Volume 15: Issue 3, Special Issue

Table of Contents

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Judicial Interpretations of Expert Testimony from Financial Expert Witnesses and the Daubert Qualifications Criteria: A Directed Content Analysis of Judicial Statements | Full Article (PDF)
Ronnie Abukhalaf
James A. DiGabriele

Abstract: This qualitative study explores judicial perceptions of the qualifications of financial expert witnesses when they exclude the testimony of those witnesses. The research examines how judges evaluate the qualifications guidelines expressed through the Daubert standard and the Federal Rules of Evidence No. 702. Twenty-three cases from 2000 to 2021 were selected. Directed content analysis of 112 segments was conducted using MAXQDA. An initial coding frame was developed from Rule 702, the Daubert standard, and the literature. The frame was refined iteratively through the coding process. Four themes emerged. First, judges interpreted failure to possess or utilize specialized knowledge in three ways. Experts (a) failed to possess industry-relevant subject knowledge associated with an organization; (b) failed to possess technical knowledge associated with disciplinary models, methods, regulations, and procedures; or (c) engaged in a behavior called “parroting” that was indicative of (a) and/or (b). Second, experience was a multifaceted criterion involving a wide range of experience types, and judges often associated it with a lack of subject knowledge and training/education. The third theme of reliability and the fourth theme of relevancy, although treated separately from qualifications in the language of Daubert, were occasionally associated with a lack of qualifications.

Keywords: Financial expert witness; qualifications; Daubert exclusion; Rule 702; judicial interpretation; judicial perceptions; CPA; damage expert; auditor

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Wirecard and Potential U.S. Audit Issues | Full Article (PDF)
Benoit N. Boyer
Danny A. Pannese
Paul N. Iannone

Abstract: The German company Wirecard saga is yet to be fully written. Similar in scope to Enron and others in the early 2000’s, many lessons will be learned for company executives, regulators, and especially auditors worldwide. For U.S. companies and auditors, the PCAOB (Public Company Accounting Oversight Board) has promulgated comprehensive audit standards and procedures designed for public companies, but these standards also could have ancillary application to private companies for auditors when planning the audit engagement. The red flags and audit issues that manifested in the Wirecard events will provide the financial and academic communities with robust case studies as well as prudent warning signals that can potentially lead to material financial statement irregularities. The authors chronicle Wirecard’s financial story based upon public news reporting and identify and address certain PCAOB requirements and procedures when observable issues or “red flags” become readily apparent, assuming Wirecard was a U.S. company. This article does not address international audit requirements or the legal ramifications and remedies surrounding Wirecard’s legal case. However, the article should be of interest to financial executives and directors of public companies that have primary responsibility for company’s financial statements.

Keywords: Wirecard; Public Accounting Oversight Board; PCAOB; financial statement audit; audit issues; Financial Times; FT.com; fraud

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President Biden’s Executive Order on Cryptocurrencies and the Future of FinTech | Full Article (PDF)
Dimitrios Koutmos

Abstract: On March 9, 2022, President Biden signed Executive Order 14067, titled "Ensuring Responsible Development of Digital Assets." This executive order comes at a unique point in time in U.S. and world affairs. First, we are at the later stages of the SARS-CoV-2 (COVID-19) pandemic, which has caused incalculable worldwide health and economic impairment. Second, we are presently experiencing a high degree of asset price volatility across financial markets. This volatility may be a sign of a possible inflection point in global market indices and a precursor to at least short- and medium-term recessionary conditions in our economy. Third, there is an active effort among central banks internationally to develop and promote so-called central bank digital currencies (CBDCs). In the private sector, and against this backdrop, we are observing a rise in investments seeking to develop cryptocurrencies and mining technologies, as well as fintech firms utilizing some aspect of blockchain technology. The fundamental question this article addresses is: what does the future hold for innovation in cryptocurrencies and fintech at large following Biden's executive order? To examine this multifaceted question, this article (a) explores recent trends in cryptocurrency markets and fintech investment; (b) examines the purported motivation, language, and substance of the executive order; (c) given (a) and (b), recommends probable directions which cryptocurrency and fintech innovation can take in the future, in terms of their societal relevance, and evaluates ensuing research which may begin emerging in the fields of accounting, engineering, financial economics and banking, law, and public policy at large.

Keywords: Cryptocurrency; FinTech; digital assets; Central Bank Digital Currencies; Biden’s Executive Order

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Kraft Heinz and the $15.4 Billion Impairment Charge: Subsequent Lawsuits | Full Article (PDF)
Amanda M. Grossman
Steven D. Grossman
D. Larry Crumbley

Abstract: On July 2, 2015, Kraft Foods completed a merger with H. J. Heinz, with the hope that the merger would lead to cost-cutting synergies due to economies of scale and the implementation of zero-based budgeting. Additionally, the newly formed Kraft Heinz Company hoped to capitalize on increased international sales revenue. The company’s stock price initially increased from around $70 to $90 per share, but on February 21, 2019, Kraft Heinz Company disclosed the issuance of an SEC subpoena related to misconduct in the procurement area. Concurrently, Kraft Heinz grossly overvalued its intangible assets after the merger, and the company was obligated to record a $15.4 billion impairment charge. As may be expected from the confluence of these events, Kraft Heinz Company soon faced federal securities fraud lawsuits. This study reviews the declining financial position of Kraft Heinz upon revelation of potentially fraudulent activities and explains the various accounting irregularities inherent in the company’s alleged misconduct. These irregularities are then discussed within the context of the eventual SEC enforcement action against the company and two of its executives, the securities fraud class action lawsuits that have now been settled, and any cases still pending. An event study regression analysis substantiates the plaintiffs’ position that shareholder losses were suffered because of the company’s procurement misconduct and impairment charge.

Keywords: Kraft Heinz Company; federal securities class action lawsuit; event study regression analysis; litigation support; procurement misconduct; management fraud; impairment charges; channel stuffing; zero-based budgeting, Daubert and Frye challenges

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Managerial Ability and Lawsuit Settlement | Full Article (PDF)
Wray Bradley
Li Sun

Abstract: This study examines the impact of managerial ability on lawsuit settlement, which is reported in the special items section of an income statement. Using a large panel sample from 1996 to 2020, we find that firms with more capable managers are less likely to become involved in lawsuits. Furthermore, we find that more capable managers are associated with more favorable settlement outcomes (i.e., larger settlement gain or smaller settlement loss), highlighting the importance of having more capable managers. Our findings are robust to a battery of additional tests. Lastly, we find that the negative relation between managerial ability and lawsuit settlement is largely driven by firms with lower cash holdings.

Keywords: Managerial ability; lawsuit settlement; settlement gain; settlement loss; corporate cash holdings

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Workaround Opportunities in Concealing Revenue and Expense Misstatements | Full Article (PDF)
Radiah Othman
Rashid Ameer

Abstract: This study identifies accounting misstatement and associated concealment strategies in 30 financial statement fraud (FSF) cases alleged and investigated from 1998 to 2020. The study analysed the narratives from SEC filings, scholarly work, and other publicly available information, which were then classified into revenue and expense misstatement techniques. For each, the context in which each fraud was perpetrated determined the type of concealment strategies employed. The findings revealed that the sampled U.S., European, and Asian companies resorted to 57 revenue-related and 29 expense-related concealment strategies. These findings indicate that management tends to take advantage of internal opportunities to masquerade improved financial performance.The results suggest some unusual techniques and systems used by dishonest management to collusively create new ways of misstating and concealing revenue and expenses misstatements. The examination of the contexts is aligned with the increasing importance placed by the regulators and standard setters to further understand the complexity of fraud cases to enable better prevention and detection in the future.

Keywords: Accounting manipulation; concealment; opportunity; misstatement; revenue and expenses; financial statement fraud

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Odebrecht Bribery: The Worst FCPA Violation | Full Article (PDF)
Obeua S. Persons

Abstract: This article uses Odebrecht bribery, the worst violation of the Foreign Corrupt Practices Act (FCPA) involving $3.5 billion penalty, to highlight the seriousness of bribery in the global economy, and to instill in managers of multinational corporations and others an anti-bribery attitude and a strong bribery-prevention desire. Using a qualitative research method, the study conducts an extensive research of academic and practitioner business articles along with FCPA enforcement documents against Odebrecht, a Brazilian construction conglomerate, to address the following seven questions. First, why are Brazilian institutional environment and cultural values conducive to bribery? Second, what did Odebrecht do to deserve such an exceptionally large penalty? Third, what were the consequences to Odebrecht and its executives who orchestrated the bribery, and corrupt officials/politicians who received bribes from Odebrecht?Fourth, why was Odebrecht subject to the U.S. Foreign Corrupt Practices Act? Fifth, what were corrective actions that Odebrecht has agreed to take to prevent any future bribery? Sixth, what were anti-bribery responses to Odebrecht scandal in Brazil and Latin America? Seventh, what are the harms to society because of bribery, and what would you do if you discovered bribery in your organization? Answers to these questions are useful to: (1) multinational corporations that can use this study as part of ethics/anti-bribery training for their managers, (2) educators who want to instill anti-bribery attitude into their students, (3) academia who are interested in bribery or FCPA research, and (4) regulators who are interested in anti-bribery reform.

Keywords: Odebrecht bribery; Foreign Corrupt Practices Act; FCPA violation; anti-bribery; Brazilian institutional environment; cultural values conducive to bribery

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Smart Contract Fraud and Theft: Balancing Functional Opportunities with New Risks | Full Article (PDF)
Richard Brody
Craig White
Domenic Lucero
Aryn White

Abstract: Blockchain-based smart contracts provide opportunities for innovation in contract structure and implementation. While this technology enables the possibility of expanded economic activity, it also creates a need to recognize new security and associated challenges. This context is especially important for auditors as they are tasked with monitoring and attesting to the appropriateness and accuracy of reported financial activity. Further, as this area continues to develop, auditors and forensic accountants may be called upon to assist and evaluate these smart contracts. In this article, we further this understanding by highlighting three key aspects of working with smart contracts: 1) an understanding of the scope of smart contracts, 2) the existence of innovative fraud and theft opportunities, and 3) examples of evolving approaches to mitigate fraud-related risk. The discussion highlights the care organizations must take when implementing a smart contract and internal control risks auditors face as these contracts increase in adoption.

Keywords: Blockchain; smart contracts; fraud; risks

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Bitcoins and Beyond: Crypto-Asset Considerations for Auditors/Forensic Accountants | Full Article (PDF)
Daniel Dupuis
Debbie Smith
Kimberly Gleason
Yezen Kannan

Abstract: Given the relative nascency of digital assets, we provide a holistic overview of the topic. This article first places digital assets within the context of money and describes the microstructure of a transaction using crypto assets. We then focus on the considerations that digital assets present and explain auditor considerations associated with digital assets for auditors. We address the current accounting treatment of digital assets and explain the challenges posed by digital assets for forensic accountants and auditors regarding management assertions. We identify the fraud risk factors that auditors and forensic accountants should be aware of and describe potential innovations in the digital currency markets.

Keywords: Bitcoins; fraud;cryptocurrency; digital assets; crypto assets; virtual assets; crypto accounting

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Book Reviews

Easy Money Ben McKenzie and Jacob Silverman, 2023, 289 pp. Abrams Press 195 Broadway New York, NY 10007    The authors provide a well-researched and entertaining account of the rise and fall of cryptocurrencies. From an all-time high of over $68,700 in mid-November 2021, the virtual currency Bitcoin fell to $16,600 at the start of 2023. By design only 21 million of Bitcoins can be mined by software and hardware. Miners are even using wasteful flaring from oil wells to create Bitcoins. Near the end of September 2023, Bitcoin price has moved to over $28,800, with some predicting one million dollars by 2025. Over 13 chapters and an epilogue, the authors use the terms fraudsters, conmen, swindlers, and scammers to describe the various actors in the crypto industry as one author spent looking down the crypto rabbit hole. The tale weaves together stories of average traders, victims, colorful crypto “visionaries,” Hollywood’s biggest true believers, anti-crypto whistleblowers, and government operatives. This read is an on-the-ground look at a perfect storm of irresponsibility and criminal fraud based on original reporting across the country and abroad, including many interviews, such as with Sam Bankman-Fried, Tether co-founder Brock Pierce, and Celsius’s Aex Mashinsky. The authors paint a disappointing picture that crypto and their by-products are at best a zero-sum game and are not used for anything productive.

Crash Landing Liz Hoffman, 2023, 275 pp. Crown Publishing, $30 Penguin Random House penguinrandomhouse.com     The author reports how the pandemic set the economy on fire, but if you look closely, the tinder was already there. After the global financial crisis in 2008, corporate leaders embraced cheap debt and growth at all costs. Wages flatlined, and millions were pushed into the gig economy. Companies crammed workers into offices, and airlines did the same with flyers on their planes. Wall Street cheered on this relentless march toward efficiency, overlooking the collateral damage and the risks produced in the process. This book is a kaleidoscopic account of one of the most remarkable periods in modern economic history, revealing through fly-on-the-wall reporting how CEOs battled an economic catastrophe for which there was no playbook. For example, Airbnb’s Brian Chesky was blindsided by a virus in the middle of a high-stakes effort to go public. American Airlines’ Doug Parker traveled between K Street and the White House, determined to secure a multibillion-dollar bailout. Ford’s Jim Hackett had his assembly lines move from building cars to churning out ventilators. Wall Street Journal closed down along with the rest of New York City. Nobody bought anything, and massive layoffs were announced every day. Goldman’s $230 billion liquidity pool was draining fast, and Delta had a $1 billion loan coming due in a few weeks. Broadway went dark, major league sports canceled their season, and Disneyland emptied out. The author interviewed hundreds of people to show how the world’s biggest companies survived an economy on the brink of disaster.

Advanced Financial Risk Management D.R. Van Deventer, K. Imai, M. Mesler, 2023, 3rd Edition DeGruyter Publishing degruyter.com     This textbook bridges the gap between the idealized assumptions used for risk valuation and the realities that must be reflected in management actions. The authors explain, in detailed, easy-to-understand terms, the analytics of these issues and lay out a comprehensive strategy for risk management measurement objectives and hedging techniques that apply to many types of institutions. Written by three experienced risk managers, they cover integrated interest rate risk, market risk, credit risk, value at risk, and the most accurate implementation of regulatory risk management standards and accounting standards, including the International Financial Reporting Standard 9. Revised and updated with lessons from the 2007–2010 financial crisis and a database of securities prices and default probabilities spanning the last decade, the authors outline a framework for fully integrated risk management. They show how a practical implementation of multi-factor interest rate models should be integrated with macro factor models and probability models for default, prepayment, mortality, and other random events.

Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall Zeke Faux, 2023, $21.56 Penguin Random House penguinrandomhouse.com    Sam Bankman-Fried (Fried) was declared the world’s richest person under thirty by Forbes, who declared that crypto FTX would one day take over all of Wall Street. Before the FTX collapse he was ranked the 41st richest American by Forbes. In 23 chapters, Bankman-Fried, the underdressed, frizzy haired CEO declared that his crypto fortune would save the world, and Faux indicates that he was secretly embezzling billions of dollars of his customers’ money. When the crypto bubble burst in 2022, the author goes inside the Bankman-Fried penthouse as he faced his ultimate arrest. A.J. Jacobs of the New York Times said the “book is riveting, scary, funny, unbelievable, depressing, insane, and many other adjectives,” but the book is “one of the greatest business stories of all times.”

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Events
2024 LSU Annual Fraud and Forensic Accounting Conference
LSU is having their two-day Fraud and Forensic Accounting Conference on July 18–19, 2024, in Baton Rouge.
Please mark your calendars!
https://lsu.edu/business/accounting/fraud.php

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