processes work so that we can ensure our organization is resistant to fraud and corruption. Finally, ‘Trainers’: those who need to train employees to be more aware and to recognize the warning signs in order to put fraud and corruption under control. The book supplies ideas and tools for these targets.

The Business Interruption Book;
Coverage, Claims, and Recovery Remedies

D.T. Torpey et al., 2004, 380 pp.
National Underwriter Company
5081 Olympia Blvd
Erlanger, KY, 41018
www.nuco.com
 

The authors provide a road map that business and risk professionals need both before and during the challenges of a business interruption loss and claim. Moving from the theoretical to the practical, the authors share their personal knowledge of what it takes to successfully establish coverage and handle losses and resulting claims.


The book takes the reader across the spectrum of standards to customized coverage provisions, outlining the path to a comprehensive understanding of their intricacies. The section of manuscripting coverage language explains the major differences among the options, couched in the framework of practical possibilities.


Chapters then reveal the authors’ knowledge of the numbers side of the equation: how to establish insurable business interruption values, how to document and file a claim, and how to manage the claim process.


No such book would be complete without a discussion of the legal issues that impact the process. This one goes beyond a mere discussion of the legalities to explain how the system works and the steps that can be taken to successfully resolve differences of opinion that are sure to arise when negotiating business interruption coverage and claims.


What makes the book unique is its offering of step-by-step insight into the claim process. Claim scenarios provide the reader with the tools to actually work through specific situations, offering practical insight into a process that is both complex and uncertain.


This book unlocks that black box, providing insight that will serve the reader well when establishing appropriate coverage, working through a claim, and recovering from loss situations.