Journal of Forensic & Investigative Accounting
Senior Editor:  D. Larry Crumbley
 
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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. 2, July - December, 2013

Table of Contents

+ The Effects of Communication Media and Client Familiarity on Auditors' Confidence in Deception Detection

    • Meghann Cefaratti

    • Reza Barkhi

Abstract: Auditors collect audit evidence through client inquiry. When auditors incorporate audit evidence gathered via client inquiry, they must be able to detect deception to be effective. Detection of deception, in the information that is communicated, may be more difficult with the proliferation of web-based communication applications. These applications represent an efficient approach to facilitate the exchange of information between auditors and audit clients. However, the effectiveness of the information exchange between auditors and audit clients may be more challenging for audit clients that are unfamiliar (i.e., new clients). We collected data from 84 participants (upper level accounting students) to study the influence of communication mode and familiarity with the client on auditors’ perceived ability to detect deception. We find that, consistent with Media Richness Theory and Channel Expansion Theory, leaner forms of communication media and less familiarity with the audit client lead to a diminished confidence in ability to detect deception. Our study provides support for auditors’ consideration of the most appropriate form of communication before gathering information from a client.

Keywords: Auditing, deception, deception detection, familiarity, media richness.

+ Wi-Fi Hotspots: Secure or Ripe for Fraud?

    • Richard G. Brody

    • Kyle Gonzales

    • Dustin Oldham

Abstract: This paper explores the threats involved with accessing public wireless fidelity (Wi-Fi) hotspots, and how sensitive information can be compromised by malicious users to commit fraud.  Every network contains a service set identifier (SSID), which can be exploited to conduct an attack on a wireless unprotected public network.  Since unprotected wireless networks are susceptible to attacks, security mechanisms surrounding wireless networks are necessary.  Older wireless encryption algorithms such as Wired Equivalent Privacy (WEP) have become deprecated due to malicious users successfully cracking the key.  Presently, Wi-Fi Protected Access (WPA & WPA2) is the industry-best standard for maintaining a secure wireless connection to mitigate any attempts of acquiring information from other users on the network.  Attackers can use various techniques to harvest critical information from users on the same network, which can be used to commit fraud.  The most common fraudulent actions by the attacker includes activities such as obtaining authentication credentials, conducting social engineering attacks, and acquiring sensitive information for personal gain.  This article will examine the technology associated with Wi-Fi, vulnerabilities associated with using public Wi-Fi, methods for exploiting vulnerabilities to commit fraud, and preventative measures that can be taken to avoid becoming a victim of fraud.

Keywords: Wireless fidelity, service set identifier, wired equivalent privacy, Wi-Fi protected access, wireless security.

+ Fraud-Risk Factors and Audit Planning: The Effects of Auditor Rank

    • David S. Kerr

Abstract: This research examines the association between external auditors’ position in their firm (rank) and their consideration of fraud risk factors when planning an audit. Included in this examination is a study of the relationship between rank and judgmental agreement among auditors concerning the effects of risk factors on the extent of substantive testing.

Results reveal that, when planning the extent of testing, audit managers place greater relative importance on tone-at-the-top than do senior auditors, who give it greater importance than auditing students. Results also reveal a significant relationship between auditor rank and inter-auditor judgmental agreement in audit planning in the early stages of auditors’ careers. In contrast, however, rank above the senior level is associated with decreased levels of judgmental agreement when planning the audit. An analysis of auditor rank and sources of judgmental agreement among auditors at different ranks in their firm reveals significant relationships between rank and factor-weighting agreement among auditors, but does not find significant relationships between rank and judgmental consistency or agreement on the appropriate degree of configural factor processing. Finally, results reveal that pair-wise mean absolute differences between participants’ judgments are a more sensitive measure of inter-auditor judgmental agreement than the traditional measure of consensus—the product-moment correlation coefficient.

Keywords: Tone-at-the-top, internal control, fraud risk, audits planning, auditor rank, audit experience, auditor judgment, decision making.

+ The Effects of Wrongdoer Motivation and Internal Versus External Reporting Channel on Intention To Report Fraud

    • Blaise M. Sonnier

Abstract: Using an experiment, this study examines the impact of the motivation of the wrongdoer and characteristics of the corporate reporting channel on the likelihood that in-house accountants will report fraudulent financial reporting to an employee hotline.  The results indicate that in-house accountants are more likely to report a fraudulent financial misstatement when motivated by the wrongdoer’s personal gain. In addition, the study provides evidence that in-house accountants are more likely to report to a hotline managed by the internal audit department than to a hotline managed by a third-party contracted by the corporation. Employees may be hesitant to report wrongdoing to an external channel given the traditional duty of loyalty and obligation of confidentiality of corporate employees. In addition, the education, training, and codes of conduct of accountants all place an emphasis on confidentiality. Based on the results of the study, corporations should explore implementing an employee reporting hotline managed internally for reporting accounting or auditing irregularities.

Keywords: Employee hotline, fraudulent financial reporting, reporting intentions, whistle blow, whistleblowing.

+ Manipulating Sales Revenue to User Reference Points in Pre- and Post- Sarbanes-Oxley Eras

    • Charles E. Jordan

    • Stanley J. Clark

Abstract: Cosmetic earnings management occurs when unmanipulated income falls just below a user reference point (e.g., $395 million) and management increases earnings just across the threshold (e.g., to slightly above $400 million).  Extant research shows this form of earnings management routinely occurred prior to but not after the Sarbanes-Oxley Act (SarbOx). The current study examines this same type of biased reporting but with sales revenue as the object of manipulation instead of earnings.  Results indicate clear signs of cosmetic sales management in the pre-SarbOx period examined but no evidence of it in the post-SarbOx era, thus providing further evidence of an increased commitment by managers and accountants in recent years to provide more transparent reporting.

Keywords: Revenue manipulation, earnings management, Sarbanes-Oxley Act, Benford’s Law.

+ An Empirical Evaluation of Graham's Model of Principled Organizational Dissent in the Whistleblower Context Post-SOX

    • Blaise M. Sonnier

    • Walfried M. Lassar

Abstract: Using an experiment, we empirically examine the applicability of Graham’s Model of Principled Organizational Dissent on the intention to report corporate wrongdoing in a post-SOX environment. We establish that the perceived seriousness of the wrongful act, the employee’s level of personal idealism, and the perceived duty to report wrongdoing as part of one’s job directly influence an employee’s perceived responsibility to report. Contrary to extant literature that perceived seriousness is directly related to reporting intention, our data establishes that it has only an indirect impact by increasing one’s perceived responsibility to report. We also find that while the threat of adverse job action if management discovers the whistleblower’s identity increases the perceived personal cost of reporting. The potential that management will discover his/her identity did not impact the perceived personal cost. The prohibition against retaliation against employee-whistleblowers by Section 806 of SOX had no impact on the perceived personal cost of reporting; however, it directly increased the likelihood of reporting. 

We also demonstrate that factors that influence reporting intention vary depending on whether the employee is required to provide his/her name when reporting. The perceived personal cost and perceived responsibility both impact reporting intention when the employee is not required to provide his/her name to the hotline. However, these factors have no impact on intention to report when the employee is required to provide his/her name when reporting. The protection afforded employees against retaliation by Section 806 of SOX predominates reporting intention in this situation.

Keywords: Employee hotline, fraudulent financial reporting, reporting intentions, Sarbanes-Oxley Act, whistleblow, whistleblowing, Graham’s Model of Principled Organization Dissent.

 

+ Chinese Reverse Mergers: Accounting Fraud and Stock Price Collapse

    • Brittany Lang

    • John R. McGowan

Abstract: Investing in stock is a risky business. However, Chinese reverse mergers (CRM) have introduced a new level of risk. Research has shown that many Chinese reverse merger companies have used the process as a way to gain access to U.S. markets without having their financial statements inspected. Many Chinese companies are corrupted by fraudulent accounting practices and have taken advantage of the reverse merger method to mislead investors. This article highlights many common fraudulent accounting practices, which have led to the downfall of many CRM firms. The second objective of this article is to look at the role that investigative research companies play in revealing these companies’ true financial condition. For example, CRM firms’ stock prices commonly exhibit significant decline when Muddy Waters Research announces CRM firms’ fraudulent accounting practices. We examine seven CRM firms to highlight both the incidence of fraudulent accounting practices and the markets reaction when these practices are brought to light. Finally, this article seeks to enlighten and encourage unsuspecting investors to pursue due diligence procedures before investing in Chinese reverse merger companies. Many CRM companies engage in unethical business and accounting practices. Investors should be wary before investing in these firms. 

Keywords: Chinese reverse mergers, accounting fraud, Muddy Waters research, risk.

+ Market Reactions to the Reform of Shareholder Derivative Litigation in Japan

    • Shingo Kawashima

    • Fumiko Takeda

Abstract: This paper investigates how stock prices of high-litigation-risk industries reacted to the news on legal changes in shareholder derivative suits in Japan. Specifically, we focus on two amendments to the Japanese Commercial Code. The 1993 Commercial Code amendments lowered the filing fees required to bring derivative actions, while the 2001 Commercial Code amendments attempted to reduce abusive shareholder derivative suits. We find stock prices of the pharmaceutical industry tended to react negatively to the news that increased the likelihood of the passage of the 1993 amendment, while stock prices of the retailing and electronics industries tended to react positively to the news that increased the likelihood of the passage of the 2001 amendment.

Keywords: Litigation, shareholder lawsuits, event study.

+ Does Financial Reporting Fraud Recognize Borders? Evidence From Bank Fraud in Iran

    • Zabihollah Rezaee

    • Gholamhossien Davani

Abstract: Reliable and high quality financial information is the lifeblood of the global capital markets and that quality can be adversely affected by the existence and persistence of financial reporting fraud (FRF). The 2007-2009 global financial crisis caused by subprime loan mortgage shenanigans has also provided incentives and opportunities for management to engage in FRF. Fraud in general and FRF in particular (Enron, WorldCom, Satyam, Madoff, Olympus) are global phenomena. The September 2011 discovery of Iran’s biggest bank fraud, totaling 2.6 billion USD, resulted in the arrest of more than 50 suspects, including some government officials. This bank fraud involved the use of forged documents to secure credit at one of Iran’s top financial institutions to acquire companies, conduct fraudulent business, and transfer money abroad. This article concludes that FRF does not recognize borders and can occur in any country.  In the end, fraud does not yield rewards but rather result in severe consequences such as death sentences of the four fraud perpetrators in the bank fraud case in Iran                                                                      

Keywords: Financial reporting fraud, bank fraud in Iran, fraud prevention, detection.

Books Reviews

Detecting Fraud in Organizations

Joseph R. Petrucelli, 2012, 362 pp.

John Wiley

11 River Street

Hoboken, N.J. 07030



 

Filled with cartoon, pictures, motivational quotes, and one-minute mysteries that creatively help readers to see beyond numbers and instead focus on open, proactive communication with organizational staff, the author looks at the people in today’s organizations and identifies how and where the value within your organization may potentially be exposed to fraud.

Drawing from the author’s thirty years providing fraud training and prevention/detection services for professionals, this book is designed to get you proactively thinking about fraud from a new perspective. Straightforward, simple, and entertaining in presentation, this unique book focuses on the people in today’s organizations and on pinpointing how the value within those organizations is exposed to fraud.

Featuring a companion website with additional fraud case studies and business process maps, this practical, hands-on guide explores:

  • Fraud and why it keeps happening.

  • How to get a handle on transactions

  • What happens when someone decides to commit fraud.

  • The six Ps of successful fraudsters: passion, philosophy, planning, persistence, patience, and prison.

  • How to build a case – document organization, data analysis, and lifestyle analysis.

  • Fraud control points in the organizational process.

Faces of Fraud

Cases and Lessons from a Life Fighting Fraudsters

Martin T. Biegelman, 2013, 288 pp.

John Wiley

11 River Street

Hoboken, N.J. 07030


 

Fraud is an evil with a life of its own that shows no sign of abating. The aura of fraud comes not from how a person looks or where they come from but from their criminal intent and the resulting self-serving actions, ruthlessness, and arrogance. The faces of fraud run the gamut from simple schemes that hit and run, like advance-fee loan scams, to long running and complex financial accounting frauds, such as the high-profile crimes that occurred at Enron, HealthSouth, and WorldCom. The author helps you detect fraud and prevent this evil from taking hold in your organization.

Sharing his 40 years of international fraud-fighting experiences, cases, and best practices, Martin Biegelman breaks down the key lessons he has learned in fighting fraud. Written for fraud investigators, auditors, and managers, he reveals the essential characteristics of fraudsters and the skills you need to spot and stop scammers in their tracks. Biegelman profiles the key traits fraudsters share, as well as the skills good forensic accountants must possess to be successful in thwarting fraud before it takes root.

Topics included in the book include:

  • The Fraudster Mindset

  • Silver-Tongued Devils

  • Fraud Theories

  • A Short History of Fraud in America

  • Rise of Boiler Rooms and Bucket Shops

  • Use Your Imagination in Fighting Fraud

  • The Mob Strings Fraudsters

  • Fraudster Stupidity Is Your Friend

  • One Man’s Trash Is an Investigator’s Gold

  • If You Don’t Ask, You Will Never Know

  • New York State of Fraud

  • Good Humor Ice Cream Scandal

  • Bad Hams and Bribes

  • Arrogance and Recidivism

  • Informants and Whistleblowers

  • Managing Confidential Informants

  • A Tale of Deceitful Pitches and Vendor Kickbacks

  • Cruise to Nowhere

  • A Story of Vanity and Deception

  • The Making of a Fraudster

  • Scoundrels without a Conscience

  • Why I Love Liars

  • Fraudsters Love Expense Report Fraud

  • San Francisco Meter gate

  • Fraud Prevention for Individuals and Business Organizations.

The Forensic Accounting Deskbook

Miles Mason, Sr., 2011, 385 pp.

American Bar Association

321 North Clark Street

Chicago, Illinois 60654-7598

 

In the preface the author, who is both an attorney and CPA, states that the book was written for both the experienced and less experienced family law practitioner. For the more experienced, the deskbook connects the dots and fills gaps among the inter-related topics of subpoena practice, accounting concepts, depositions, reports, methodology, financial statements, tax returns, reports, and testimony. For the less experienced family law practitioner, the author provides a basic introduction to core divorce concepts, such as asset identification, classification and valuation, income determination, and expenses. He provides a step-by-step explanation of basic “how to” mechanics and explores higher-level strategic concerns appropriate for high-asset and high-conflict cases.

The book is useful to a solo practitioner, the partner in both the small and large law firm, an associate who needs a primer for his/her own edification, and the associate assigned to read the book for the benefit of the partner to whom he/she reports.

Mr. Mason suggests that forensic accountants can help clients keep money that might otherwise be taken from them by a difficult and confusing divorce. Some interesting chapters are:

  • The Hunt for Hidden Assets – Red Flags, Schemes, Scams, Lies, and Damn Lies

  • Discovery – Documents, Details, and Transactions

  • Methodologies, Investigation, and Techniques

  • Determining Income

  • Lifestyle Analysis

  • Reports and Testimony

The 2013 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/2013-Fraud-and-Forensic-Conference.aspx

Advertise in the JFIA

Would you like to advertise in this journal? Full page advertisement is $300. Half page ad is $150. Contact Larry Crumbley (dcrumbl@lsu.edu) Checks are to be made out to Journal of Forensic and Investigative Accounting and sent to Larry Crumbley at 2833 Business Education Complex, Dept. of Accounting, L.S.U., Baton Rouge, LA 70803.

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