- The Danger of Assessing Management Attitudes: An Examination of the Dilution Effect in Auditors’ Fraud Risk Assessments
- The Ethics of Transfer Pricing: Insights from the Fraud Triangle
- The Effects of Tax Law Information, Deterrence, and Tax Morale on “High-Opportunity” Taxpayers’ Intentions to Report Income
- Business Combination v. Asset Acquisition: KPMG’s Earnings Management and Subsequent Litigation Involving Miller Energy Resources
- The Effect of Auditor Busyness and Audit Report Signing Experience on Constraining Earnings Management: Evidence from China
- Creativity in Auditing: Theoretical and Practical Concepts to Enhance Auditors’ Recognition of and Responses to Fraud Risk
- Cybersecurity and Data Privacy: The Rising Expectations within Internal Audit
- Capital Market Penalties and Corporate Violations of the Three Pillars (Operations, Reporting, and Compliance) After COSO 2013 Internal Controls: Integrated Framework
- An Exploration of Internal Controls and Their Impact on Fraud in Protestant Churches
- Keeping an Investigative Eye on the Financial Pulse of a Company Using Data Analytics
- Prescription for Fraud: NMC Health Group
- Book Reviews
Abstract: We explore the dilution effect of management attitudes toward fraud on auditors’ fraud risk assessments. Despite auditing standards that explicitly caution auditors not to reduce fraud risk assessments when management attitudes toward fraud are low risk, we find that low-risk attitude cues cause auditors to make lower overall fraud risk assessments and subsequently reduce planned audit procedures. Our results are the first to empirically demonstrate the dilutive effect of low-risk management attitudes toward fraud, an effect that prior studies assume but do not test, and to provide evidence of the path through which auditors incorporate the dilutive information in fraud risk assessments and audit procedures. In an experiment with experienced auditors, we find that the dilution effect specifically operates through a reduced sensitivity to high-risk pressure cues rather than high-risk opportunity cues. Contrary to prior research, we find that auditors also are less likely to adjust the nature, timing, or extent of procedures in a clearly high-risk environment. We consider whether high trait professional skepticism mitigates this effect and, unfortunately, do not find evidence to suggest it does. Our results have implications for practitioners, academics, and regulators as they seek best practices for fraud risk assessment and planning of audit procedures.
Keywords: Auditing; fraudulent financial reporting; fraud risk assessment; professional skepticism; dilution; AS 2110
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L. Murphy Smith
Abstract: The semi-globalized nature of the world economy provides a variety of external motivations for multinational enterprises (MNEs) to engage in transfer price manipulation (TPM) by arbitraging regulatory differences across countries. Governmental concerns over profit shifting by MNEs through TPM have resulted in a complex network of national laws and regulations governing the pricing of cross-border related-party transactions. Despite (or perhaps due to) these regulatory differences and complexities, transfer pricing is a highly controversial area, especially in international tax law. In this article, we discuss the ethical implications of transfer pricing, focusing on abusive transfer pricing, which we define as unethical and/or illegal pricing of transactions among controlled entities. We draw insights from the fraud triangle (opportunity, motivation, and rationalization) to explain why abusive transfer pricing occurs and use this framework to provide policy recommendations to recognize and deter abusive transfer pricing.
Keywords: Transfer pricing; fraud triangle; arm’s length standard; tax planning; profit shifting; abusive transfer pricing
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Karl Bryan Menk
Abstract:This study examines the tax compliance of high-opportunity taxpayers. Using a quasi-experimental design, researchers ask high opportunity taxpayers, in this case restaurant servers, how much of their cash tips they would report before and after assigned to one of three interventions. The first intervention presents servers with the tax laws on tip reporting, the second intervention adds a tax deterrence message about penalties for underreporting, and the third intervention adds a moral appeal message to encourage tax compliance. Researchers find that learning tax law increased the reporting of cash tips by 26.4 percent. The combined effect of tax information and deterrence increased tip reporting by 33.5 percent, although not statistically different when compared to the first intervention. However, the total effect of tax information, deterrence, and moral appeal significantly increased cash tips reporting by 40.8 percent. The findings of this study can serve as a guide for policymakers in developing strategies to increase tax compliance in the United States.
Keywords: High-opportunity taxpayers; tax compliance; tax ethics; tax training; tax morale
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D. Larry Crumbley
Steven D. Grossman
Abstract: In 2009, Miller Energy Resources purchased nonoperational assets of an Alaskan company for $2.25 million in cash along with the assumption of approximately $2 million of liabilities. Miller then vastly overvalued the assets and recorded a bargain purchase gain of over $277 million. The transaction was correctly recognized as an asset acquisition, not the purchase of a separate business; however, a bargain purchase gain should not have been shown in the financial statements. KPMG encouraged Miller to change its accounting treatment to a business combination, because bargain purchase gains can be recognized in earnings in business combinations. For several reasons, including Miller’s lack of oil experience in deep water wells and lack of financing ability to make these assets operational, KPMG should have considered Miller a high-risk client and not accepted the engagement. The SEC charged Miller with fraud and penalized KPMG for its actions. A class action lawsuit against KPMG is in progress, and information about litigation support is provided in the article.
Keywords: Asset acquisition; business combination; bargain purchase gain; fraud; earnings management
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Candice T. Hux
Abstract: Prior research shows that incentives and pressures on management to meet earnings targets can lead to earnings manipulation, and that firms with earnings manipulation are more likely to commit financial statement fraud. Auditors play an important role in constraining clients’ earning manipulation, but their “busyness” throughout the year may not catch management’s deviant behavior. Nevertheless, auditors’ exposure of leading more engagements in the signatory role increases auditors’ experience, which could reduce the busyness effect. In China, the audit report is signed by two auditors who jointly manage the engagement. Using hand-collecteddata of individual auditors in China, westudy the effects of auditor busyness (total number of audit reports signed per year) and experience (total number of audit reports signed during one’s career) on constraining clients’ earnings management. We find that audit partner busyness is associated with higher earnings management, particularly among male partners and partners older than age 40. However, their experience in a signatory role attenuates this adverse effect of busyness on earnings management. Auditors serving in a manager role are less busy than partners, and their signing experience also constrains earning management. Given increased audit partner disclosures globally, these results are timely and of interest to scholars, regulators, auditors, and investors.
Keywords: Earnings management; earnings manipulation; auditor busyness;auditor experience
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Eddward T. Herron
Robert M. Cornell
Abstract: This article provides a theoretical foundation for how individual and environmental creativity enhances auditors’ recognition of and responses to fraud risk. In the absence of an element of surprise amidst increasingly standardized audit procedures, fraud has become more sophisticated and nuanced, yielding questions of adequacy of fraud discovery among auditors. Given the limitations of traditional brainstorming, we discuss theoretical and practical concepts to enhance auditors’ creative ideation and encourage creativity within the audit environment. Based upon evidence that individual and environmental creativity is related to fraud cue recognition and effective audit plan adjustments, we present foundational concepts for research and practical ideas to improve audit quality.
Keywords: Creativity; fraud; fraud detection; ideation; standardization
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Liahona R. Hepworth
Abstract: This article is a qualitative case study focusing on the changing role of the internal auditor. The purpose is to assist in better understanding the expectations and responsibilities of internal auditors. Internal auditors are an essential part of risk management, and they must provide an independent assurance on the entity’s effectiveness of governance and internal control process along with risk management. With the ever-increasing issues surrounding cybersecurity, the expectations of internal auditors and their roles and responsibilities have grown. Results show that with the growing problem of cybersecurity, the role of the internal auditor has evolved where they must have more technical knowledge about cybersecurity threats. Implications are discussed and suggestions for further research are given in this article.
Keywords: Cybersecurity; internal audit; data privacy; auditing; management auditing
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Jesus Rodolfo Jimenez-Andrade
Abstract:The Committee of Sponsoring Organizations (COSO) issued an updated version of the Internal Control-Integrated Framework in 2013. Proper documentation and a higher control environment are the major updates to the three pillars of internal controls (operational safety, reporting quality, and regulatory compliance). To dissipate some of the cost-benefit-debate on whether these enactment implementation costs are justified, this study explores the role of this guidance in moderating the relationship between market penalties and corporate failures in executing such controls. Relying on asymmetric information principles, a sample of 370 violations to these pillars between 2008 and 2018 (-5,+5 years) documents the findings. Results support a positive moderation effect of this new guidance in the three-day (and not eight-day) window after the violation that attenuates the market penalties in operational safety and reporting quality controls failures (absent in the regulatory compliance pillar). Consequently, the costs of implementing and executing such a framework are justified with 33 percent (average) lower stock returns penalties compared to the previous enactment. Compelling supplementary analysis enriches the quality of the findings.
Keywords: Corporate violations; market penalties; internal control pillars
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Abstract: This qualitative study ascertains the current practices of internal control systems of Protestant churches and examines their system’s effectiveness when compared with anti-fraud activities recommended by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The participants for this study were drawn from Protestant churches in the Central Louisiana (CENLA) area. The researcher used convenience/purposeful sampling to select five small to medium-size churches and interviewed each church financial administrator. Also, the researcher created 63 interview questions based on the five elements of the COSO model and analyzed and organized responses concerning a number of variables. Finally, the researcher offered recommendations to improve the effectiveness of the churches’ internal controls. When suitable internal controls are present, churches have a greater opportunity of efficiently safeguarding their assets and achieving their missions.
Keywords: Fraud; internal controls; churches; COSO
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Christie L. Comunale
David C. Hayes
James H. Irving
Abstract: Arecent survey of accounting professionals indicated that 78 percent of the 458 respondents analyze financial ratios and financial information in their current or previous accounting role(s). Survey respondents also noted that their employers continue to make significant investments in data analytics training, tools, and technologies, and that data analysis skills are an expected competency in accounting practice at all experience levels and specializations. Given the growing importance of data analytics in the accounting profession, and in an effort to better prepare students for their future careers, this article provides an educational case that introduces students to data analytic tools and techniques using financial statement information. Guided by instructional videos and using real public company data as well as an assortment of data visualization graphs, students apply four data analytic tools—ratio analysis, common-size analysis, horizontal analysis, and related accounts analysis—to identify and investigate unusual and unexpected changes (financial pulses) in a company’s financial statements. Results from the case show that students in both undergraduate and graduate accounting courses significantly increased their proficiency in applying the data analytic tools and techniques presented.
Keywords: Data analytics; financial statement analysis; AACSB Accreditation Standard A5; case study
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Abstract: NMC, a medical service company listed on the London Stock Exchange, grew to become one of the largest healthcare providers in the Middle East. A short seller raised suspicions of NMC regarding hidden assets, improper asset valuation, and insufficient disclosure of related party transactions. This case study helps students understand the relationship between governance quality and fraud in the context of a company headquartered in a developing country that is subject to UK listing status. Students learn how auditors and forensic accountants incorporate procedures for fraud risk assessments and use financial statements to flag suspicious transactions to identify accounts affected by fraud schemes.
Keywords: Financial statement fraud; governance; forensic accounting; auditing; UAE
2023 LSU Annual Fraud & Forensic Accounting Conference
LSU is having their two-day Fraud & Forensic Accounting Conference on July 25–26, 2023. Please mark your calendars! https://www.lsu.edu/business/accounting/newsevents/ffac/index.php