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Volume 6: Issue 2, July–December, 2014

JFIA

Volume 6: No. 2, July–December, 2014

Table of Contents



Debunking the Myth of the Out of Character Offense | Full Article (PDF)
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.

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Fighting Discovery Abuse in Litigation | Full Article (PDF)
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.

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Detecting Deception in Client Inquiries: A Review and Implications for Future Research | Full Article (PDF)
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.

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The Role that Fraud has on Bankruptcy and Bankruptcy Emergence | Full Article (PDF)
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. 

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An Analysis of SEC and PCAOB Enforcement Actions against Engagement Quality Reviewers: A Comment and Extension in Support of the Nevada Effect | Full Article (PDF)
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.

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Objectivity and Independence: The Dual Roles of External Auditors | Full Article (PDF)
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.

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Mortgage Fraud:  Schemes, Red Flags, and Responses | Full Article (PDF)
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.

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What Every Victim of a Ponzi Scheme Must Know About Tax Deduction | Full Article (PDF)
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. 

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Blackstone Valley Chiropractic Clinic: International Deferred Compensation | Full Article (PDF)
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.

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Consideration of Fraud in a Financial Statement Audit: Forensic Case Study | Full Article (PDF)
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.