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Volume 9: Issue 1, January–June, 2017
 
Table of Contents

Review of Recent Literature on Pressure on CFOs to Manipulate Financial Reports | Full Article (PDF)
Carol C. Bishop
F. Todd DeZoort
Dana R. Hermanson
 
Abstract: CFOs face a variety of pressures that can cause them to manipulate financial results. This article reviews selected recent studies to provide insight into why some CFOs misreport financial results, including what specific pressures influence their decision-making. These studies suggest that a CFO may misreport financial results and participate in accounting fraud due to various internal and external pressures, including: 1) pressure from the CEO; 2) pressure to hit earnings benchmarks; 3) pressure to retain his/her job; 4) pressure to maintain the stock price; and 5) pressure to cover financial downturns. We also provide a number of questions that external and internal auditors should consider to reveal undue pressure on the CFO.
 
Keywords: Chief Financial Officer; pressure; manipulation; fraudulent financial reporting

Wills, Asset Protection Trusts, and Financial Crime | Full Article (PDF)
Nicole Forbes Stowell
Debra Sinclair
Erik Johanson, JD
Carl Pacini
Grover Kearns
 
Abstract: According to the Internal Revenue Service (IRS), trust and estate matters are one of the highest growth areas among CPA firms. Accompanying this growth has been a proliferation of abusive estate planning, such as will fraud, asset protection trust schemes to reduce or evade income taxes, concealment of assets from creditors and divorcing spouses, and participation in money laundering. This article highlights and analyzes wealth transfer and preservation fraud and trust schemes, scrutinizes both offshore and domestic asset protection trusts, provides red flags of fraud to assist forensic accountants and focuses on the role forensic accountants can play in the prevention, detection, and prosecution of wealth transfer and preservation fraud schemes.
 
Keywords: Asset protection trust; estate planning fraud; will fraud; undue influence; duress

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Growth Firms’ Real Earnings Management Practices | Full Article (PDF)
Sandeep Nabar
Xuehu (Jason) Song
 
Abstract: This study examines the real earnings management practices of growth firms over the period 1989 through 2014. Prior research indicates that growth firms are more likely to use accruals earnings management than non-growth firms. By contrast, we predict that growth firms are reluctant to use real earnings management, because managers are concerned about real earnings management’s negative effects on firms’ long-run growth. Our evidence supports our prediction, and is consistent with Cohen, Dey, and Lys’s (2008) conclusion that accrual earnings management and real earnings management may be substitutes. Our result is also consistent with Payne and Thomas’s (2011) assertion that growth firms may not manage earnings more than non-growth firms.
 
Keywords: Growth firms; earnings management; real earnings management

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Can Pre-employment Tests Identify White-collar Criminals and Reduce Fraud Risk in Your Organization? | Full Article (PDF)
Connie O’Brien
 
Abstract: A large amount of research has been conducted on the use of personality tests and integrity tests, but little research has been done to understand the effectiveness of these tests on identifying indicator of white-collar crime. This study empirically examines the efficacy of pre-employment tests to elicit a predictive profile of white-collar crime by testing the relationship between deviant behaviors, personality traits, and integrity. The data for this study were obtained through questionnaires and pre-employment tests administered to convicted white-collar inmates (N=20) within the Federal prison system. Results were compared to the general population statistics as provided by the pre-employment test providers. In line with the literature, positive relationships were found between low integrity and deviant behaviors. In this study, integrity tests failed to identifying individuals with predictive profiles of deviant behaviors at a rate of forty-five percent. This study contributes to the existing literature on personality, integrity, and deviant behaviors by providing insights into the nature of the relationships as they relate to white-collar crime.
 
Keywords: Integrity tests; pre-employment tests; personality tests; fraud risk; prison study; and Five-Factor Model

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An Investigation of the Factors that Impact the Perceived Value of Forensic Accounting Certifications| Full Article (PDF)
Madeline Ann Domino
Gabrielle Giordano
Mariah Webinger
 
Abstract: The strong demand for forensic accountants has resulted in a proliferation of forensic certifications. Having a forensic credential may be viewed as a relevant and distinguishing factor to practicing forensic accountants. The aim of this research is to evaluate the perceived value of forensic accounting certifications. Sixteen commonly held forensic certifications were identified and analyzed based upon relevant characteristics. The opinions of experts were solicited and used to evaluate the importance of nine characteristics resulting in a ranking of the perceived value of each forensic certification. Results show three forensic certifications are perceived to be most valuable: Certified Financial Forensics (CFF), Certified Forensic Accountant (CrFAC), and Accredited Business Valuation (ABV). These findings have implications to practitioners and academics alike in the training, marketing, and hiring of forensic accountants, as well as to accounting professionals who desire to expand their career prospects and enhance their earning power. These findings are also helpful to academics who design forensic education programs and counsel students.
 
Keywords: Forensic accounting; certifications; CPAs; accountants

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The Impact of Intra-firm Transfer Pricing on Firm Value, Taxes, and Earnings: International Financial and Tax Fraud? | Full Article (PDF)
Kingsley O. Olibe
D. Larry Crumbley
Dann G. Fisher
 
Abstract: In this paper, we investigate whether investors’ consider intra-firm transfers when assessing firm value. We find, as predicted, that international intra-firm transfers exhibit incremental association with firm value. The findings imply that significant wealth gains accrue to shareholders of firms that engage in cross-border, intra-firm transfers (e.g., they are rewarded with high equity value). We also study the impact of intra-company transfers on U.S. and foreign pretax earnings and the resulting tax cost. We find that global tax incentives influence U.S. and foreign income reporting, with firms in our sample shifting taxable income away from the U.S. on average. The evidence supports the view that greater transfer-pricing management, on average, lowers U.S. reported profits and taxes and overall global taxes for our sample firms, and the decrease in tax costs is reflected in stock price as investors price assets on after tax basis. Because profits located in foreign countries and designated as “permanently reinvested” are not subject to U.S. income tax levy until repatriated, incentives to shift income away from the U.S.  appear to be greater than corresponding incentives to shift income to the U.S. Our findings are consistent with claims that multinational transfer pricing practices undermine U.S. income tax revenues (e.g., part of the tax gap). Estimation results show that a one percent increase in intra-company, inter-geographic area transfers leads to approximately 0.38 percent decrease in U.S. pretax income.
 
Keywords: Intra-company transfers; transfer pricing; earnings management; taxes; profit margins; share price.

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Risk Assessment Perspectives for Forensic Accountants and Auditors Based on Some International Evidence | Full Article (PDF)
Hugh Grove
Mac Clouse
Adam Greiner
 
Abstract: Fraudulent financial reporting has been an issue since the advent of financial statements. Fraud risk management helps management and Boards of Directors identify misconduct, gain insight into enhanced internal fraud assessments, improve business operations, and achieve quality reporting. We develop and apply risk assessment screening guidelines using common statistical analyses and follow-up procedures based on the work of financial analysts, forensic accountants, and short sellers. In addition, we apply an expanded set of risk focus measures including profitability and liquidity ratios, utilizing metrics in the balance sheet, income statement, and statement of cash flows. Our screening guidelines and follow-up procedures are applied to nineteen Chinese companies that had significant cases of fraud and eight of the most significant 21st Century company frauds. We show that the eleven screening red flags analyzed over fifty-two reporting years from 2006–2014 yielded fraud prediction rates from fifty percent to ninety percent. Our analyses support the notion that fraud is an international concern. We believe our analyses may assist audit teams’ fraud brainstorming discussions as part of their consideration of fraud according to Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit.
 
Keywords: Fraudulent financial reporting; risk assessment; risk management; risk focus measures

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Application of Forensic Tools to Detect Fraud: The Case of Toshiba | Full Article (PDF)
Anupam Mehta
Ganga Bhavani
 
Abstract: The primary goal of this study is to detect fraud in the financial statements of Toshiba Corporation using the Beneish Model, the Altman Z-Score, and Benford’s Law. For eight years, Toshiba’s financial statement included unchecked fraud, raising the question of auditor competency. In addition to the auditors, other Toshiba stakeholders could have detected the fraud with the help of forensic accounting fraud-detection tools. This case study tests the efficacy of three selected forensic tools to detect Toshiba’s fraudulent financial statements (FFS). The results show that the Beneish Model was not able to detect the fraud, but the Altman Z-Score and Benford’s Law clearly indicated that the company’s financial statements contained misstatements. Although the Beneish Model is very popular for predicting FFS, the results of the present study do not indicate its efficacy. In addition, the present study’s investigation of forensic tools highlights the importance of selecting the best tool(s) to detect financial misstatements. The study’s discussion of and suggestions regarding the efficacy and applicability of the tested tools provides useful direction to investors, financial auditors and forensic auditors when making policy decisions.
 
Keywords: Fraudulent financial statements; forensic tools; financial misstatements; probabilistic model; fraud detection and examination

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Crazy Accounting at Crazy Eddie, Inc. | Full Article (PDF)
Norbert Tschakert
 
Abstract: This case describes a well-known fraud at a consumer electronics chain in the tri-state New York area in the 1980s. Crazy Eddie went public in 1984 and a long-lasting financial statement fraud was not discovered until 1987. Due to its notoriousness and multifacetedness, the case is engaging and provides many learning opportunities for accounting students.
 
The case has been developed for auditing and forensic accounting classes, but it also can be used in financial statement analysis, ethics and capstone classes. The case exposes students to several important concepts, including: 1) financial statement fraud; 2) fraud motivation triangle; 3) fraud element triangle; 4) red flags; 5) fraud schemes; 6) audit risk, independence, professional skepticism and audit failure; and 7) the importance of internal control.
 
The case provides students with an opportunity to participate in active learning exercises requiring independent study and the use of Microsoft Excel to perform horizontal, vertical, and ratio analysis. Students were genuinely engaged in the learning process and recommended the case as a learning assignment for subsequent classes.
 
Keywords: Crazy Eddie; financial statement fraud; internal control; forensic accounting; auditing

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Using the Classroom to Assist Students to Find their Fit in the Forensic Accounting Profession | Full Article (PDF)
J L Souza
 
Abstract: The field of forensic accounting is fast-growing, leading to an increased need for recent accounting graduates to develop the skills required to succeed National Institute of Justice, 2007. Many students understand the need for strong technical development to become forensic professionals. However, those same accounting and business students do not fully appreciate the personality traits and non-technical skills that will help ensure success. While many accounting faculty may work to inform students of these keys to success and assist in career selection or exploration, this misunderstanding can still lead to students opting out of a career in forensic accounting despite being well-suited for it or pursuing a career that will not fit them well. The purpose of this paper is to demonstrate how using games and competition may assist students in finding the appropriate fit for themselves. This increases the likelihood of career success and requisite skill development while opening students to career choices not previously considered.
 
Keywords: Interactive learning; course development; accounting curriculum Back to Top

Books Reviews
BookHealth Care Fraud and Abuse Compliance Manual
Wolters Kluwers
2700 Lake Cook Road
Riverwoods, IL 60015

This manual provides a comprehensive overview of legislative and regulatory restrictions that affect the way health care providers conduct business and how they structure relationships among themselves. This book helps providers determine the boundaries of permissible conduct under the numerous statutes and regulations that relate to health care fraud and abuse at both the federal and state levels.
 
Specific coverage includes the statutory language in the Medicare/Medicaid civil money penalties and false claims statutes, the Medicare/Medicaid anti-kickback statute, the Stark “self-referral” law, and the numerous safe harbors and exceptions contained with these prohibitions.
 
This updated volume includes:
  • Updated nationwide health care fraud and abuse enforcement statistics
  • OIG Work Plan for FY 12 (Medicaid projects)
  • Enforcement actions involving billing for services of unlicensed personnel
  • Enforcement actions involving billing without proper documentation
  • Enforcement actions involving illegal inducements to beneficiaries
  • Hospital liability for submission of false cost reports
  • Cases involving maximum hospital liability for EMTALA violations
  • Criminal false claims liability for unsolicited telemarketing by a DME supplier
  • Managed care provider liability for cherry-picking, retaining overpayments, and other practices
  • Hospice liability for providing services to ineligible patients
  • Enforcement actions involving federal research grant fraud
  • Criminal kickback liability for sham consulting arrangements
  • Self-referral liability for office lease agreements and independent contractor relationships inconsistent with fair market value or not memorialized in writing
  • Updated Medicaid Fraud Control Unit performance standards (MFCU)
  • False claims laws of Massachusetts, Montana, and Nevada
  • OIG evaluation of Massachusetts, Montana, and Nevada false claims laws

BookGuide to Intangible Asset Valuation
R.F. Reilly, R.P. Schweihs, 2014, 745 pp.
AICPA
220 Leigh Farm Road
Durham, NC 27707

The valuation of intangible assets can be a financial maze. This comprehensive publication starts with principles, moves through processes, and examines each of the generally accepted valuation approaches. This book reviews the research and due diligence necessary for you to effectively estimate a defined value, economic damages measure, or intercompany transfer price for specific intangible asset types.
 
This book will help you to:
  1. Identifying intangible assets and intellectual property
  2. Select and apply valuation approaches, method, and procedures
  3. Select and apply economic damages analysis methods and techniques
  4. Select and apply the allowable intercompany transfer price methods
  5. Document the analysis and conclusion in a well-supported valuation, damages, or transfer price report
     
The highly experienced authors explain the disciplined process of identifying intangible assets and provide an analytical framework within which to value those assets. Through illustrative examples of quantitative analysis and qualitative assessment, this book makes abstract concepts come to life to help you deliver defensible and accurate valuation, economic damages, and transfer price analyses. This comprehensive book is an essential reference source for intellectual property practitioners and professors involved in litigation, taxation, financing, financial accounting, bankruptcy, and licensing.

Book
House of Nails: A Memoir of Life on the Edge
Lenny Dykstra, 2016, 340 pp.
Harper Collins Publisher
195 Broadway
New York, NY 10007
 
If you like baseball or Lenny Dykstra, you will appreciate this book. He was the centerfielder for the legendary 1980 Mets and the 1990 Phillies. You will learn about a $17.5 million mansion, a real estate broker fraud, car wash king, Chapter 11 bankruptcy, conflict of interest of trustees and lawyers, possible lawsuit against a trustee, and federal agents handcuffing and arresting him.
 
He was “thrown in a jail cell and locked up for six straight days.” In the Los Angeles County Men’s Central Jail, he says he was “placed in solitary confinement for leasing a car.” He “was the victim of a savage beating by prison guards that knocked out his front teeth.”
 
If a professional baseball player gets the following pitches called balls, their batting average are as follows:
After a 0 balls-1 strike count, .221 average.
After a 1-0 count, .268 average.
After a 2-0 count, .281 average.
After a 3-0 count, .282 average.

So how do you get umpire to call “close” pitches balls?
 
Lenny hired a private detective agency, paying $500,000 to have PIs follow umpires around to uncover dirt on them. When he came up to the plate, he would say “sports betting is tough, man. Especially for umps.” His strike zone became smaller—or no strike zone.
 
Do you get it? Umpires are human. “Yeah, it’s all about leverage and fear. Fear does a lot to a man. Fear of losing his job. Fear of being turned in. Fear of being exposed,” Lenny says. This same concept can apply to strong internal controls and prosecuting fraudsters.
 
Is this fraud? Baseball players steal bases, throw spitballs, cork and tar bats, and steal signals. Football teams deflate footballs (e.g., the New England Patriots).
 
In March 2012, Los Angeles Superior Court Judge Cynthia Ulfig sentenced Lenny to three years in prison after she refused to allow him to withdraw his plea of no contest to grand theft auto and providing fraudulent financial information and claiming credits through a phony business.
 
A good read.


Events
The 2017 LSU Annual Fraud and Forensic Accounting Conference will be held July 11–12, 2017, in Baton Rouge, Louisiana, at the Crowne Plaza Hotel. Some interesting speakers will be Jeff Aucoin, Allen Brown, Teresa Durham, Toby Grove, Roger Harris, David Hoffman, Tim Louwers, Woody Overton, Steven Patterson, and others.
 
The next NACVA and the CTI’s Annual Consultants’ Conference will be held June 7–10, 2017, in Chicago, Illinois, at the Swissôtel Chicago.