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

Associate Editor
Christine Crawford-Cheng

Louisiana State University
Department of Accounting
2808 Business Education Complex
Baton Rouge, LA 70803
Phone: 225-578-6229
Fax: 225-578-6201

Volume 6: No. 2, July - December, 2014

Table of Contents

+ Debunking the Myth of the Out of Character Offense

    • Frank S. Perri

    • Richard G. Brody

    • Justin M. Paperny

Abstract: Theory and research on the criminological and behavioral profile of white-collar offenders has historically been underdeveloped compared to non-white-collar offenders. This paper argues that applying criminological and behavioral profile paradigms to white-collar criminals reveals why they are at risk to offend, and because many fraud investigation specialists describe white-collar offenses as “out of character” behavior, they misconceive this offender profile and diminish white-collar crime. The authors apply the criminal personality model to white-collar offenders by examining their criminal thinking traits coupled with negative behavioral traits creating a negative synergy for white-collar offending to occur. Furthermore, the concept of normalized organizational deviance is examined to determine if there are certain factors within an organization that increase the probability that an individual(s) are more apt to commit a crime. Lastly, the concept of projection bias is used to explain how misperceptions are created to fill the gap surrounding this offender profile in the absence of the application of the criminal personality to this offender group to neutralize such myths.


Keywords: Criminal thinking, Projection bias, White-collar crime, Behavioral traits.

+ Fighting Discovery Abuse in Litigation

    • William Hopwood

    • Carl Pacini

    • George Young

Abstract: Over the years, discovery has been transformed from a tool to gather facts during litigation to a tactical weapon.  Discovery abuse involves excessive or improper use of discovery devices to harass, cause delay, wear down opponents, and/or “stonewalling” or opposing proper discover requests to frustrate the other party.  This paper provides an overview of the various discovery devices and highlights numerous predatory discovery practices.  We then show how a collaborative or team approach  can be combined with standard discovery tools to obtain critical evidence from an opposing party bent on discovery abuse.  An improved understanding of these issues will place forensic accountants in a better position to assist attorneys in litigation. Towards the end of the paper we provide a list of research questions that could be useful to academic researchers in crafting a responsive research agenda that exploits insights from the behavioral sciences.

Keywords: Discovery, Civil Procedure, Discovery Abuse, Discovery Tools, Abusive Tactics, Forensic Accountant and Discovery.

+ Detecting Deception in Client Inquiries: A Review and Implications for Future Research

    • D. Kip Holderness

Abstract:  Auditors use inquiries as an important tool to gather evidence throughout the audit process. While such inquiries can be useful, auditors must be cognizant of the possibility of client deception when conducting inquiries. Previous research suggests that auditors have a limited ability to detect deception. The purposes of this article are twofold. First, this article summarizes extant literature from the communications and accounting fields to identify various research avenues that can further our understanding of auditors’ ability to detect deception during client inquiries. Second, this article examines how deception detection may change as auditors conduct an increasing number of client inquiries via computer-mediated communication.

Keywords: Client Inquiry, Deception Detection, Auditor-Client Interaction.

+ The Role that Fraud has on Bankruptcy and Bankruptcy Emergence

    • Daniel Bryan

    • Troy Janes

    • Samuel L. Tiras

Abstract: We examine a set of bankrupt firms from 1989-2005 and test the role fraud has on bankruptcy and the emergence from bankruptcy.  Since most bankruptcies are adversarial, whereby stakeholders attempt to force changes in management and/or management’s business plan, managers have incentives to take actions in an ongoing attempt to cover up the deteriorating financial condition of the firm in order to avoid going concern modifications of audit opinions, debt covenant violations, and bankruptcy.  Our results indicate that fraud is positively associated with bankruptcy, indicating that managers use fraudulent financial reporting to avoid bankruptcy.  The fraudulent reporting likely delays the bankruptcy, allowing the asset base of the firm to further deteriorate, which also would reduce the likelihood of a favorable emergence from bankruptcy.  Consistent with this expectation, we find that fraudulent financial reporting prior to bankruptcy is negatively associated with bankruptcy emergence.  We expect this finding to be of great interest to stakeholders, auditors, and the Public Company Accounting Oversight Board (PCAOB).

Keywords: Fraud, Bankruptcy, Bankruptcy Emergence.

+ An Analysis of SEC and PCAOB Enforcement Actions against Engagement Quality Reviewers: A Comment and Extension in Support of the Nevada Effect

    • A.J. Cataldo II

    • Lori Fuller

    • Thomas Miller

Abstract: We examined data used by Messier, Kozloski and Kochetova-Kovloski in their 2010 article published in Auditing: A Journal of Practice and Theory. State of incorporation patterns consistent with those identified in the three non-randomly selected samples of SEC trading suspensions and interventions investigated by Cataldo, Oehlers and Scanlon (2009) were detected. In all cases, Nevada firms were over-represented with respect to SEC regulatory involvement. We produced an extension, only to find that Nevada firms also were over-represented for the entire population of calendar year 2012 SEC trading suspensions.

Legal and financial economics literature streams have examined Nevada corporate law for more than a decade. They continue to examine and explain why the state of Nevada is enjoying market share gains in the market for corporate law. Their characterization of Nevada is a negative one, consistent with Nevada’s desire to generate tax revenues from corporate filing fees and their disproportionate share of regulatory interventions, briefly described above. We introduce and integrate findings from legal and financial economics literature streams and provide recommendations for additional investigations into what has been characterized as the Nevada effect.

Keywords: Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), The Nevada Effect, Regulatory Actions/Sanctions.

+ Objectivity and Independence: The Dual Roles of External Auditors

    • James A. DiGabriele

    • Marianne Ojo

Abstract: This paper is aimed at illustrating that certain capacities exist whereby the dual role of the external auditor (in undertaking internal audit roles as well as skilled persons roles) could be exercised to the optimal and maximum benefit of an entity or organization. It also aims to accentuate on why a return to and focus on traditional auditing techniques, as well as auditing techniques which focus on internal controls is a much needed move. In so doing, it contributes to the extant literature by highlighting why such a move should be facilitated, as well as proposing means whereby such a move would be facilitated - namely, through a focus on benefits which could be derived where the external auditor is able to incorporate certain internal audit responsibilities. The paper also draws attention to safeguards which require due consideration if the ever important attributes of objectivity and independence are not to be compromised.

While the benefits and potentials of the dual roles assumed by external auditors are emphasized, as well as the need to ensure that safeguards operating to guard against a compromise of objectivity and independence are in place, authors' opinions in support of dual roles also take into consideration the utmost priority of ethical values. The paper also highlights the fact that even though such dual roles are appropriate in certain cases – as illustrated by justifications for limitations imposed by the Sarbanes-Oxley Act and other relevant and applicable legislation – instances also persist where section 201 of Sarbanes-Oxley, with regard to internal audit outsourcing, may have been over-reactionary and may continue to hinder both companies and their auditors.

Keywords: Independence, Objectivity, Sarbanes-Oxley Act, FSMA Section 166, Non-Audit Services.

+Mortgage Fraud:  Schemes, Red Flags, and Responses

    • Nicole Stowell

    • Carl Pacini

    • Kathryn Keller

    • Martina Schmidt

Abstract: Mortgage fraud has been on the rise in recent years.  Mortgage fraudsters reap illicit gains by engaging in diverse fraud schemes.  These frauds include foreclosure rescue, home equity conversion, loan modification, illegal property flipping, builder bailouts, equity skimming, straw buyers, and short sale schemes.  We review unique red flags for each scheme.  We then document how and why the rise in mortgage fraud has not been accompanied by a concomitant increase in federal and state prosecution.  While the federal government has reinstated tougher mortgage underwriting standards and instituted a license registration system for mortgage brokers, additional actions can be taken to combat mortgage fraud.  We recommend a series of additional steps that could be taken by the public and private sectors to enhance the attack on mortgage fraud.  Forensic accountants would play an important role in the implementation of the additional anti-mortgage fraud steps.

 Keywords:  Mortgage Fraud, Mortgage Crisis, FBI, Dodd-Frank Act, RICO, Mortgage Fraud Schemes.

+ What Every Victim of a Ponzi Scheme Must Know About Tax Deduction

    • James G.S. Yang

Abstract: When an investor suffers loss from a Ponzi scheme, the investment involves the tax question as to whether the loss should be deducted as a theft loss or a capital loss as well as the amount of tax deduction.  The IRS has issued two rulings that govern its treatment, and offers options depending on whether the taxpayer intends to seek potential third-party recovery and file an amended tax return.  The most important item in this process is the treatment of phantom income.  This article addresses these issues and offers tax-planning strategies.  The decision depends on the amount of possible potential third-party recovery as compared to the tax savings on loss deduction.  Despite the notorious Madoff case, Ponzi schemes are still thriving today.  This article further offers investment-planning strategies.  The critical decision depends on the equilibrium point of a Ponzi scheme, which consists of the investment growth rate, dividends payout rate and the surviving period.

Keywords: Ponzi Scheme, Capital Loss, Theft Loss, Phantom Income, Safe Harbor, Net Operating Loss, Tax Deduction.

+ Blackstone Valley Chiropractic Clinic: International Deferred Compensation

    • Kevin E. Dow

    • B. Charlene Henderson

    • Marcia Weidenmier Watson

Abstract: This case presents students with an active-learning setting in which to conduct tax research and tax planning via a developing four-part timeline. Students first evaluate an international deferred compensation plan that a potential client is considering. The focus is on determining whether the plan complies with U.S. tax law, and if not, on developing recommendations on modifications to make the plan compliant. Next, students learn the individual has acted, and they must evaluate the implemented plan. Third, students learn the individual has been indicted for tax evasion. They must then consider whether their firm should agree to work with the individual and whether relying on the advice of professionals can be used as a defense against tax evasion charges. Finally, students learn that the individual has been convicted of criminal tax evasion. Moreover, the trial evidence suggests that the tax evasion extended beyond the facts known from the prior timeline, i.e., the individual participated in the evasion. Students must re-evaluate whether their firm should agree to work with the individual in appealing his conviction. As the epilogue explains, the case materials are based on an actual case in which a dentist attempted to minimize income taxes via an offshore deferred compensation plan.

Keywords: Tax Research; Tax Planning; Offshore Deferred Compensation Plan; Tax Evasion.

+ Consideration of Fraud in a Financial Statement Audit: Forensic Case Study

    • Charles J. Russo

    • Amber Stone

    • Charles L. Martin, Jr.

Abstract: This case study examines fraud during a financial statement audit using an actual SEC Case. This forensic accounting case study discusses the fraud triangle, the responsibilities of the independent auditor, audit procedures for related party transactions, and the impact of Sarbanes Oxley Sections 302 and 404 on internal controls.  This case study includes four case questions and instructor notes.

Keywords: Auditing, Forensic Accounting, Fraud,  Fraud Triangle, Misappropriation Of Assets, Securities Fraud, Falsified Journal Entries, Related Party Transaction, Internal Controls, Sarbanes Oxley, AU316 Consideration Of Fraud In A Financial Statement Audit, AU 334.

Books Reviews

BVR’s Guide to Discounts for Lack of Marketability

John Stockdale, Sr., 5th edition, 2013

1000 SW Broadway, Suite 1200
Portland, OR 97205




This two-volume book provides a summary of relevant theory, evidence, and techniques useful in reaching a conclusion for the appropriate discount for lack of marketability (DLOM). By assembling the material the author took the first steps in creating a body of knowledge to develop generally accepted principles for DLOM determination.

Volume One has seventeen chapters, such as comparative factor analysis, methods for tiered entities, and various computational methods. Volume Two provides a compendium of abstracts of over 100 DLOM court decisions dating back to 1983.


Bone Remains: Cold Cases in Forensic Anthropology

Mary H. Manhein, 2013

Louisiana State University Press
Baton Rouge, LA 70808

For the forensically inclined the author takes readers into the field, inside her lab, and through DNA databases and government bureaucracies as she and her team tirelessly work to identify and seek justice for those who can no longer speak for themselves. From a 2,000-year-old mummy to Civil War sailors to graves disturbed by Hurricane Isaac, Manhein presents both modern and historic cases. Her conversational accounts provide a fascinating look into the stories behind the headlines and sometimes heart-wrenching details of people lost and found.


The Audit: A Novel

Edward J. McMillan, 200

Harwood Publishing
P.O. Box 233
Churchton, MD 20733


          The author’s passing away last July reminded me of his excellent auditing novel which can be located on Amazon. When his character, Pat McGuire, became a CPA he expected his career to be challenging and rewarding, but not particularly exciting. He was wrong - one day he would find accounting to be very exciting.

Finding himself on the audit staff of the National Tobacco Federation, Pat would soon find his predictable life turned upside down as he and the beautiful Rita Davies are placed in the center of a scandal that rocks an international industry. As they deftly piece together clues of a clever puzzle, they are suddenly caught in a web of deceit involving fraud, income tax evasion, murder-for-hire, greed and ultimately the brutal, but brilliant and controlling psychopath, Andy Lombardo.

         Pat and Rita unravel twists, counter-twists, crosses and double crosses while lives and a fortune in embezzled funds hang in the balance as they ride a roller coaster of emotions and excitement towards THE AUDIT's stunning conclusion.


Case Studies In Forensic Accounting and Fraud Auditing

D.L. Crumbley, W.A. LaGraize,
      C.E. Peters, 2013

Wolters Kluwer
4025 W. Peterson Ave.
Chicago, Il 60646 – 6085

One of the first forensic accounting/fraud casebooks to bring together in a single volume a number of short, medium, and longer case studies covering the broad approach to forensic and investigative accounting. This book can be used as a supplement to any of the forensic accounting or fraud examination textbooks on the market. Or it could be used as a stand-alone text by an instructor who has extensive power point slides or prefers not to use a textbook. Auditing professors should find these cases to be helpful in an auditing or ethics class.

The use of case studies is a form of the scenario principle. A “scenario” presents information using characters performing activities in a specialized setting. Previous research indicates that applications of the scenario principle enhances students' communication and interpersonal skills, stimulated students’ creativity, and enabled instructors to improve their teaching performance. These benefits are due to the fact that students are either reading about or portraying characters interacting, formulating solutions to dilemmas, putting textbook information into practice and, hopefully, enjoying the process.



The 2014 Annual Fraud and Forensic Accounting Conference

The LSU Fraud and Forensic Accounting Conference will be held July 28 and 29, 2014, in Baton Rouge, Louisiana, at the Crowne Plaza. Please mark your calendar now! Our speakers will include Richard Scrushy, former CEO of HealthSouth; Frank J. Panepinto, Toby Groves, Sri Romamoorti, Timmy Naddy, and more.


Registration for the 2014 Conference will open in May 2014.


More information:


The 2014 AAA Forensic and Investigative Accounting Section Meeting was held in San Antonio, TX on March 28-29, 2014 at Hilton Palacio Del Rio.


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 ( 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.