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Journal of Forensic & Investigative Accounting
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Journal of Forensic & Investigative Accounting
Senior Editor
D. Larry Crumbley
Louisiana State University
Department of Accounting
2833 Business Education Complex
Baton Rouge, LA 70803
Phone: 225-578-6231
Fax: 225-578-6201
dcrumbl@lsu.edu
Volume 5: No. 1, January - June, 2013
Table of Contents
+ Summary Witness Testimony in Federal Tax
Litigation Cases as Identified in Court Opinions
-
Brigitte W. Muehlmann
-
Priscilla Burnaby
-
Martha Howe
Abstract:
In U.S. tax litigation, there are three types of summary witnesses
that may be called by both parties in a case. Their use provides
insights into how large volumes of evidence and empirical research
complex issues are presented in tax cases. To determine how
witnesses are used during tax trials, this is the first to review
the 109 tax opinions published through 2010 that disclose the use of
summary witnesses. This paper first discusses the Federal Rules of
Evidence related to summary witnesses: Rule 1006 primary evidence,
Rule 611 pedagogical device and hybrid or secondary-device summary
witnesses. Then the court cases are surveyed to determine: the
trends in the use of summary witnesses; who presents the summary
witness; how many cases are Rule of evidence 1006 versus Rule 611;
the demographics of the summary witnesses; if they serve as more
than one type of expert during the trial; and the reasons for which
their testimony was challenged in courts of appeals. A detailed
review of the opinions led to the master list of 109 cases. The
majority of the summary witnesses (57.1%) presented Rule 611
pedagogical-device summaries, 26.5% presented Rule 1006
primary-evidence summaries, and only10.2% provided the hybrid 1006
and 611 secondary-evidence summaries. The vast majority of the
summary witnesses (65.3%) were IRS revenue agents or IRS special
agents (10.2%). Fifty percent of the summary witnesses served dual
roles before the introduction of the Daubert standard, but
only one summary witness did so after the standard was introduced.
The summary witnesses’ testimony was challenged in 22 court cases
and six verdicts were overturned due to problems with their
testimony.
Keywords:
Tax, summary witness, expert witness, primary evidence summary,
pedagogical-device summaries, secondary-evidence summaries.
+ Validating Early Fraud Prediction
Using Narrative Disclosures
-
Chih-Chen Lee
-
Natalie Tatiana Churyk
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B. Douglas Clinton
Abstract: This study documents a model
building and validation process for the purpose of early fraud
prediction based on asynchronous communication contained in the
narrative disclosures of annual reports. Following Churyk et al.
(2009), we apply content analysis to the management discussion and
analysis section of the annual report to determine and examine
significant qualitative fraud risk factors. Using both discriminant
analysis and a holdout sample, we confirm the accuracy of a robust,
early fraud prediction model. Our model provides two significant
contributions to fraud prediction. First, the model can be applied
earlier than conventional models (i.e., potentially prior to the
incidence of catastrophic consequences as a result of the fraud);
and second, the model provided an overall fraud/non-fraud prediction
rate of 64.8 percent using a cross validation method and 55.9
percent using holdout sample. This overall classification accuracy
compares to conventional model accuracy of only 30 to 40 percent (Skousen
and Wright 2008).
Keywords: Fraud, prediction, content
analysis.
+ Fraudsters and the Form 1099
Technique
-
Christine Crawford Cheng
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D. Larry Crumbley
Abstract:
This paper discusses a technique employed by firms to recoup
money and property stolen from a business by employees. Under
the Form 1099 technique the firm supposedly uses the threat of
filing a Form 1099 with the IRS for the amount stolen, unless
the fraudster signs an installment note agreeing to a payback.
This article discusses various aspects of this Form 1099
technique, including anecdotal evidence regarding the use of
this technique, and the incentives of the firm, the employee who
committed the fraud, and the IRS perspective of this technique.
In general, a
company prefers the Form 1099 technique as a recoupment method
when the probable amount collected from the employee exceeds the
amount the firm would receive through insurance and tax
recoupment. The employee should prefer to have the amount stolen
reported to the IRS, unless the employee’s potential tax
liability exceed the amount stolen from the firm. The IRS should
prefer delayed reporting of the fraud when the company has
sufficient net income to offset the amount of the fraud. The IRS
should prefer the immediate reporting of the fraud when the
company does not have sufficient net income to offset the amount
of the fraud. Based upon our discussions and the unlikelihood of
full repayment by a fraudster, the Form 1099 technique may not
be a valuable approach. However there are instances where the
Form 1099 technique is preferable to immediate tax reporting.
Congress may wish to consider a tax rule which would protect a
firm’s ability to use this technique for these instances.
Keywords:
Form 1099, fraud, incentives, illegal income, embezzlement.
+ Influence of Leadership Positions
on Internal Controls and Reported Fraud In Religious Organizations
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Robert M. Cornell
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Carol B. Johnson
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William C. Schwartz, Jr.
Abstract:
This study examines the extent to which particular leadership
positions and governance bodies within churches are associated with
the presence of internal controls and/or the absence of fraud. Our
study is motivated by Marquet’s (2011) chronicle of 21 high-profile
church embezzlements in the first half of 2011; Ventura and Daniel’s
(2010) finding that church members tend to trust their leaders in
spite of the absence of internal controls; and discoveries by Booth
(1993) and Conway (1999) that clergy tend to be ill-disposed to
utilize secular accounting and internal control practices. We
surveyed 131 individuals who were responsible for financial
management within their respective churches. The survey was
conducted through in-person, structured interviews. After removing
duplicate interviews, we analyzed a sample of 129 responses. The
subjects were affiliated with churches that varied widely in size,
age, and denomination. Our results indicate that the leadership
position most closely associated with the presence of internal
controls in the church is a financial expert on the board of
directors. Consistent with the findings of Booth (1993) and Conway
(1999), paid clergy tend to traverse in the opposite direction. We
fail to find any indication that presence of the leadership
positions or governance bodies we examined are associated with a
reduced incidence of reported fraud. These results suggest that
future research should go beyond simply looking for internal
controls in churches and should establish whether there are
characteristics or viable practices of churches (internal controls
or otherwise) that can indeed reduce the incidence of fraud.
Keywords:
Fraud, governance, internal audit, internal control, nonprofits,
religious organizations.
+ Effects of Alternative
Short-Session Training Methods on Fraud Detection: A Performance and
Efficiency Assessment
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W. Eric Lee
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Vairam
Arunachalam
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Dennis Schmidt
Abstract: Many novice
accounting professionals and current accounting students receive
limited training in fraud detection, often restricted to a short
CPE course or a short module in an accounting course. Therefore,
it is important to investigate the effects of alternative
short-session training methods on fraud detection. This study
reports the results of a short-session experiment that employed
two widely used training methods: lecture and experiential. By
comparing to a control group who received no training, we assess
the relative performance effectiveness of the two training
methods with respect to both fraud cue identification and fraud
cue justification. We also assess efficiency, in terms of effort
and time, relative to performance. Except for the experiential
group, with no significant identification performance
improvement, we find that either training method increases
performance and efficiency compared to no training. Regarding
both performance and efficiency for fraud cue identification, we
observe slightly better results for lecture training over
experiential training, but no significant difference between the
two methods. With respect to both performance and efficiency for
fraud cue justification, we find significant support for
experiential training over lecture training. Our results should
help accounting educators decide which approach to use when
designing a short-session fraud detection training module.
Keywords: Fraud detection training, fraud cue
identification, fraud cue justification, efficiency.
+ Using Forensic Analytics to
Evaluate the Reliability of Fair Value Reporting
-
Stan Clark
-
Charles Jordan
-
Mike Dugan
Abstract:
A fundamental
argument that has persisted throughout the modern history of
accounting concerns whether the primary measurement basis in
financial reporting should be input-based (historical cost) or
outcome-based (fair value). The key issue hinges on the
trade-off between the relevance and reliability of the numbers
reported under these two measurement bases, with fair value
measures viewed as more relevant, but historical cost measures
considered more reliable. This article provides a background
and discussion of these two measurement bases and explains the
FASB’s gradual shift from historical cost toward fair value
reporting. More importantly, though, through the application of
Benford’s Law, which has become an important forensic analytical
tool for detecting earnings management and other forms of
fraudulent financial reporting, the study provides an empirical
examination of the reliability of all three levels of fair value
disclosures required by SFAS No. 157. The findings suggest a
significant amount of manipulation occurs in each of the three
levels of fair value disclosure, including Level 1, which should
be based on objectively determined external marketplace data.
Thus, the results of the forensic procedures performed in this
study call into question the reliability and credibility of the
fair value information currently reported in the financial
statements.
Keywords:
Fair value reporting, SFAS No. 157, reliability, manipulation,
Benford’s Law.
+
Forensic Accountant, Forensic Accounting Certifications, and Due
Diligence
Abstract:
Previous research has established that some corporations that issue
certifications in forensic accounting fail to disclose their legal
status and the qualifications of their Officers and Board of
Directors. Previous research also established that a significant
number of forensic accountants have inaccurate beliefs about the
legal status of the corporations and the qualifications their
Officers and Directors. This study investigates whether forensic
accountants exercised due diligence in investigating the
corporations that issued their certifications prior to obtaining
their certifications. The results of a survey show that forensic
accountants failed to exercise due diligence in their investigation
of the corporations that issued their certifications. The failure of
forensic accounting corporations to disclose important information
coupled with the failure of forensic accountants to exercise due
diligence in investigating the corporations suggests there is a need
for reform within the forensic accounting profession.
Keywords: Forensic accountants, forensic accounting
certifications, due diligence, forensic accounting corporations.
+ Auditors' Responsibility for Fraud
Detection: New Wine in Old Bottles?
Abstract: We observe a
historical trend that standard setters often resort to issuing
additional auditing standards as a response to restore public trust
after widely publicized fraud. Despite the standard setters’
intention, auditors are generally poor at fraud detection. Auditors
are not fraud examiners. We contend the failure of auditors to
detect fraud is attributable to the differences in skill sets and
task objectives between financial statement audits and fraud
auditing. Our paper provides a brief overview of the changes in
auditors’ responsibility for fraud detection over the years. We
highlight the differences between auditors and forensic specialists
based on prior literature and an expert panel. Without proper and
adequate forensic training, expecting auditors to detect fraud is
similar to pouring new wine into old bottles. We conclude by
identifying changes in the current audit model and research
opportunities that can be used to improve auditors’ fraud detection
performances.
Keywords: Auditors'
responsibility, fraud detection, forensic specialists, audit
standards, expert panel.
+ Compensatory Damages for Patent
Infringement: TEXAHOMA HIGHWAY CONSTRUCTION CASE
Abstract: This case involves
damages for the infringement of two patents owned by Salsa, Inc. The
patents are for (a) the design and (b) the method of manufacture of
concrete walls for containing construction noise caused by the
building or widening of highways. By containing this noise, the
state highway construction authority saves on the cost of
compensation paid to nearby business owners and homeowners disturbed
by the noise of highway construction. This patent has been infringed
by other highway construction companies. Therefore Salsa has sued
the infringing companies in order to recover compensatory damages
for its lost profits due to patent infringement. The case requires
students to calculate compensatory damages for lost profits from
lost sales, lost profits from margin erosion, lost profits (if any)
from convoyed sales, and interest on all lost profits.
Keywords: Patent, infringement,
compensatory, damages, lost profits, lost sales, margin erosion,
convoyed sales
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+ Advocacy v. Objectivity
As provided by Rule 702 of the Federal Rules of Evidence, an individual
qualified as expert by knowledge, skill, experience, training or education
(e.g., the forensic accountant), may offer “expert testimony” to assist the
trier of fact (judge or jury or arbitrator) to understand the evidence. The
court, of course, needs assurance of the expert's objectivity. This
assurance may be a problem for an expert because the court, as well as the
opposing attorney, may assume that advocacy has supplanted the expert's
objectivity.
Consider, for example, the following characterization of forensic
accounting experts (FA) testifying in a business valuation case by Judge
David Schwartz, of the U.S. Court of Claims: "The trier must first judge the
qualifications of the opposing experts, then try to understand their
presentations, pass on their sincerity and credibility, and finally choose
between opposing conclusions. Throughout, there is the uneasy doubt as to an
appropriate discount for partisanship. Have the witnesses ... anticipated a
discount by the trier and hiked their opinions twice, once for discount and
once for loyalty to their client, or only once, or even not at all?"
Sometimes, the FA must deal not only with the court's and the
opponent's assumptions about their advocacy, but also with the real
difficulty of maintaining objectivity that is posed in some cases.
Conclusions about technical and professional issues are sometimes based on
probability rather than certainty. The determination of the value of closely
held stock, for example, is a matter of judgment, rather than just
mathematics. In such instances, the FA needs to be particularly careful to
maintain objectivity and avoid becoming an advocate for an unwarranted
position or conclusion.
A testifying expert’s role (and duty) should be qualified during
the engagement interview. At this point, the FA needs to clarify the nature
and scope of the engagement and proposed limitations. Because of time and
monetary constraints, for example, counsel may wish to limit the scope of'
the expert's involvement or make that involvement conditional in
anticipation of expanding or curtailing the scope of the expert's
involvement. As the case progresses, the expert's scope of involvement may
change from providing services as a consultant to testifying as expert
witness. The FA needs to ensure that the scope of the engagement, including
any changes, is documented in the case file and that all expert opinions
offered fall within the scope of the engagement.
Each of the six segments of a litigation services engagement
(engagement interview, investigation process, attorney communications,
reporting, depositions, and testimony) is a progression built upon the prior
segment. However, the investigation process is perhaps the key to keeping
the expert an objective witness. A strong, thoroughly executed investigation
gives the support needed to withstand the pressures and outright
manipulations inherent in the rest of the litigation process.
Data Issues
As the investigation progresses, certain issues can arise that
make it difficult for the FA expert to keep the investigative process
objective. Attorneys and clients come to the FA with their own view of the
facts. Inadvertently or deliberately, they may provide inaccurate
information, or they may withhold information. This problem creates an
opportunity for opposing counsel upon cross examination to compromise or
discredit even the most seasoned expert witness. To avoid such impeachment,
the FA needs to recognize that attorneys and their clients are biased. The
FA needs to keep an open mind and avoid reaching conclusions prematurely.
For example, the FA may use the scientific method of forming a hypothesis.
Then the FA carefully follows well established investigative steps and
develops forms, procedures, and processes that will ensure proving or
disproving the hypothesis and that he or she will not neglect or overlook
critical data, or be taken in by inaccurate data.
Even after the FA has thoroughly investigated the facts of the
case and has objectively reached a supportable conclusion, he or she is
still vulnerable to subtly shifting from objective expert to advocate.
Sometimes, the expert's conclusion can fall within a range on a continuum of
conclusions that at one end support the client-attorney's goals and at the
other end support the opponent's goals. Wherever the FA expert's conclusion
falls on that continuum, he or she needs to return to the data to be sure
that the results, in fact, is supported by the data.
Communications between the attorney and the FA expert are necessary
to ensure that everyone on the team is aware of all facts and the direction
of the case. Such communications also provide opportunities for the expert
to learn of new or contradictory data (e.g. alternative explanations) and to
assess challenges to the conclusions he or she has reached.
At this point, the expert needs to avoid becoming attached to the
original conclusion if it is attacked by the attorney or other team members.
Understandably, an expert who has invested considerable time and effort in
reaching this conclusion may be reluctant to change it. That said, the
expert must maintain an objective point of view, realistically assessing
challenges to opinions and remaining open to the possibility of flaws in the
initial approach. A change may or may not be warranted, depending on the
supporting data. Again, the expert needs to return to the data to see which
conclusion it best supports.
Investigative
Issues
An investigation that fails the mandates of Rule 702 (sufficient
facts /data and the application of reliable methods) puts the expert's
opinion in jeopardy. The FA expert needs to be careful, for example, when
using a purchased software program (such as valuation and economic damage
software) as part of the investigation to reach a conclusion. The conclusion
may be subject to many variables unaccounted for by the software, making the
expert's credibility vulnerable.
In general, the FA expert can help to avoid having testimony
discredited by reviewing the investigation carefully before testifying. The
FA should review records of time and research to make sure they agree with
the case file reports. The FA also should review the files to make sure his
or her conclusions are supported with documentation.
Although the FA expert can advocate his or her position based on
the findings of an investigation, as an expert witness, he or she must be
objective whether or not those findings support the goals being advocated by
the attorney. This objectivity is required not only to provide services
ethically, but also to ensure attracting the right kind of referral sources
and clients.
*Bill Barrett,
CPA/CFF/ABV, has investigated
fraud and misfeasance in governments, corporations, boards of directors and
professional practices; and has directed federal teams investigating
multi-defendant money laundering, illegal income, tax evasion and
white-collar fraud.
He is the current vice president of practice for the American Accounting
Association Forensic and Investigative Section. Contact him at bill.barrett@barrettpc.com
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Books Reviews
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Cyber Forensic
A. J. Marcella, Jr., F. Guillossoi, 2012,
$80 John
Wiley 201.748.6358
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The authors
begin by explaining the origins of data. From there, the authors
address concepts related to data storage, boot records,
partitions, volumes, and file systems and how each of these is
interrelated and essential in a cyber forensic investigation.
They then analyze the roles these concepts play in an
investigation and what type of evidential data may be identified
within each of these areas.
Ronelle Sawyer
and Jose McCarthy – two fictional characters – are used
throughout the book to illuminate specific IT and cyber forensic
concepts and discuss critical cyber forensic processes. Their
activities and actions bring cyber forensic concepts to life by
providing you with specific examples of the applications.
Cyber Forensics also examines endianness and time - two
important yet often overlooked topics – that drastically impact
almost every cyber-based investigation.
Providing a
through foundation to this emerging field, this step-by-step
reference covers:
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Converting
binary to decimal
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The power of
HEX
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Forensics
and encrypted files
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Master Boot
Record (MBR)
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Volume
versus Partition
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FAT filing
system limitations
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New
technology file system
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Forensic
Investigative Smart Practices
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MS-DOS
32-bit time stamp: date and time
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Characteristics of a good cyber forensic report
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A cyber
forensic process summary
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Essentials of the Reid
Technique Criminal Interrogation and Confessions
F.E. Inbau et al., 2005
Jones and Bartlett Publishers
40 Tall Pine Drive
Sudbury, MA 01776
info@jbpub.com
criminaljustice.jbpub.com
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This
book teaches readers how to identify and interpret verbal
and nonverbal behaviors of deceptive or truthful people, and
how to move toward obtaining solid confessions from guilty
persons using the Reid Technique. The Reid Technique is
built around basic psychological principles and presents
interrogation as an easily understood nine-step process.
Separated into two parts, What you Need to Know About
Interrogation and Employing the Reid Nine Steps of
Interrogation, this book will help readers understand
the effective and proper way that a suspect should be
interrogated and the safeguards that should be in place to
ensure the integrity of the confession.
Key Features
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An abridged book covering the state-of-the-art technique
of interviewing and interrogation.
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Designed for criminal investigation students, law
enforcement personnel, corporate security officers, and
attorneys.
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Includes real-world scenarios and examples.
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Contains fascinating insights into how people behave
when they are trying to lie.
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Teaches proper and effective ways to interrogate and
safeguard against false confessions.
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Safeguarding Critical
E-Documents
Robert F. Smallwood, 2012,
$75 John Wiley
& Sons 201.748.6358 |
The author identifies the sources of electronic document leakage
in terms non-techies can understand, as well as the many threats
to confidential e-documents across a wide range of digital
platforms, including e-mail, instant messaging, mobile devices,
cloud computing, and social networks. Then he offers proven
solutions for proactively defending against each of those
threats.
While Smallwood describes proven technological fixes that can be
implemented right away, he is careful to explain why technology
alone cannot fix the problem. Real e-document security, the
author explains, begins at the top, with clear, rigorously
enforced Information Governance (IG) policies. Drawing upon his
more than a quarter-century of experience, Smallwood provides
step-by-step guidance on how to establish a set of IG protocols
appropriate to your organization and for developing an
organization-wide program of total life-cycle security for
critical electronic documents, from their creation to their
eventual archiving or destruction. |
The 3rd Annual Midyear Forensic and Investigative Accounting
Conference
The Annual Mid-Year Forensic and Investigative Accounting Conference
will be held March 22-23, 2013, jointly with the Public Interest Section
in New Orleans, LA. The conference will be 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
Mark your calendar for July 29 and 30, 2013, for the
Louisiana State University Fraud & Forensic Accounting Conference in
Baton Rouge, LA. For more information about the 2013
conference, go to:
http://business.lsu.edu/Accounting/fraud/Pages/2012-Fraud-and-Forensic-Accounting-Conference.aspx
Advertise in the JFIA
Would you like to advertise in this journal? Full page advertisement
is $300; Half page advertisement is $150. Contact Larry Crumbley (dcrumbl@lsu.edu).
Checks are to be made out to Journal of Forensic and Investigative
Accounting and to be sent to Larry Crumbley at 2833 Business Education
Complex, Dept. of Accounting, L.S.U., Baton Rouge, LA 70803
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