The Use of Forensic Accounting Experts in Tax Cases as Identified in Court Opinions | Full Article (PDF)
Brigitte W. Muehlmann
Abstract: This paper presents the first comprehensive analysis of what judges have written about forensic accounting experts in federal and state court decisions. The earliest opinion was issued in 1982, but the majority of the cases (31 out of 40) were decided by federal and state courts during the decade from 2001 to 2010. This gives an indication of the emerging role of forensic accounting expert witnesses in tax cases. Understanding the past involvement of forensic accounting experts will assist taxpayers and their legal counsel in evaluating the need for forensic accounting expertise when disputes arise in the future. The results may be summarized as ‘80-80-80-80-80.’ A tax issue was the primary reason for involving a forensic accounting expert in nearly 80% of the cases and 80% of the identified cases related to income tax disputes. The issues were of procedural or administrative nature in over 80% of the cases. The court proceedings were civil in more than 80% of the cases. More than 80% of the forensic accountants served as experts for the taxpayers or third parties. Judges evaluated about half of the forensic accountants’ performance as effective, which signals a potential for substantial improvement. The expert witnesses were not considered to be effective by the judge in the majority of the cases that were decided for the government. When a case was decided for the taxpayer, the expert testimony was always considered to be effective by the judge. The paper also provides insights into the underlying tax issues, the assignments performed by forensic accountants, reasons for ineffective testimony and favorable attributes of forensic accounting experts...
tax case, court opinion, forensic accountant, expert witness testimony
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The State Of, and Prospects For, Forensic and Fraud Research that Matters | Full Article (PDF)
Dan N. Stone
Timothy C. Miller
Abstract: The emergence, and recent rapid growth, of forensic and fraud (FF) research and practice offers a unique and important opportunity to explore potential synergies between accounting research and practice. This manuscript contributes by exploring: (1) the state of, and rewards structure for, forensic and fraud research (FFR) in accounting, and, (2) the prospects and possibilities for creating a FFR literature that matters beyond the career-advancing goals of accounting scholars. Analysis of the non-education FFR published in American Accounting Association (AAA) journals between 2000 and mid-2011 suggests that published papers based in economic theory, and using quantitative methods, more frequently appear in higher rated AAA journals. But, will scholarship based in quantitative methods and economic theory yield the broadest readership and best inform FF practice? The manuscript concludes with five propositions that, the authors argue, will create a FFR literature that matters to a larger, broader readership than the large-sample, public database research that dominates higher-ranked AAA publications.
literature review, fraud investigation, forensic accounting
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Preparing Deposition Questions: The Critical Role of the Forensic Accountant | Full Article (PDF)
Edmund D. Fenton
Abstract: Litigation support services offered by forensic accountants often include producing a financial damages report, as well as providing testimony in the capacity as an expert witness. Another important service is analyzing thoroughly the results and assumptions of the opposing expert’s report. Within these types of engagements, however, is a sometimes overlooked role that the forensic accountant can readily fulfill: preparation of deposition questions used to obtain testimony from the opposing expert witness. The deposition is the only opportunity before trial that the opposing counsel has to compel the expert to answer direct questions concerning the written report produced by the expert. This article begins by discussing the steps of a lawsuit, and then covers in depth the details of depositions and highlights the invaluable contribution that forensic accountants can make in this area. The forensic accountant understands the decisions other accountants make in preparing financial accounting statements and income tax returns, and he/she will be able to assess weaknesses and discover errors in the opposing expert’s report. The forensic accountant’s suggested deposition questions may raise doubt on the credibility of the opposing expert, thus possibly resulting in an out-of-court settlement or at least obtaining valuable information to be used during trial.
litigation support, depositions, deposition questions, expert reports, expert witness.
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Perceptions of Auditor Conscientiousness and Fraud Detection | Full Article (PDF)
David J. Emerson
Abstract: Using an experiment, this study examines the impact of industry specialization and firm size on juror evaluations of blame, findings of negligence, and damage awards in auditor malpractice cases. The results indicate that jurors attribute less blame to industry specialist auditors and are less likely to find them negligent than non-industry specialists auditors. The study establishes that industry specialization increases the perceived competence of the auditor reducing the likelihood that jurors will hold it liable for an audit failure. While firm size was not found to effect evaluations of blame or negligence verdicts, it did have a significant impact on damage awards. Significantly greater damages were awarded against larger firms than against small firms in the experiment. Based on the results of the study, firms can reduce their litigation exposure by becoming industry specialist auditors. Additionally, small firms can benefit from the propensity of jurors to award less in damages.
fraud detection, personality, audit risk, conscientiousness
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Abstract: Howard Schilit, the founder and CEO of Financial Shenanigans Detection Group, observed (2010): “I read recently that the one lesson we have learned from history is that we have learned nothing from history. Yet my mantra remains that in order to find fraud, we must study the history of fraud. A common element is all the fraud I have described is that their warning signs were not hard to find; in fact, they were hard to miss.” Thus, major financial reporting frauds need to be studied for lessons learned and strategies to avoid or reduce the incidence of such frauds in the future. Examples of such frauds (many also referred to by Schilit in the above research paper) include Enron, Parmalat, Satyam, Qwest Communications International, WorldCom, AOL, Freddie Mac, Tyco, Xerox, and Lehman Brothers. Furthermore, as Sir David Tweedy, Chair of the International Accounting Standards Boards said (2007): “The scandals that we have seen in recent years are often attributed to accounting although in fact, I think the U.S. cases are corporate governance scandals involving fraud.” Thus, both financial statement red flags and non-financial red flags of corporate governance need to be studied (as also advocated by Schilit in the above research paper). Accordingly, this paper analyzes the recent 2009 scandal of Satyam, one of India’s largest information technology companies and provider of computer software and business process outsourcing. The paper has four main sections: Section I presents the main facts, Section II analyzes financial and non-financial red flags in the scandal, Section III proposes strategies to reduce fraudulent financial reporting and Section IV concludes and includes an epilogue.
financial reporting frauds, financial red flags, corporate governance
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Role of Corporate Governance Participants in Preventing and Detecting Financial Statement Fraud | Full Article (PDF)
Ben L. Kedia
Abstract: Effective corporate governance can prevent and detect financial statement fraud (FSF). This study examines the roles and responsibilities of corporate gatekeepers in preventing and detecting FSF through the establishment, implementation and enforcement of proactive and effective antifraud policies and procedures. This survey of executive MBA (EMBA) students provides insights into the antifraud best practices of boards of directors, management, internal auditors, and external auditors. Results suggest that corporate culture should create an environment that sets an appropriate tone at the top, promotes ethical behavior, reinforces antifraud conduct, and shows that the company is “doing the right thing always”.
corporate governance, financial statement fraud, antifraud policies and procedures
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Fraud Insights Derived from Stories of Auditors of Financial Institutions | Full Article (PDF)
Carol M. Jessup
Iris N. Noblet
Abstract: Auditors understand the existence of fraud risk factors, namely incentive, opportunity, and rationalization. This qualitative research study combined two techniques to analyze the existence of such factors in stories involving fraud within a unique industry setting. The methodology entailed electronically recording the reminiscence of an audit partner who told five fraud and five non-fraud financial institution stories in his own words. The stories were analyzed separately by two accountants. General content analysis was initially performed in ethnographic fashion to uncover recurring themes; direct quotations are provided to aid the reader’s contextual understanding. When this part was concluded, a more grounded approach of a formalized assessment tool applied an industry checklist to the events of each story. The results indicated the frequency of factors to be consistent with the occurrence of fraud; in all cases the fraud stories were associated with more fraud risk factors; the non-fraud stories yielded fewer risk factors. Issues of professional skepticism, importance of informal communications, and lessons urging auditors to look beyond the numbers in their attempts to “know the client” are just a few insights to emerge from this research. Several morals of the story are provided pertaining to auditors, management and perpetrators.
fraud schemes, misappropriation of assets, financial institutions, qualitative research, lessons
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An Automated Internet Analysis/Alert System for Employer Compliance with EEOC/ADA Discrimination Regulations | Full Article (PDF)
Abstract: This study develops an Alert Control methodology for a Forensic Accounting & Computing Expert System (FACES). This system is intended to assist employers in avoiding lawsuits resulting from violations of provisions of the Equal Employment Opportunity Commission (EEOC), the Americans with Disabilities Act (ADA), or any other international regulatory agency. This system produces alerts that will warn management of red flags that may reveal the existence of illegal discrimination. A web server on the World Wide Web provides a Computer Professional Offer and Affirmative Action Survey Form that collects data for a Multiple Cross-Sectional Time-Series Linear Regression Analysis model. The system determines whether there is statistically significant discrimination based on national origin, sex, race, religion, and/or disabilities. The system provides early problem detection; subsequent enforcement is automated to raise the level of compliance with the law at a lower cost than traditional systems. The system cannot determine whether the discrimination is legal or not; it only reports if a statistically significant discrimination exists. When there is an alert from the system, management can then respond by correcting the problem as soon as possible, if such a problem exists. Moreover, this system can help calculate the damages and recoveries to settle such cases expediently.
ADA, EEOC, information technology, discrimination analysis system, expert witness testimony, forensic accounting, internet surveillance audit, online survey
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Convertible Debt Issuance and Earnings Management: Evidence from Japanese Issuers | Full Article (PDF)
Abstract: The study examines whether Japanese firms manipulate the reported earnings around the time of issuance of convertible debt and the impact of earnings management on the firms’ long-run post-issue stock performance. We find that managers of the issuers engaged in income-increasing earnings management around issuance of convertible debt. We propose that earnings management serves as a likely source of investor over-optimism at the time of issuance. The empirical evidence suggests that the income-increasing accounting accruals made at the time of convertible debt issuance predict the long-run post-issue stock underperformance. In contrast to research on U.S. convertible debt issues that finds that U.S. issuers tend to manipulate earnings in the year prior to the issuance, during the issue year, and in the year after, we find that Japanese managers manipulated earnings only in the issue year. The study contributes to the large body of literature on earnings manipulation around the time of securities issuance.
convertible debt, earnings management, long run performance, and Japan
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The Obvious Fraud: A Short, Problem-Based Case Study to Highlight Inappropriate Fraud Examination Techniques | Full Article (PDF)
Jeffrey J. Quirin
Abstract: You are a member of the internal audit department at E.Z. Pickens Conglomerate, S.A. which is a large, multi-national manufacturing organization. When arriving at the office one morning, you discover that an anonymous tip has been left on the company’s fraud hotline. The tip pertains to a division manager of the company and the manager’s significant other. From a general perspective, your task is to follow-up on this tip to determine whether a fraud has truly been committed and, if so, garner a confession from the potential fraudster. More specifically, this will require you to identify, gather, and evaluate appropriate background information and also accumulate a list of questions that will be used during a face-to-face interview with the accused division manager.
Keywords: interviewing, interrogation, fraud examination, forensic accounting, internal auditing