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Volume 9: Issue 3, Special Issue, 2017

Table of Contents

Testing for Impression Management in Creative Accounting: A Case of the Automobile Industry  | Full Article (PDF)
Stuart Robinson
Mark Lokanan

Abstract: This article seeks to determine whether managers in the auto industry were selective in the presentation of annual reports, by misreporting (committing fraud) financial results in a self-interested and self-serving manner.  The paper uses data from the annual reports of eight car manufacturing companies for the years 2005-2010.  Two impression management techniques were chosen: selectivity and benchmarking.  We examine 1) the determinants of pro-forma and GAAP figures in relations to profitability, and 2) managers’ decisions to use internal and external benchmarks in times of increasing/decreasing profitability.  The results are inconsistent with previous findings and suggest that there is little evidence to indicate that selectivity and strategic benchmarking were employed on an industry wide basis.

Keywords: Corporate scandals; corporate misreporting; fraud; GAAP; impression management; disclosure; Selectivity; Benchmarking

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The Use of Personality Traits to Predict Propensity to Commit Fraud | Full Article (PDF)
George Gonzalez
Lori Kopp

Abstract: A major contributor to fraud is personality (Duffield and Grabosky 2001).  Personality influences attitude/rationalization, which is the least understood aspect of the Fraud Triangle.  This study explores four well-established personality measures (honesty, Machiavellianism, narcissism, and conscientiousness) in their ability to predict the propensity to commit fraud.  Through a controlled laboratory experiment with performance-contingent incentives, we measure participants’ personality traits and observe their fraudulent behavior.  We find the relative strengths of four main personality traits’ ability to predict fraud propensity to be, in descending order, honesty, Machiavellianism, narcissism, and conscientiousness, with the first two significant and narcissism marginally significant.  Our results indicate that the sincerity and greed avoidance facets of honesty also are individually significant predictors of fraud.  We also rank, in terms of fraud predicting ability, three major rationalization categories on which participants base their decisions to commit fraud, and find that the most economically rational participants show the highest propensity to commit fraud.  Our findings contribute to a greater understanding of the attitude/rationalization leg of the fraud triangle framework and how personality measures can be used to enhance fraud deterrence and prevention, and extend our understanding of counterproductive work behavior (CWB).

Keywords: Fraud triangle; honesty; Machiavellianism; personality

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Identifying Red Flags in an Accounts Payable Environment: The Importance of Controls in the Detection of Fraudulent Activity | Full Article (PDF)
Liz Mulig
Cheryl L. Prachyl

Abstract:The accounts payable system at a company is important in handling payments to suppliers, consultants, and others to whom the company owes money for goods and services bought on credit.  Accounts payable is also a system that can be at potential risk for fraud if proper internal controls are not in place and properly enforced.  This paper describes the accounts payable system controls that should be in place to protect the integrity of accounts payable data and to assure that a company does not approve and disburse funds on fraudulent requests for payment.  Emphasis is placed on the importance of implementing and following these accounts payable controls and of indicators (red flags) that something is amiss.  First, we discuss the development of regulatory requirements regarding internal controls.  We then describe the accounts payable system and the importance of implementing effective internal controls within this system.  Next we discuss important controls that should be used and red flags that might indicate that the controls are not working effectively.  These controls are broken into groups: vendor records controls, access controls, authorization and processing controls, disbursement controls, and other miscellaneous oversight controls.  Types of controls and red flags that might indicate problems are identified for each group of control type.

Keywords:Fraud detection; red flags; fraud risk factors; accounts payable controls

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"Reasonable Degree of Certainty" During Expert Testimony | Full Article (PDF)
Susan W. Lanham
Keri E. Lucas

Abstract: In many U.S. jurisdictions, forensic accountants who testify as expert witnesses are asked during deposition or trial if their opinions were formulated to a reasonable degree of accounting or economic certainty.  The reasonable degree of certainty standard also is used on expert witnesses testifying in other disciplines, such as medical, scientific, and psychological.  The determination of whether an expert’s testimony is reasonably certain is a requirement for admissibility of that testimony, and although the standard is used commonly during litigation, a review of the literature and case law provides no consistent definition of the phrase.  This study addresses how judges and justices across the U.S. define and regard the phrase reasonable degree of certainty as it relates to expert testimony.  Results suggest agreement regarding the importance of the phrase and its use by expert witnesses, but also suggest inconsistencies concerning the definition or meaning of the phrase.  Most participants agree that an expert’s opinions must be reasonably certain to be admissible, and that the phrase lacks a consistent definition.  A gap exists in the literature regarding the definition and importance of the phrase reasonable degree of certainty, resulting in broad variations in the way the phrase is interpreted and used in the legal profession.

Keywords: Reasonable certainty; expert testimony; admissibility

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Cutting through the Numbers: How Data Mining Was Used to Uncover Multiple Frauds at a Hospital System Medical Center | Full Article (PDF)
Bryan Cataldi
Bryan Callahan
James F. Sander
Anne S. Kelly

Abstract: This case analysis examines collusion over a long period between two key individuals at a small medical center, which was part of a large hospital system.  Through a series of small frauds, the individuals managed to misappropriate over $300,000 in known assets.  Ultimately, admission-seeking interviews determined that the total fraud accumulated to over $1,000,000.  This case study shows how an agreed-upon procedure engagement did not uncover the frauds.  In contrast, forensic accounting—specifically data mining and data analytics—provided the necessary tools to expose the fraudulent activities.

Keywords: Data mining; hospital medical center; agreed-upon procedure engagement; data analytics

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Conducting Interviews: An Auditor's Guide to Getting the Truth | Full Article (PDF)
Donald Berecz
Eddie Metrejean
David Thompson

Abstract: Auditors need answers to many questions that arise during the performance of an audit.  Simple interviewing techniques are almost mandatory for every auditor’s toolbox.  Employees who are interviewed are often nervous simply because they are being interviewed by an auditor.  When conducting an interview, the auditors should observe the employee’s behavior and should be aware of subtle changes to those behaviors or the subject’s voice.  These changes could be an indication that the subject is not being honest or is hiding something.  Once an auditor has narrowed down the “suspect” list, the objective naturally becomes getting the truth or a confession from the subject.  This article gives the auditor some tools, including a non-confrontational interrogation method, to use when conducting interviews for routine audit questions all the way to more complex interrogations.

Keywords: Interviewing skills; interrogation; non-confrontational method

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Sensitivity and Specificity in Application of Benford's Law to Explore for Potential Fraud | Full Article (PDF)
William R. Fairweather

Abstract: Financial databases are routinely analyzed for fraud by means of summary statistics.  The behavior of these statistics must be well characterized under conditions that are likely to be encountered in practice.  One increasingly common procedure is to evaluate the leading digit or the first two digits of a set of transactions to determine whether they conform to Benford’s Law.  Using ROC curves, we show quantitatively how well four common statistics perform, under seven patterns of fraud and for six conditions of database size and proportion fraudulent.

Keywords: ROC curves; Benford’s Law; sensitivity; specificity; false positive rate (FPR); computer simulation

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Will Professional Accountants Whistleblow on Organizational Fraud? | Full Article (PDF)
Lynn H. Clements
Tara J. Shawver

Abstract: This study explores the whistleblowing judgments and intentions of professional accountants and the factors that contribute to those judgments and intentions.  Specifically, we explore the effects of perceived overall harm and perceived societal pressure on the moral judgment (“should the whistle be blown?”) and moral intention (“would the whistle be blown?”) in certain situations.  Three organizational fraud scenarios were presented to conference attendees who were asked whether the actions should and would result in whistleblowing, and why.  There were 165 usable responses.  Our findings are significant in two ways.  First, our findings lend support to prior studies which report that the whistle should be blown because of perceived overall harm and perceived societal pressure.  Second, and most importantly, the surveyed accountants suggest the whistle would be blown by their peers because of perceived societal pressure.  If this action is true, and we hope it is, this trend will result in a stronger willingness to report fraud, which could be a major paradigm shift. 

Keywords: Fraud; accounting decisions; earnings management; ethical evaluation; harm and pressure; moral intensity

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A Teaching Case Using the Elements of the Foreign Corrupt Practices Act (FCPA) | Full Article (PDF)
Constance M. Lehmann

Abstract: This case study is based on a Foreign Corrupt Practices Act (FCPA) enforcement action filed by the SEC in 2014.  Coupled with either the web research assignment included here as an Appendix, or to supplement discussion of the FCPA, this case allows students to apply knowledge gained to a situation involving potential violations.  The case has the following learning objectives: 1) Identify and recognize potential violations of the FCPA in the described business activities, 2) Discuss potential liabilities and penalties for any violations identified, 3) Develop recommendations for control improvements to improve oversight of the international operations of the company, and 4) Participate in the class discussion of the case.  This case was used by two different instructors during four semesters in a graduate-level fraud examination course and for one semester in a graduate-level accounting information systems (AIS) course.  Feedback collected from the fall 2016 and spring 2017 semesters in these courses suggested the students enjoyed the case and felt the case helped them identify violations of the FCPA/ABAC and recognize the challenges associated with working in countries that lack a strong anti-bribery culture.

Keywords: Foreign Corrupt Practices Act (FCPA); case study; anti-bribery/anti-corruption (ABAC) acts; international operations

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AIG and General Re: Helping One Another or Reinsurance Fraud | Full Article (PDF)
Susan Hass
Priscilla Burnaby
Mindy Nitkin

Abstract: This fraud and ethics case followsthe events surrounding transactions between American International Group (AIG) and General Re Corporation (Gen Re) from 2000 to 2004; the trials of the key players in 2008 and 2009; the court overturning the defendants’ fraud convictions in 2011; and the deferred prosecution agreement in 2012, which allowed five of the defendants to remain free with only payment of a fine and the equivalent of one year probation.  The events are broken into two cases.  Case A provides an overview of the events, introduces the key players, defines reinsurance and reviews the facts concerning the transactions between AIG and General Re.  Case B covers the initial court’s findings, the federal appeals court throwing out the criminal convictions for five of the defendants and the subsequent signing of a deferred prosecution agreement that allowed the defendants to avoid a retrial and possible prison time.

Keywords: Fraud; reinsurance; loss portfolio transfer; deferred prosecution agreement

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Book Review
BookWarnings:  Finding Cassandras to Stop Catastrophes
Richard A. Clarke, 2017, 405 pp.
Harper Collins Publishers
195 Broadway
New York, NY 10007
Cassandra had the ability to see impending doom for Troy, but no one listened.  This author covers eight warnings that were not heeded (e.g., Madoff’s Ponzi scheme and the 2008 recession).  He develops a Cassandra Coefficient involving four components: 1) the warning, the threat, or risk in question; 2) the decision makers or audience who must react; 3) the predictor or possible Cassandra; and 4) the critics who disparage or reject the warnings.

Clarke then discusses seven current warnings including the computer scientist/artificial intelligence (AI) and the engineer/the Internet of everything.  With respect to AI, he worries about weak AI that can be fallible.  He gives the example of the May 6, 2010, stock market meltdown with the autonomous algorithm of high-frequency traders. 

A 2013 study suggests that AI will depose 140 million full-time knowledge workers worldwide or forty-seven percent of jobs within twenty years.  Examples include stockbrokers, medical diagnosticians, IT support staff, travel agents, lawyers, doctors, and investment managers.  He asks: What will society look like when the labor force can no longer earn?

The Internet of Everything involves cyber-attacks against any digital control system software (e.g., Russia’s Ukrainian blackout retaliation).  Joe Weiss explains that one can remotely hack the variable frequency drives of large, rotating equipment in power plants, refineries, and dams.  Clarke does not even mention North Korea’s electromagnetic pulse (EMP) bomb that would stop all cars, computers, etc.  The Internet is connected to almost everything—just consider hospitals.  He does not even mention the deadly electromagnetic pulse bomb which stops computers, cars machines, and more.

2018 AAA Forensic Accounting Research Conference
The 2018 AAA Forensic Accounting Research Conference will be held March 2–3, 2018 at Wyndham Dallas Suites, Park Central Dallas.
More information:

2018 NACVA and the CTI’s Annual Consultants’ Conference
The 2018 NACVA and the CTI’s Annual Consultants’ Conference will be held June 20–22, 2018 at Caesars Palace, Las Vegas, Nevada.
More information:

2018 LSU Annual Fraud and Forensic Accounting Conference
The LSU Fraud and Forensic Accounting Conference will be held July 19–20, 2018, in Baton Rouge, Louisiana, at the Crowne Plaza Hotel.  Registration for the 2018 Conference is not open yet.
More information: