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Volume 5: Issue 2, July–December, 2013

JFIA

Volume 5: Issue 2, July–December, 2013

Table of Contents:

 

The Effects of Communication Media and Client Familiarity on Auditors' Confidence in Deception Detection | Full Article (PDF)
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. 

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Wi-Fi Hotspots: Secure or Ripe for Fraud? | Full Article (PDF)
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.

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Fraud-Risk Factors and Audit Planning: The Effects of Auditor Rank | Full Article (PDF)
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.

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The Effects of Wrongdoer Motivation and Internal Versus External Reporting Channel on Intention To Report Fraud | Full Article (PDF)
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.

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Manipulating Sales Revenue to User Reference Points in Pre- and Post- Sarbanes-Oxley Eras | Full Article (PDF)
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.

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An Empirical Evaluation of Graham's Model of Principled Organizational Dissent in the Whistleblower Context Post-SOX | Full Article (PDF)
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. 

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Chinese Reverse Mergers: Accounting Fraud and Stock Price Collapse | Full Article (PDF)
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.

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Market Reactions to the Reform of Shareholder Derivative Litigation in Japan | Full Article (PDF)
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.

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Does Financial Reporting Fraud Recognize Borders? Evidence From Bank Fraud in Iran | Full Article (PDF)
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.