Volume 12: Issue 2, July–December 2020
Table of Contents
Back to Top
- Providing Balance in the Accounting Curriculums and Beyond: The Case for Capitalism
- The Impact of Cyber Breaches on the Content of Cybersecurity Disclosures
- Uncovering Toshiba’s Fraudulent Financial Statements: An Audit Perspective
- Using Experts in Municipal Contract Negotiations
- A Different Approach to Detecting Fraud and Corruption: A Venn Diagram Fraud Model
- Lowering Standards: Unintended Consequences of Form 990-N and Value Congruence on Donor Decision Making
- Forensic Approaches to Transfer Pricing Enforcement Could Restore Billions in Lost U.S. Federal and State Tax Losses: A Case Study Approach
- Impact of Perceived Empathy and a Confidentiality Guarantee on Auditee Reporting Intentions
- Why Do Auditors Fail to Identify Fraud? An Exploration
- Effects of Guanxi with Supervisor on Whistleblowing
- The Effects of Accounting Complexity and the Choice of Accounting Methods on Financial Reporting Quality: Evidence from the Oil and Gas Industry
- Book Reviews
Providing Balance in the Accounting Curriculum and Beyond: The Case for Capitalism | Full Article (PDF)
Dana R, Hermanson
Douglas F. Prawitt
Abstract: This commentary discusses younger Americans’ negative views of capitalism and develops implications for accounting faculty members and accounting practitioners, with a particular focus on fraud and auditing topics. Our central thesis is that the information that younger Americans receive about economic issues is heavily slanted against market-based capitalism and that accounting faculty members (in addition to other business school faculty) and practitioners can play a valuable role in contributing to a more balanced perspective on business and capitalism than is typically provided by other university faculty, the news media, and the entertainment industry. Specifically, we argue that accounting faculty members can enhance educational balance by helping students to understand the pragmatic case for capitalism in terms of wealth creation and poverty reduction, as well as the moral case for capitalism, which preserves individual liberty and personal freedom as compared to socialism. Further, we argue that accounting practitioners are in a position to reinforce the case for capitalism and promote younger accountants’ understanding of their important role in the capitalist system.
Keywords: capitalism; socialism; economic growth; fraud; incentive; coercion
The Impact of Cyber Breaches on the Content of Cybersecurity Disclosures | Full Article (PDF)
Orry Swift
Orry Swift
Ricardo Colon
Kelly Davis
Abstract: This study examines financial reports from firms identified by the Verizon Data Breach Investigations Report as having experienced a cybersecurity breach in the United States. We employ text-based analysis of the Management Discussion and Analysis (MD&A) section of annual reports to determine how the occurrence of a cyber breach impacts the content of cybersecurity disclosures by analyzing five textual characteristics: length, boilerplate, fog, specificity, and tone. We find that the occurrence of a cyber breach significantly impacts both boilerplate disclosures and disclosure length. We also find that pre-breach disclosures often consist of boilerplate language that fails to inform investors and financial statement users of material cybersecurity risks and the potential costs and consequences of such risks.
Keywords: cybersecurity; content analysis; disclosure; boilerplate
Uncovering Toshiba’s Fraudulent Financial Statements: An Audit Perspective | Full Article (PDF)
Radiah Othman
Rashid Ameer
Fawzi Laswad
Abstract: Toshiba fraud shook the confidence of the investors and public of the global brand. Being a pillar of Japanese economy, many have questioned its corporate culture, its real performance, and the reliability of the audit performed by the auditor. Previous research has focused on how the fraud could have been detected using various forensic tools, including Benford’s Law digital analysis (DA). Taking a slightly different approach, Toshiba’s 14 years of financial statements, from 2002 to 2015, were analyzed using digital and trend analysis on sales, expenses, and current assets, with the aim to examine how DA may have been used in an audit context to help detect the fraud. The analysis revealed irregularities in these accounts even during pre-fraud period. The results indicate the potential usefulness of DA as an addition to other typical analytical procedures used by the auditor, especially when the trend analysis shows no indication of suspicious fluctuations. As the audit working papers are inaccessible, this article hopes to bring some insights of the fraud from an audit or forensic accounting perspective to reflect on some of the challenges faced by the an investigator in adhering to the auditing standards and, at the same time, having to deal with extreme circumstances when fraud was collectively and systematically perpetrated and skillfully concealed from them. From the auditor’s viewpoints, the lessons highlight the critical importance of maintaining professional skepticism throughout the audit processes, and they should never accept less-than-persuasive evidence or rely on management’s honesty when they are aware of corporate cultures such as in Toshiba.
Keywords: fraud; digital analysis; trend analysis; financial statements; Toshiba
Using Experts in Municipal Contract Negotiations | Full Article (PDF)
Alan Reinstein
Myles Stern
Abstract: Forensic accountants often must master the nature of various types of businesses to provide “client value.” This article shows how these accountants can help municipalities resolve collective bargaining issues, a practice area with potential growth. Most U.S. states allow contract negotiations between their counties, cities, townships and other municipalities, and their labor unions. Such contracts usually focus on both the municipality’s direct (e.g., salaries and overtime) and indirect (e.g., seniority) economic matters. There will be huge pressures on municipalities during and after the coronavirus pandemic and possible bankruptcies. Providing guidance on evaluating key municipal accounting matters, the techniques discussed herein also apply to many other types of expert valuation services that require accumulating, summarizing, analyzing, and reporting financial data.
Keywords: municipal contracts; municipalities; expert witnessing; collective bargaining; labor contracts; arbitration; ability to pay
A Different Approach to Detecting Fraud and Corruption: A VENN Diagram Fraud Model | Full Article (PDF)
D. Larry Crumbley
Donald L. Ariail
Abstract: Several models of white-collar fraud have been proposed: Cressey’s embezzlement model including motive, opportunity, and rationalization; the SAS 99 model includes the elements of incentives/pressures, opportunity, and attitude/rationalization; the Wolfe and Hermanson model includes the four elements of incentive, opportunity, capacity, and rationalization; the Goldman model with five elements, adding employee disenfranchisement and personal greed; the Dorminey et al. 2010 MICE model; the Kelly 2017 model; and the Harte and McHone 2019 Discourse Fraud Analysis.
We propose a different approach focusing on the motivations/incentives of perpetuators of white-collar fraud. Our Venn Diagram Model includes four motivations/incentives: greed/self-interest, social, altruism, and non-financial, which often bleed together. A second iteration of our model includes four motivations as included in context with the three elements of the SAS No. 99 triangle—a four-component model that includes motivation, pressure, rationalization, and opportunity. This model focusing on fraud motivations aids for auditors and forensic accountants for making better risk assessments and helping investigators better detect various types of fraud.
Keywords: fraud detection; fraud motivations; audit risk assessments; financial statement misstatements; elements of fraud; white-collar crime; audit red flags; fraud models
Lowering Standards: Unintended Consequences of 990-N and Value Congruence on Donor Decision Making | Full Article (PDF)
Qianhua Ling
Andrea M. Scheetz
Joseph Wall
Abstract: We investigate how IRS form types (990-N vs. 990-EZ) influences existing donor decisions when fraud is suspected, as well as the pathways used to find information. The influence of donor values being closely tied to the organization also is examined. We find that participants whose values are closely represented by the nonprofit view the information they receive valuable independent of the tax form they receive. Further, participants whose values are aligned with the nonprofit are more likely to be willing to incur added costs to obtain more information when presented a Form 990-N. They pay to hire others for help or lose time filing a complaint with the better business bureau. Perhaps worse, some donors who are passionate about the cause indicate they will take their donations elsewhere when presented a Form 990-N and fraudulent action is suspected, representing the ultimate form of cost to the nonprofit.
Keywords: nonprofit; Form 990; fraud; donor; value congruence
Forensic Approaches to Transfer Pricing Enforcement Could Restore Billions in Lost U.S. Federal and State Tax Losses: A Case Study Approach | Full Article (PDF)
Stephen Curtis
Yaron Lahav
Abstract: Successful IRS enforcement of corporate transfer pricing regulations is by all measures at an all-time low, and profit shifting from transfer pricing appears to be near an all-time high, costing the U.S. federal and state treasuries as much $140 billion dollars or more per annum in recent years, even as the U.S. Congress has cut the annual budget of the IRS by more than 20% since 2010. The U.S. approach to enforcing transfer pricing laws suffers from a mismatch between models of compliance and enforcement, in which compliance is voluntary and dynamic according to the Arm’s Length Standard with unlimited opportunities for profit shifting, while enforcement is scarce, random, and ineffective when it occurs.
Most illegal profit shifting remains undetected, illustrating that current enforcement approaches are ineffective. Under these conditions, failed enforcement is technically more costly than no enforcement. Yet increasing the amount of transfer pricing enforcement without fundamentally changing the nature of this enforcement is likely to fail, because current approaches are unable to detect non-compliance and have not been successful in enforcing the law when non-compliance is detected. This result leads to high audit rates for compliant taxpayers, an inability to identify sophisticated non-compliance, and failure to overcome non-compliance when it is detected.
Leveraging innovations from law enforcement, industry, academia, and other sources, we find that the use of more advanced forensic approaches and technologies by the IRS and possibly state tax authorities could dramatically improve the effectiveness of transfer pricing enforcement efforts and lead to greater compliance. We identify specific systemic improvements based on new forensic models of tax enforcement that could result in more accurate risk detection, deployment of scarce resources on the largest non-compliance risks, elimination of examinations targeting compliant taxpayers, and improvement in the ability to prevail in examinations of non-compliance. We provide specific recommendations to achieve these objectives and illustrate the potential of these approaches with two case studies that apply them in the context of two existing enforcement outcomes.
Keywords: transfer pricing; auditing; forensic taxation; tax compliance; and tax enforcement
Impact of Perceived Empathy and a Confidentiality Guarantee on Auditee Reporting Intentions | Full Article (PDF)
Aaron B. Wilson
Diane M. Nelson
Abstract: This study extends earlier research on factors that influence an auditee’s intention to report questionable behavior to an external auditor. We examine the effect of the level of perceived empathy displayed by an external auditor along with the effect of a confidentiality guarantee framed by the external auditor’s SAS 99 requirements. The effect of perceived empathy and a confidentiality guarantee is evaluated under two fraud types: asset misappropriation and financial statement fraud. The results suggest that both perceived empathy and a confidentiality guarantee affect reporting intentions. The results were further evaluated at the fraud type level, suggesting when financial statement fraud is observed, the auditee’s reporting intention is influenced by both the level of perceived empathy displayed and a confidentiality guarantee. These findings provide new options that an external auditor has at their disposal to encourage whistleblowing behavior, specifically in situations involving financial statement fraud.
Keywords: whistleblowing; perceived empathy; confidentiality guarantee; SAS 99 fraud inquiry; financial statement fraud; asset misappropriation
Why Do Auditors Fail to Identity Fraud? An Exploration | Full Article (PDF)
Gary Kleinman
Pam Strickland
Asokan Anandarajan
Abstract: The auditing profession has an important responsibility in locating financial statement fraud as part of its standard procedures if such fraud results in material misstatements of the client firm’s financial statements. Yet it is most usually not the auditor that discovers the fraud. Despite closer regulatory scrutiny and harsher penalties for financial statement fraud, there seems to be little improvement in identifying fraud among those who seek to uncover it. This study proffers ideas as to why auditors are most often not the one to discover fraud affecting the client’s operations. Based on our topical review we surmise that there are a variety of factors, not yet fully investigated in auditing research, that may prevent auditors from identifying fraud. The factors, alone or in combination, may act to affect the auditor’s ability to accurately perceive fraud when it exists. We build on a framework of factors developed by Asare, Wright, and Zimbelman (2015) and propose that the factors described in this article, contribute to the frequent failure of auditors to detect fraud that materially affects the financial statements.
Keywords: financial statement fraud; audit; forensic accounting; fraud assessment; auditor inherent factors
Back to Top
Back to Top
Effects of Guanxi with Supervisor on Whistleblowing | Full Article (PDF)
David J. Emerson
Ling Yang
Yanyan Li
Abstract: In this article we investigate how guanxi with supervisor (a particularistic relationship between a subordinate and a supervisor in Confucian cultures) is related to whistleblowing intentions. In the West, the concept is who you know is more important than what you know. We offer competing hypotheses positing both a positive and negative association based on conflicting evidence in the extant research. Using structural equation modeling, we find that guanxi with supervisors exert a positive influence on whistleblowing through both internal and external channels. We also find that organizational trust mediates the association between guanxi and whistleblowing through internal channels.
The Effects of Accounting Complexity and the Choice of Accounting Methods on Financial Reporting Quality: Evidence from the Oil and Gas Industry | Full Article (PDF)
Russell Barber
Dana Hollie
Abstract: This study examines whether the financial reporting quality of oil and gas firms differs for firms that use successful efforts versus full cost accounting methods. Successful efforts is generally perceived as a more complex method, while full cost is perceived as a less complex method. The Financial Accounting Standards Board (FASB) considers reducing unnecessary complexity in financial reporting a benefit to all FASB stakeholders. This research provides additional insights into the discussion on accounting complexity and financial reporting quality. Using restatements as a proxy for financial reporting quality, we find that firms using successful efforts (the more complex method) have better financial reporting quality, as shown by a lower likelihood of restatements. These findings have implications for regulators, investors, auditors, and academics interested in financial reporting quality and the relative association of complexity with financial reporting quality.
Keywords: financial reporting quality; successful efforts; full cost; accounting choice; restatements; accounting complexity