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Journal of Forensic & Investigative Accounting
D. Larry Crumbley
Louisiana State University
Department of Accounting
3106A Patrick Taylor Hall
Baton Rouge, LA 70803
430 S. Michigan Avenue
Chicago, IL 60605
Volume 3: No. 3, July-December, 2011
Table of Contents
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
Ponzi schemes, detection, red flags, investigation,
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.
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.
fraud detection, history of auditing, Montgomery, auditing standards,
auditing procedures, content analysis.
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.
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
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.
internal controls, local government, towns and villages.
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.
accounting, Funds tracing, Bailout, General Motors.
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.
Auditing; Fraud Avoidance; Fraud Detection; Fraud Avoidance/Detection
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.
Corruption, culture, religion, legal origin, governance and accounting,
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.
triangle, stages of crisis, forms of power, ethics.
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.
business, internal control, fraud detection, human resource policies, the
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.
forensic accounting, earnings restatements, vendor rebates, confirmations.
The 3rd Annual Midyear Forensic and Investigative Accounting
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 (firstname.lastname@example.org). 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.
Dangerous Hoops: A Forensic Marketing Action
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
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.
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
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
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.
• Fundamentals of litigation support and investigative auditing.
• An insider’s perspective-authored by educators who also are
• 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.