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Volume 3: No. 2, Special Issue, 2011

JFIA

Volume 3: No. 2, Special Issue, 2011

Table of Contents:

 

Does The American Accounting Association Exist? An Example of Public Document Research | Full Article (PDF)
Wm. Dennis Huber
 
Abstract: This article looks at the American Accounting Association (AAA) from a forensic accountant’s viewpoint. One of the primary functions of a forensic accountant is to investigate, gather evidence, and reach conclusions. While forensic accounting is much more than auditing, like an auditor, forensic accountants must maintain professional skepticism and verify everything. This research uses the AAA as an object lesson to demonstrate how some simple tools can be used in a forensic accounting investigation: how and where to gather evidence, and how to draw conclusions based on the evidence gathered. 
 
Keywords: American Accounting Association; forensic accountants; forensic accounting; public records.
Note: The Executive Director and the current and next presidents were invited to respond to this article, but no response was forthcoming.

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Legal Status of the American Accounting Association | Full Article (PDF)
Wm. Dennis Huber
AAA Attorney

Factors Influencing Responsibility Attribution to the Auditors | Full Article (PDF)
Siew H. Chan
Qian Song
Lee J. Yao
 
Abstract: The purpose of this study was to identify factors influencing the jurors’ responsibility attribution to the auditors in audit failure litigation. These factors included affect, perception of the auditors’ role in fraud detection and loss sharing, and the jurors’ risk attitude. In a laboratory setting, participants read a hypothetical audit failure case, completed several questions pertaining to the independent and dependent variables, and provided their demographic information. The findings indicated positive relationships between (1) affect and responsibility attribution to the auditors, (2) affect and the auditors’ role in fraud detection and loss sharing, and (3) the auditors’ role in fraud detection and loss sharing and responsibility attribution to the auditors. In addition, the results demonstrated the mediating role of the auditors’ role in fraud detection and loss sharing in the relationship between affect and responsibility attribution. The findings also revealed the moderating role of risk attitude in the effect of affect on responsibility attribution.
 
Keywords: Audit failure; fraud; responsibility attribution; affect; auditors’ role in fraud detection and loss sharing; risk attitude.

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Auditor Independence When Management Attempts to Mislead: A Rational Economic Analysis | Full Article (PDF)
Paul Barnes
 
Abstract: We examine the economic factors affecting the auditor’s independence when management wishes to mislead investors. By means of a single person decision-theoretic model, we show that, in the absence of transaction costs, audited financial statements are unlikely to be biased. However, when transaction costs in the form of legal costs are introduced, bias is likely to occur. By means of a game-theoretic model, we also examine two areas of information asymmetry and the economic factors involved causing a ‘rogue auditor’ compared with a ‘professionally correct’ auditor to fail to act independently.
 
We also examine the implications of this both at the micro and public policy level and whether the ‘bad auditors’ will drive out the ‘good auditors.’ We find that the ‘good corporations’ have an incentive to drive out the ‘bad auditors.’ However, whilst investors have negligible information about audit quality, scandals such as Enron and Arthur Andersen are likely to occur.
 
Keywords: Auditor independence; rational economic analysis; rogue auditor; transaction costs; game-theoretic model.

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The New Victims of Identity Theft: Children | Full Article (PDF)
Richard G. Brody
 
Abstract: Identity theft remains a serious problem for many individuals. The Federal Trade Commission estimates that 9 million Americans become victims of identity theft each year. A recent disturbing trend is that many victims of this crime are children under the age of 18. Many of these younger victims are unaware that their identity has been stolen and do not learn of their fate until they start working or apply for their first loan or credit card. This article discusses the history of why children are now becoming more common victims of identity theft and offers suggestions as to what parents can do to protect their child’s identity.
 
Keywords: Identity theft; children; prevention; detection.

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The Effects of Moral Intensity on Whistleblowing Behaviors of Accounting Professionals | Full Article (PDF)
Tara Shawver
 
Abstract: Earnings management is one of the most important ethical issues facing the accounting profession. Lapses in ethical sensitivity and judgment caused many large, well known accounting scandals leaving many questioning how accountants make ethical decisions and why did not someone ‘sound an alarm’ that could have mitigated damage caused by corporate misconduct. Although accountants are facing more and more ethical dilemmas, there is little research available exploring whistleblowing behaviors of practicing accountants. This study explores Jones’ (1991) model of moral intensity to determine which factors may contribute to the identification of an ethical problem, reasons for making a moral judgment, and ultimately why one may choose to report an action of earnings management that they believe is unethical. One-hundred fifty-seven attendees at the 2007 Institute of Management Accountants (IMA) National Meeting participated in this study providing a unique perspective on whistleblowing and earnings management.
 
Keywords: Ethical decision-making; moral judgment; moral intensity; whistleblowing.

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Major Financial Reporting Frauds of the 21st Century: Corporate Governance and Risk Lessons Learned | Full Article (PDF)
Hugh Grove
Elisabetta Basilico
 
Abstract: This paper advocates a risk management strategy of using a combination of timeless corporate governance weaknesses, emerging fraud detection models, and key financial ratios. The corporate governance weaknesses occurred as red flags 81% of the time for nine companies that had major fraudulent financial reporting (FFR) in this century. The emerging fraud models and key ratios occurred 57% of the time for these FFR companies versus only 31% of the time for matched non-FFR companies. Thus, sufficient red flags or warnings should exist from this combination of corporate governance and financial factors for use by Boards of Directors, external and internal auditors, financial analysts, and government regulators.
 
Keywords: Fraud detection; corporate governance; red flag models.

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New Executives and Audit Fees | Full Article (PDF)
Clark Wheatley
Yun-Chia Yan
 
Abstract: The role of Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) in the financial reporting process has come under heightened scrutiny in recent years, such that SOX requires individual executives to certify the accuracy of their financial reports and the quality of their internal controls. Prior research shows that the appointment of new executives is associated with higher levels of earnings management, and that auditor judgments about top management are important elements in the audit planning process. We examine the association between firms hiring new CEOs or CFOs and audit fees, to determine if there is an audit fee premium associated with new CEOs (CFOs). Our results indicate that the presence of a new CEO (CFO) is associated with an audit fee premium of 10.5 (9.4) percent. This suggests that auditors are cognizant of, and price, the potential impact of new executives on financial reporting. 
 
Keywords: Audit fees; executive turnover; audit risk; fee premium.

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A Forensic Accounting Examination of Financial Reporting Fraud at the Segment Level | Full Article (PDF)
Dana Hollie
Curtis Nicholls
Shaokun Carol Yu
 
Abstract: The purpose of this study is to assess various financial reporting frauds that occurred at the segment-level. This study describes firm characteristics, the types of fraudulent activities, some of the financial effects, as well as the perpetrator of the fraud. Although one of the primary objectives of segment reporting is to increase the transparency of the firm, most of the emphasis in financial reporting is at the consolidated level. As the analysis here suggests, a more thorough examination of the segment level may uncover fraudulent transactions in a timelier manner. The data suggests that firms with significant bill and hold transactions may be more at risk for fraud at the segment level. We find that during the fraud period our sample firms appear to be performing better on average than comparable firms. This is not to say all above-average performing firms are committing fraud, but rather suggesting it could be one of many indicators that fraud may be occurring. These are possible fraud indicators that could be explored in future segment fraud research.
 
Keywords: Segment reporting; segment fraud; forensic accounting; AAER.

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Using ACL Scripts to Teach Continuous Auditing/Monitoring: The Tremeg Case | Full Article (PDF)
Jill Joseph Daigle
Ronald J. Daigle
James C. Lampe
 
Abstract: This paper presents a two-part educational case to help students understand how CAATs can be used in a continuous auditing/monitoring context to detect potential fraud and security breaches. The first part is a step-by-step tutorial with instructions and screenshots that guides students to create an ACL script in a fictional company setting that can be run on a repetitive and recurring basis for detecting terminated employees who still have access to network resources. The second part involves creation of a script that that can also be run on a repetitive and recurring basis for detecting active employees with dormant network accounts. While the second part can also be given as a step-by-step tutorial, we suggest that it be given as an assignment or take-home exam without instructions and screenshots. In both parts, students are also required to respond to ethical questions brought about by technology and use critical thinking skills.
 
Keywords: Accounting education; ACL; CAATs; continuous auditing; continuous monitoring; fraud investigation.

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An Observation of Differences in the Transparent Objectivity of Forensic Accounting Expert Witnesses | Full Article (PDF)
James A. DiGabriele
 
Abstract: This paper reports the views of forensic accountants, attorneys, and accounting academics concerning the perception of forensic accounting expert witness’ transparency. The core insights from the study are the differences in participants’ views within the role of a forensic accountant acting as a testifying expert and consultant. Forensic accountants disagreed with attorneys on all nine survey items. The results of this study could influence the future behavior of forensic accountants engaging in expert testimony by offering evidence in areas where there is a disconnect between perceptions of the forensic accountant’s role in expert testimony.
 
Keywords: Expert witness; transparency; consulting expert; dual roles; expert impartiality; court appointed.

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Dr. Sterling’s Disability Insurance Claim: A Case Study | Full Article (PDF)
Diane M. Matson
Wen Yu
 
Abstract: This is the case of Dr. Albert Sterling, a fictitious surgeon who has submitted a disability income claim to Guardian Protection Insurance Corporation, a fictitious insurance company. Students can practice forensic accounting techniques in the specific context of disability insurance, as they assume the role of an insurance investigator assessing the validity of the claim. The case is divided into two phases. Phase 1 contains the majority of the information and analysis and can stand alone. The optional Phase 2 presents additional sources of evidence relevant to the determination. The case contains background information on disability insurance and financial, personal and professional details about Dr. Sterling. Students will find several ‘red flags of fraud’ to investigate and can request and consider additional evidence in their determination. This case is designed for students in an undergraduate or graduate forensic accounting course, or in an advanced auditing course.
 
Keywords: Disability income claim; insurance investigator; suspicious spending; insufficient accumulation of wealth; depression or addiction.