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

Tanweer Hasan

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

Volume 3: No. 3, July-December, 2011

Table of Contents

+ Conducting Effective Ponzi Scheme Investigations
    • Thomas A. Buckhoff
    • Bonita K. Peterson Kramer
Abstract: Subsequent to the 17-year span encompassed by Bernard Madoff’s Ponzi scheme and the billions in investors’ losses resulting from it, the Chairman of the Securities and Exchange Commission (SEC) directed the SEC Office of Inspector General to investigate the failure of the SEC to uncover Madoff’s Ponzi scheme. Although the SEC had received several complaints concerning Madoff’s hedge fund operations, the SEC investigators responsible for following up on the complaints did not have a sufficient understanding of the following three issues critical to effectively investigating Ponzi schemes: 1) understanding what a Ponzi scheme is and how it works; 2) detecting the red flags of a Ponzi scheme; and 3) conducting an effective Ponzi scheme investigation. It is impossible to effectively investigate a Ponzi scheme—or any other fraud scheme—without first developing a thorough understanding of each of the above three issues. Accordingly, we explore in detail each of these issues in order to enhance the effectiveness of future Ponzi scheme investigations.

Keywords: Ponzi schemes, detection, red flags, investigation, forensic accounting.

Abstract: Previous studies in auditing have proposed statistical analytic techniques to determine the presence of unusual fluctuations in financial data. However, these techniques use past financial data and/or other explanatory variables to compute expectation parameters. If past data were contaminated with errors or fraud, then the precision of developed expectations is questionable and this leads to an increase in Type II error. The current study introduces a new analytic technique known as the bootstrap regression (BREG) procedure in the context of Benford’s Law. The BREG procedure mitigates Type II error based on Benford parameters and exact confidence intervals to assess for the presence of unusual fluctuations in financial data sets. These parameters and confidence intervals are derived independently from the financial data subject to audit. In addition, the BREG procedure mitigates Type I error and the excessive power problem. The BREG procedure was applied to a wide range of data sets such as non-fraudulent, fabricated, allegedly fraudulent, and fraudulent data sets. The overall results demonstrate that the BREG procedure effectively and efficiently identifies the presence of data anomalies. Unlike the BREG procedure, other commonly used analytic techniques were either difficult to implement or yielded inconsistent results in the context of the fraudulent data.

Keywords: Analytic procedure, Confidence Intervals, Fraud, Misstatements, Power, Regression Analysis, Type I and Type II errors, Unexpected Fluctuations.

Data Availability: The fraudulent data are bound by a confidentiality agreement with the Mexican Retail Company.

Abstract: We analyze various federal court decisions that demonstrate varying legal standards used to determine whether the conduct of accountants, lawyers, investment bankers and others amounts to a primary violation of federal securities fraud laws. Although the Central Bank of Denver ruling eliminated aider-and-abettor liability for accountants and other professionals, the case shifted debate to when secondary actor conduct rises to a primary violation of section 10b of the Securities Exchange Act of 1934. The rising number of securities fraud lawsuits, increasing damage settlement amounts, and the application of different legal tests for section 10b liability show a rising level of legal uncertainty in the securities fraud area. Our analysis enhances understanding of evolving Rule 10b-5(b) legal standards to hold secondary actors liable for federal securities fraud so interested parties can better assess legal exposure.
Keywords: Securities fraud, auditor liability, Section 10b liability, Rule 10b-5.
Data Availability: Federal court decisions are available on Lexis-Nexis and WestLaw.

Abstract: We use the authoritative Montgomery’s Auditing reference series from 1912 to 1998 as a proxy for the U.S. auditing profession’s stance towards fraud detection as an audit goal and its attention to the implementation of this goal. A quantitative content analysis of the editions finds that the amount of text expressing a position on the auditor’s fraud detection responsibility, whether affirmative, negative, or ambivalent, was very high in the early 20th century, low from 1916-1975, and high in the last decades. In contrast, text explaining how to detect fraud lagged the three positions variables (affirmation, denial, ambivalence); how-to text was voluminous until mid-century, plummeted after 1949, and stayed low thereafter despite the appearance of new standards acknowledging fraud detection as a goal and despite the series’ stated support of the new standards.

Keywords: Fraud, fraud detection, history of auditing, Montgomery, auditing standards, auditing procedures, content analysis.
Data Availability: The data series developed for this paper appears in an appendix. Its development required substantial effort, and we ask that any who uses it in the future acknowledge its source.

Abstract: Internal controls are a primary means to deter fraud. Failure to establish or to follow a strong program of controls provides opportunities for fraud to occur. Fraud occurs in all types of organizations. This article considers fraud risks in local government. Over 87,000 municipal governments exist in the United States, ranging from the smallest villages and special districts to the largest cities and counties. Smaller municipal units are often likely to suffer from control deficiencies, due to lack of financial and personnel resources and limited oversight.

This research examines the findings of 234 audits of town and village governments in New York State, as conducted by the State Comptroller’s Office over the period 2003-09. The audits focused on governance and internal control issues, not financial statement issues. The audits presented numerous recommendations for improvements in controls. We analyze the content of 1,387 control recommendations from a fraud prevention perspective. The findings suggest locations of the greatest areas of weakness in the ongoing battle against governmental fraud.

Keywords: Fraud, internal controls, local government, towns and villages.
Data Availability: The data used in this study are publicly available.

Abstract: GM received $20 billion in bailout funds from the United States government but was unable to avoid bankruptcy. This paper examines the possible ways in which the bailout funds were spent. Specifically, it examines the first $10 billion loaned that GM spent in a matter of three months. The study finds that GM spent this money on normal operating expenses, and further that these expenses created a cash burden because GM was not collecting their receivables as well as they had in the past, that the cost of sales was higher than it had been in the past, and that suppliers were unwilling to extend GM credit like they had done in the past. There is weak evidence that GM spent an abnormally high amount of cash on other post retirement benefits, but no support for the popular allegations that GM used the cash to buy property in Brazil, paid excessive executive compensation, and little support for the theory that GM propped up their pension funds with the cash from the bailout.

Keywords: Forensic accounting, Funds tracing, Bailout, General Motors.

+ Fraud Prevention and Detection in the United States: A Macro Perspective
    • Sara Aliabadi
    • Alireza Dorestani
    • Mohammed Qadri

Abstract: The collapse of Enron and other high profiled corporations such as WorldCom and Xerox in the beginning of the new century sheds light on the weakness of our auditing and accounting profession to prevent or detect fraud. It is shown that only a small portion of revealed frauds in the United States is detected by auditors. In this paper we introduce the Fraud Deterrence Triangle and show that for preventing or detecting fraud, we need to invest in: a) providing programs for educating and training for fraud prevention/detection, b) providing a set of corporate governance characteristics, and c) providing programs for educating and promoting ethical values. We argue that the literature on corporate governance is rich; however, less work is done on ethics and fraud related education. In this study we select a random sample of 201 universities in the United States and focus on programs for fraud prevention/detection education. Using a content analysis method, we show that more than 95% of business schools in the United States do not offer any fraud/related programs/courses and none offers any courses in ethics. We conclude that the inability of auditors to effectively detect frauds comes from the fact that neither universities nor audit firms provide programs that provide the required fraud and ethics related education.

Keywords: Fraud; Auditing; Fraud Avoidance; Fraud Detection; Fraud Avoidance/Detection Education.

Abstract: Drawing on macro and micro-economic theory, this paper expands the literature by examining the role of culture, religion, wealth, rule of law, governance and accounting on corruption. Using a panel of 75 countries, I find evidence that countries with Civil German law have better control of corruption and better governance, than countries with Civil French and Common Law. I also find that the relationship of individualism and corruption is mediated by the positive effect of GNI. Economically and institutionally mature countries with high individualism tend to have more corruption than countries with intermediate levels, indicating a non-monotonic, non-linear relationship between individualism, wealth and corruption. Even though Protestant countries are less corrupt than Catholic and Muslim countries, I find that this association is mediated by the level of institutional and regulatory development. Specifically, an efficient rule of law, moderate growth rates, as well as better governance and accounting is directly associated with countries that have controlled corruption.

Keywords: Corruption, culture, religion, legal origin, governance and accounting, individualism.

+ The Effects of a Charismatic Leader’s Actions in a Public Community College
    • Kathy S. Pollock
    • Kent D. Kauffman
    • Janet C. Papiernik
Abstract: The purpose of this case is to introduce students to a real-life example of how organizations respond to activities of high level employees that appear to be inappropriate. At the same time the case engages the student since it sounds like the plotline for a TV sitcom – a college chancellor not only lived in a secret apartment in the university-owned building, but periodically hosted overnight guests. This case is unique in that rather than focusing on how the possible fraud was uncovered, it asks students to evaluate through their understanding of the fraud triangle, forms of power, and stages of crisis the impact of an employee’s actions on an organization and its constituents. To complete the case, students conduct some minimal online research.

Keywords: Fraud triangle, stages of crisis, forms of power, ethics.

+  Employee Fraud at Miami Rehabilitation Services
    • Jeffrey E. Michelman
    • Bobby E. Waldrup
    • Alex Bird
Abstract: This case exposes students to internal control and fraud and their related impacts on small business. Although the issues of internal control and fraud are involved in almost every discussion of accounting, only recently has this concept received increased discussion specific to small business organizations. In particular, the case provides clear evidence how professional owners can often lose sight of the business side of “running a business” as they get involved in their myriad professional responsibilities. Further, the case illustrates the importance of the CPA in both preventing and detecting fraud, particularly in small business. Finally, the case highlights the importance of human resource policies and procedures on internal control and fraud prevention.

Keywords: Small business, internal control, fraud detection, human resource policies, the fraud triangle.

U.S. Foodservice: A Case Study in Fraud and Forensic Accounting
    • Maria H. Sanchez
    • Christopher P. Agoglia
Abstract: The Dutch company Ahold NV, parent company of U.S. Foodservice, announced a large earnings restatement for current and prior years. The restatement was largely because of fraud related to vendor rebates at U.S. Foodservice. They announced that an extensive forensic accounting investigation would be launched. It was later discovered that in an effort to boost earnings, the company had booked vendor rebates that had not yet been earned and in some cases, were entirely fictitious. It was also discovered that several vendors had provided misleading or false third party confirmations to the external auditors. In this case, students will gain insight into the proper accounting for and disclosure of vendor rebates, improving the auditor’s understanding of the clients’ business, maintaining professional skepticism, and guarding against over-reliance on third party confirmations.

Keywords: Fraud, forensic accounting, earnings restatements, vendor rebates, confirmations.

The 3rd Annual Midyear Forensic and Investigative Accounting Conference

The Third Annual Midyear Forensic and Investigative Accounting Conference will be held March 30-31, 2012, at the Loop Campus of DePaul University in Chicago, IL. The AAA meeting section is co-hosted by DePaul University and Roosevelt University. The conference will consist of keynote speakers, concurrent sessions dealing with a wide variety of fraud, forensic and investigative accounting topics, panel discussions, case work, and film previews.

The 9th Annual Fraud and Forensic Accounting Conference

The ninth Annual Fraud and Forensic Accounting Conference will be held in July 2012 in Baton Rouge. For more information about the 2011 conference, go to:

The Anyone Can Whistle Tour

Anyone Can Whistle Tour -- -- 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 ( 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

Dangerous Hoops: A Forensic Marketing Action Adventure
D.L. Crumbley, F.H. Campbell, T.J. Karam, P.A. Maresco
Louisiana State University Press, $22.95
Longleaf Services, Inc.
116 S. Boundary Street
Chapel Hill, N.C. 27514-3808
800-272-6817 (FAX)

Set in the world of professional sports, Dangerous Hoops introduces FBI agent Bill Douglass as he pursues a deadly extortionist in order to save lives and spare the NBA from a public relations nightmare. The adventurous storyline--complete with demands for cash and diamonds, poisoned collectors’ cards, and botched drop-offs--also uses the foundations of business and marketing with examples from the world of pro basketball.

Both innovative and educational, Dangerous Hoops provides real instruction in a novel form and serves as a refreshing text for business majors and MBA students.

Researching Online
D. Munger and S. Campbell
Pearson Education/Longman Publishers
Annual revision makes Researching Online the most up-to date Internet resource available. The authors have scanned the internet to locate the most valuable new sources for the online researcher, and eliminated coverage of Internet resources that no longer measure up.

Internet technology is explained step by step, so even students unfamiliar with the Internet can be doing productive work right away.

Effective Writing:
A Handbook for Accountants
, 9th
C.B. May and G.S. May, 2012
Pearson Education, Inc.
One Lake Street
Upper Saddle River, N.J. 07458
This handbook is designed to help accounting students and practitioners improve their communication skills. It can be used as a supplementary text for regular accounting courses, as a text in an accounting communications course, or as a text in business communications technical writing course when these courses include accounting students. The handbook is also a useful desk reference or self-study manual for accountants in practice.

Effective Writing guides the writer through all the stages of the writing process: planning, including analysis of audience and purpose; critical thinking about the problem to be solved or the job to be accomplished; generating and organizing ideas; writing the draft; revising for readable style and correct grammar; and designing the document for effective presentation. In addition to these basic writing principles, the book covers letters, memos, reports, and other basic writing principles. The book covers letters, memos, reporting and other formats used by accountants in actual practice, including e-mail and other forms of electronic communication. The text stresses coherence, conciseness and clarity as the most important qualities of the writing done by accountants.

Forensic and Investigative Accounting, 5th
D.L. Crumbley, L.E. Heitger, and G.S. Smith
Commerce Clearing House
P.O. Box 5490
Chicago, IL 60680-9808
The Fifth Edition lays a solid foundation for this developing field where the knowledge, skills and abilities of advanced accounting are combined with investigative expertise and applied to legal problems. The textbook provides clear, step-by-step guidance in investigative auditing, fraud detection, litigation, valuation, and cybercrime. The text is interesting and engaging, with chapter exercises and Internet-related assignments to help students understand how to identify and prevent corruption.

Coverage includes:
• Fundamentals of litigation support and investigative auditing.
• An insider’s perspective-authored by educators who also are forensic accountants.
• Ancillary materials that create a stimulating environment.
Plus special support for professors:
• Instructor’s Guide with chapter problems and solutions.
• Testbank with solutions plus daily chapter quizzes.
• Instructor’s resource CD including electronic testmaker.