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Volume 9: Issue 2, July–December, 2017

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Volume 9: Issue 2, July–December, 2017
Table of Contents

Big Data and the Perceived Expectations Gap in Digital Authentication Processes | Full Article (PDF)
Thomas G. Calderon
Colin G. Onita

Abstract: Perceptions of the security and efficacy of technological innovations significantly affect behavioral intentions and the eventual diffusion of such innovations in organizations and the broader society.  This paper uses Twitter as a data source and a big data analysis tool to investigate the public’s perceptions of current authentication methods in financial institutions.  This data source has not been used previously in the literature to examine perceptions of authentication methods.  We focus on the financial sector because of its high vulnerability, the extensive use of information technology in both products and value chain (i.e., its high business information intensity), and the widespread use of online financial services by both businesses and individuals across geographic and political boundaries.  Further, while cybercrime affects all industries, the global financial services industry is hit the hardest.  Our investigation finds that the public perceives authentication based on tokens and other possessions more positively than either passwords or biometrics.  We also uncovered an expectation gap in the perceptions about the efficiency and effectiveness of different authentication methods.  The article suggests that the public perceives all authentication methods to offer the same degree of protection against identity theft and digital fraud.  Research can further explore this gap to understand the implications for effective security practices at the end-user level and the potential cascading effects across networks.

Keywords: Digital fraud; authentication; perceptions gap; big data; end user perceptions; financial services industry

Detecting Fraud Using Validated and Specifically-identified Metrics Full Article (PDF)
Natalie Tatiana Churyk
Danny Lanier, Jr.

Abstract:The accounting profession has lost much credibility from the WorldCom, Enron, HealthSouth, Xerox, and other frauds, as well as from the dissolution of Arthur Andersen.  This paper extends the content analysis fraud prediction work of Churyk et al., (2008, 2009) and Lee et al., (2013 a, b) by including the accruals quality, performance, nonfinancial, off-balance sheet, and market-related incentive variables of Dechow et al., (2011) and newly created proxies for the frauds described by Smith (2013) to examine which, if any, variables can best predict fraud.  Results of logistic stepwise regression indicate that five of the variables can provide an overall holdout sample fraud/non-fraud accuracy of 68.5 percent compared to other reported holdout sample accuracy rates ranging between fifty-nine percent and 65.3 percent.   

Keywords: fraud, fraud prediction, content analysis, SEC AAER
Auditor Tenure and Financial Reporting Fraud: Have the Relations Changed Post Sarbanes-Oxley Act of 2002? Full Article (PDF)
Kwadwo N. Asare
Mohammad J. Abdolmohammadi

Abstract: We use a comprehensive and unique fraud database from the Institute for Fraud Prevention (IFP) to test the relationship between audit firm tenure and fraudulent financial reporting with an emphasis on post Sarbanes Oxley Act of 2002 (SOX 2002). Post-SOX long tenure, defined as greater than or equal to seven, eight, or nine years is negatively associated with fraud but when we define long tenure of greater than or equal to six years, it is not associated with fraud post-SOX. Our results suggest that efforts by the profession and regulators (such as SOX and SAS 99) are bearing fruits but it takes at least seven years to realize them. Our results suggest that the optimal number of years for an auditor-client relation may be longer than anticipated. We also find that client size is positively associated with fraud, possibly reflecting larger clients’ bargaining power with auditors in contentious audit situations (cf., Nelson et al., 2002).

Keywords: Audit, Big-N, fraud, audit firm tenure, auditor tenure, Data availability: Please contact the Institute for Fraud Prevention (IFP). 
Benford’s Law and Earnings Management Detection: The Case of REITs Full Article (PDF)
James E. Larsen

Abstract: Benford’s Law has been employed by auditors to identify suspicious financial data and by researchers to investigate whether financial data has been manipulated in various industries, but the present study is the first to apply the concept to Real Estate Investment Trusts (REITs).  Researchers using other investigative techniques report that REITs have systematically practiced earnings management.  In the present study, a Benford test is conducted on quarterly REIT net income, collected for the years 2009 through 2014 and the results are analyzed using the Mean Absolute Deviation.  For the full sample, no earnings management is detected; the distribution of both the first and second digits of net income conforms to a Benford’s distribution, but we cannot be certain whether this means the REITs in our sample did not manage earnings or that they did and the test failed to detect it.  Tests on subsamples of the data provide different results.  Combined with the results for the full sample, the latter finding is consistent with an issue critics of Benford’s Law find troublesome.

Keywords: Benford’s Law, earnings management detection, real estate investment trust
Do Significant Stock Price Drops Signal Red Flag for Financial Statement Fraud? Full Article (PDF)
Charles A. Malgwi
Irvin W. Morgan Jr.

Abstract: This paper investigates whether significant stock price drops from 8,345 firms encountering stock price drops more than ten percent from 1995–2006 serve as a red flag for potential financial statement fraud?  We utilize Beneish’s (1999) fraud detection indices as a proxy for the likelihood of the financial statement fraud.  Our results show an overwhelming similarity of fraud detection indices with our sample firms, suggesting red flags for financial statement fraud.  Robustness checks indicate that smaller firms are more likely than larger ones to experience the largest frequency of stock price drops, indicating that smaller firms are less likely to withstand periods of financial distress.  We find significant correlation between the growth of Days Sales in Receivables Index (DSRI) and Selling, General and Administration Index (SGAI) and significance of sales growth in predicting stock price reactions.  We, however, observed some disproportionate (inverse) relationship between Sales Growth Index (SGI) and Gross Margin Index (GMI), which occurred in all three years, thereby showing an increasing leverage index for the same period.

Keywords: stock price drops, red flag, financial statement fraud, fraud indices  
Number Generation Patterns Associated with Innate Characteristics Full Article (PDF)
Renee Flasher
Troy Janes
Greg Wright

Abstract: This study examines whether gender or birth country identification result in different number generation patterns.  Based on neuroscience findings that detail differences between the genders with brain component activation for tasks, we expect that males and females generate number patterns that differ from each other.  In the same vein, we expect that cultural differences based on numerology research will promote variances among cultural backgrounds when generating number patterns.  From our survey results representing 1,335 observations, we fail to find an association for gender differences, but we do find evidence of cultural variability impacting the first digit of generated numbers.  For fraud investigators and auditors who use Benford’s Law to identify areas for investigation, these results may move an investigation or audit forward by providing insights into individual characteristics reflected by potential perpetrators that could be determined the potentially falsified data. 

Keywords: Benford’s Law, number generation, gender, cultural identification
The Proof of Cash Should be King Among Forensic Auditing Techniques Full Article (PDF)
Sridhar Ramamoorti
Barry Jay Epstein
Darrell D. Dorrell
Viswanathan Varadarajan

Abstract: The proof of cash, also known as the four-column bank reconciliation, is a thoroughly tested-and-true auditing technique with a long past but a short history.  In the context of a financial statement audit, the audit of cash is considered important mainly due to two reasons: (i) Almost all business transactions are ultimately settled through the cash accounts, and the audit of cash accounts also assists in the verification of other asset and liability accounts as well as revenue and expenses, and (ii) Cash is a highly liquid asset in every company and thus naturally an area of high inherent risk--before consideration of any internal controls over cash--because there is a relatively high- risk of misappropriation.  In this article, we attempt to resurrect the proof of cash technique, and show its relevance to forensic engagements.  To our knowledge, several recent cases involved suspect cash transfers, where a proof of cash could have been useful.  This article describes the design and application of a proof of cash, or the four-column bank reconciliation, and the types of misstatements in cash and bank balances it would detect, if one or both sides of such transactions are recorded.  We provide several examples of financial frauds and cash larceny—embezzlements, skimming, kiting, and lapping—highlighting the circumstances in which the proof of cash can be profitably used.  We have also highlighted the potential applications of the proof of cash in the context of anti-money laundering efforts, particularly where anonymous third-party deposits and withdrawals may be involved.

Keywords: Proof of Cash, Bank Reconciliation, Kiting, Lapping, Skimming, Cash Larceny, Embezzlement, Audit of Cash, Swiss Leaks, Four Column Bank Reconciliation, Block Proof, Money Laundering, FATCA, Panama Papers
Forensic Accounting Procedures Applied to Valeant: Where Were the Gatekeepers? Full Article (PDF)
Hugh Grove
Mac Clouse

Abstract: Fraudulent financial reporting risk should be a key concern of gatekeepers, such as governmental regulators, auditors, boards of directors, external financial statement users, and forensic accountants to assess the possibility of fraud in any organization.  However, there are no rules or regulations concerning which methodologies and tools should be used.  The purpose of this article is to develop and apply fraud risk assessment screening guidelines, using well-known fraud models and ratios, to Valeant Pharmaceuticals International which had an eighty-two billion dollar market capitalization destruction in just the last year.  This destruction exceeded the seventy-eight billion dollar market cap destruction of Enron which Forbes magazine had ranked as the number one fraud of this century.  Then, follow-up procedures are applied, based primarily on the work of financial analysts, bloggers, forensic accountants, and short sellers, who signaled major financial reporting frauds of the 21st century and major Chinese financial reporting frauds.  How many times must lessons be learned or be relearned from these frauds which occurred from 2000 through 2016?  A good starting point to correct such failures and related market capitalization destructions would be for any gatekeepers to use these recommended screening and follow-up procedures for proactive, rather than reactive, analyses.

Keywords: Fraudulent Financial Reporting, Forensic Accounting Procedures 
An Analysis of Tax Evasion Drivers in Light of the Richard Hatch Tax Evasion Saga Full Article (PDF)
Mark J. Nigrini

Abstract: This study reviews the high-dollar, and highly publicized, tax evasion case of Richard Hatch with a view to identifying the compliance predictor variables that influenced the taxpayer’s reporting decisions.  Hatch won the first Survivor reality show series, and he then filed two tax returns that understated his taxable income by about $1.5 million.  He was convicted of tax evasion and served two prison sentences for the offense.  The facts of the case suggest that tax morale, which relates to the intrinsic motivation to pay taxes, was the main driver of his tax compliance decision.  Another insight from the case is the obvious discomfort felt by the taxpayer from the social stigma of being branded as a criminal.  There are some possible policy implications from the tax morale finding.  I first present the facts of the case followed by a discussion section.  I then provide a series of discussion questions for students to research, report, and discuss.

Keywords: tax evasion, tax compliance, tax morale, penalties, litigation support.
The Saga of Huber v. the American Accounting Association: Forensic Accounting and the Law Full Article (PDF)
Wm. Dennis Huber

Abstract: This article contributes to an understanding of the interplay between a forensic accounting investigation and the legal issues that a forensic accountant may encounter.  The article demonstrates the types of public document investigations that may have to be conducted both during and following a legal proceeding as part of litigation support.  When auditing corporate financial statements, auditors must inspect corporate documents, including articles of incorporation and bylaws, to determine the scope of authorizations that officers and directors are granted.  Articles of incorporation and bylaws are part of the auditor’s permanent file (Puncel, 2007).  Forensic accountants likewise must inspect corporate documents such as articles of incorporation and bylaws.  However, when conducting a forensic accounting investigation, a forensic accountant must investigate publicly available documents for several reasons.

First, subjects of the investigation may not be forthcoming in their production of documents or may not give candid responses to questions.  The target may withhold documents or be evasive in their response. 

Second, a forensic accountant must corroborate and confirm all evidence obtained from the subject of the investigation.  This process is often done by searching publicly available documents.  Third, some states prohibit anyone without a private investigator’s license from conducting certain types of investigations (Drew, 2013).  Searching public documents may be the only alternative for obtaining the desired information. 

Keywords: American Accounting Association, action in equity, public document research, corporate documents

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What is Your Forensic Accounting IQ in the Healthcare Industry? Full Article (PDF)
D. Larry Crumbley

Abstract: This quiz is the first of several IQ quizzes to determine how equipped you are for work in the healthcare industry along with the answers.

Keywords: healthcare, quiz, Medicare, Medicaid, fraud, Department of Justice

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Books Reviews
BookOur Bodies, Our Data
Adam Tanner, 2017, 218 pp.
Beacon Press
Boston, Mass.
Unknown to consumers, patient medical data is a multimillion worldwide trade industry between our health-care providers, drug companies, and a complex web of middlemen.  This great medical-data bazaar sells copies of the prescription you recently filled, your hospital records, insurance claims, blood-test results, and more, stripped of your name but possibly with identifiers such as year of birth, gender, and doctor.  As computing grows ever more sophisticated, patient dossiers become increasingly vulnerable to reidentification and the possibility of being targeted by identity thieves or hackers.

Paradoxically, comprehensive electronic files for patient treatment—the reason medical data exists in the first place—remain an elusive goal.  Even today, patients or their doctors rarely have easy access to comprehensive records that could improve care.  In the evolution of medical data, the instinct for profit has outstripped patient needs.  The author tells the human, behind-the-scenes story of how such a system evolved internationally.

The world’s dominant health-data miner, IMS Health now gather patient medical data from more than forty-five billion transactions annually from 780,000 data feeds in more than 100 countries.  The author uncovers some of IMS’s hidden past and follows the story of what happened in the following decades.  This is both a story about medicine and medical practice, and about big business and maximizing profits, and the places these meet, places most patients would like to believe are off-limits.

BookThe Domino Effect
Davis Bunn, 2016, 325 pp.
Bethany House Publishers
11400 Hampshire Avenue South
Bloomington, Minn, 55438

A father told his son that in times of crisis these are only two alternatives to abject and crushing defeat. Either you are first off the station block or you cheat. The bad guys in this novel find a third option, which is to combine the two.

Esther Larsen, a top risk analyst at one of the U.S.'s largest banking institutions, must stop the bad guys because she is becoming more and more convinced there is a ticking bomb with the potential to make the 2008 market crash look minor by comparison. As her own employer pursues "investment" strategies with ever-increasing levels of risk, she becomes convinced she must do something. But Esther is only one person; can she stand up to an international conspiracy of greed? And if she does, will anyone take her seriously?

Every moment of indecision edges the markets closer to a tipping point--the teetering first domino in a standing row that circles the globe. When Esther finds her voice, those she seeks to expose do not sit idly by. With global markets on the brink, and her own life in danger, Esther is locked in a race against the clock to avert a financial tsunami that threatens worldwide devastation.

An excellent read!  

Chain of Title
David Dayen, 2016, 385 pp.
The New Press
120 Wall Street
31st Floor
New York, NY, 10005

So it was not uncommon to find cars motoring past West Palm Beach’s shiny subdivisions during the great recession. Process servers contracted by “foreclosure mill” law firms, so named because they pumped out foreclosures the way a textile mill would fabrics, made their daily rounds here, unsmilingly handing homeowners legal documents and informing them that as a result of their failure to pay their mortgage promptly, their lender would place them into foreclosure.

A car dealership worker, a cancer nurse, and an insurance fraud specialist helped uncover the largest consumer crime in American history-a scandal that implicated dozens of major executives on Wall Street. They called it foreclosure fraud: millions of families were kicked out of their homes based on false evidence by mortgage companies that had no legal right to foreclose.

Lisa Epstein, Michael Redman, and Lynn Szymoniak did not work in government or law enforcement. They had no history of anticorporate activism. Instead, they were all foreclosure victims, and while struggling with their shame and isolation they committed a revolutionary act: closely reading their mortgage documents, discovering the deceit behind them, and building a movement to expose it.

Harnessing the power of the Internet, they revealed how the financial crisis and subsequent recession were fundamentally based upon a series of frauds. The author recounts how these ordinary Floridians challenged the most powerful institutions in America armed only with the truth-and for a brief moment brought the corrupt financial industry to its knees.

The three citizens unearthed another layer of the mystery, too. After they exposed foreclosure fraud and forced the nation’s leading mortgage companies to stop repossessing homes, they saw firsthand the unwillingness of our government to deliver any consequences. In fact, walk into any courtroom today and you will see the same false documents, the same ones Lisa, Michael, and Lynn exposed, used to foreclose on homeowners.

L.B. Schlachter and J. Bechtel, 2017, 247 pp.
Skyhorse Publishing
307 West 36th Street
11th Floor
New York, N.Y. 10018

Recent research ranked medical errors as the third leading cause of death in the United States, after heart disease and cancer. In addition, the study found that more than 250,000 Americans die every year as a result of medical error. And patients have enormous difficulty finding out if their doctor has been sanctioned, and if he has, why.
The author, a neurosurgeon and attorney shows how most patients enter the health-care system without any idea of the risks they face due to a medical culture that denies the existence of a patient safety problem. He argues that this medical culture avoids transparency, perpetuates an atmosphere of blind deference to doctors, and protects dangerous doctors from accountability.

Drawing on more than two decades of experience, the author provides alarming case histories that illustrate the risks patients face whenever they seek diagnostic evaluation or go under the knife. This book provides an all-access pass to the inner sanctums of the health-care citadel, exposing the cultural flaws that fuel doctors’ egos and outlining the steps every patent should take to protect themselves.

Two excellent chapters are “In the Courtroom” and “Rational Responses to Malpractice.” He says the legal standard of care “is whatever will get the doctor off the hook that his/her lawyers can sell to the jury with a straight face.” It is a “moving target, and defendant physicians can be quite disingenuous in their efforts to avoid specifying exactly what it is.”
BookHealthcare Fraud: Investigation Guidebook
Charles E. Piper, 2016, 205 pp., paperback
CRC Press
Taylor & Frances Group
6000 Broken Sound Parkway NW
Suite 200
Boca Raton, FL 22487-2742
This book takes you to the next level.  The author not only assists in identifying healthcare fraud schemes, but also provides helpful instructional guidance on how to investigate those fraudsters so that their wrongdoings can more likely be proven beyond a reasonable doubt and/or by the preponderance of evidence.  This knowledge causes wrongdoers to be held accountable and wrongly obtained funds to be recouped through fines and judgments.

This handy book also emphasizes the importance of simultaneously searching for waste and abuse as well as systemic weaknesses and deficiencies that caused or contributed to the problem or wrongdoing under investigation and then by make recommendations for improvement.

The objective of this paperback book is not to just put a Band-Aid on the problem of healthcare fraud, but to try and cure it.  Those tasked with the responsibility of investigating healthcare fraud also should strive to improve the healthcare and payment systems not only by investigating fraudulent activity but by also detecting and deterring other future instances of fraud, waste, and abuse.
BookHow They Stash the Cash
Mark Kohn, 2012, 114 pp.
Sourced Media Books, LLC
20 Via Cristobal
San Clemente, CA 92673

For many years, this forensic accountant has worked in the field of forensic accounting, specifically in the area of forensic accounting. Such a forensic accountant is involved with the determination of how much money the spouses earned (often looking for hidden income).

Here are some of the actual cases which the author encountered:

The Doctor
The Restaurant Owner
The Cosmetic Manufactures
The Lawyer
The Financial Planner
The Real Estate Developer
The Corporate Executive
The Plastic Surgeon
The Technology Inventor
The Gas Station Operator

His last chapter on “Techniques to Find Hidden Income” is excellent.
BookBreaking Rockefeller
Peter B. Doran, 2016, 337 pp.
Penguin Random House
375 Hudson Street
New York, N.Y.10014

Crude is a substance that no one wants to touch, smell, or taste yet everyone wants to control. Since oil occurs where it is needed most, that question of control ultimately comes down to distance, geography, risk, technology, and greed. At the height of the great oil boom of the 1800s, John D. Rockefeller was seemingly unstoppable. Capitalizing on the newly emerging industry that was changing the lives of people worldwide, Rockefeller eliminated his rivals to achiever near-total domination of the market.

By 1889, Rockefeller was at the peak of his power, having created one of the largest monopolies in history, so powerful that even the U.S. government was wary of challenging the great “anaconda” of Standard Oil. The Standard never loses—that is until the unlikely duo of Marcus Samuel and Henri Deterding teamed up to form Royal Dutch Shell, and set the stage for the toppling of Standard Oil.

A thrilling account of ambition, oil, and greed traces Samuel's rise from canny outsider to the heights of the British aristocracy, Deterding’s conquest of America, and the collapse of Rockefeller's oil empire. Taking readers through the rough and tumble of East London’s streets and the twilight turmoil of tsarist Russia to the halls of the British Parliament and right down Broadway in New York City. The author offers a richly detailed fresh perspective on how Samuel and Deterding beat the world's richest man at his own game.

Anne Applebaum says that “in this story of the origins of the modern oil industry, these are plenty of lessons for the present.”
BookThe Social Organism
Oliver Luckett and M. J. Casey, 2016, 292 pp.
Hachette Books
1290 Avenue of Americas
New York, N.Y.  10104 
Social media is being used increasingly as evidence in the courtroom, and forensic accountants must learn how it works, how it is changing human life, and how it can be masters for good and profit.

In barely a decade, social media has positioned itself at the center of twenty-first-century life.  The combined power of platforms like Facebook, Twitter, Instagram, Snapchat, and Vine have helped topple dictators and turned anonymous teenagers into instant celebrities.  In the social media age, ideas spread and morph through shared hashtags, photos, and videos, and the most compelling and emotive ones can transform public opinion virtually overnight.

How did this happen?  The scope and pace of these changes have left traditional businesses—and their old-guard marketing gatekeepers—bewildered.  We simply do not comprehend social media's form, function, and possibilities.  It is time we did.

The authors offer a revolutionary theory: social networks—to an astonishing degree—mimic the rules and functions of biological life.  In sharing and replicating packets of information known as memes, the world's social media users are facilitating an evolutionary process just like the transfer of genetic information in living things.  Learn how forensic accountant can use social media for fighting crime and in the courtroom.