Current Issue

Volume 14: Issue 1, January–June 2022

Table of Contents

• The Anatomy of  a Medicaid Fraud
• Think First, Act Later, or Act First, Think Later: Does the Fraud Triangle Hold When Individuals Are Impulsive?
• Tyrannical Rex: Psychopathic Corporate Leadership and White-collar Crime
• Can Forensic Accounting Experts Save Athletes from Becoming Fraud Victims?
• How to Avoid Inadvertently Violating the Foreign Corrupt Practices Act Abroad
• An Examination of Fraud Risk at Oil and Gas Companies
• The Joint Effect of Investor Protection Regimes and Big 4/non-Big 4 Auditors on Audit Quality: Evidence from Initial Public Offerings in the U.S. Market 
• Management Earnings Forecasts, Earnings Management, and the Sarbanes-Oxley Act
• Integration of Big Data into Forensic Accounting Education and Practice: A Survey of Academics in China and the United States
• Personal Skills and Educational Qualifications for Practicing Forensic Accountants in Saudi Courts: Exploratory and Qualitative Semi-Structured Interviews
• Fresenius Medical Care: A Case Study on the FCPA
• Book Reviews

The Anatomy of a Medicaid Fraud | Full Article (PDF)
Jacob Kuriyan

Abstract: The author examines a particularly egregious type of fraud that has increased Medicaid costs and strained state budgets. The seeds of this fraud and abuse originated in the Medicaid expansion of the Affordable Care Act when the Federal Government paid insurers a higher-than-normal premium to cover unanticipated medical needs of new enrollees with no prior health insurance. The increased medical needs never materialized because the Medicaid enrollees were young and had no latent medical issues. Insurers pocketed the overpayments, and under the Federal Fair Claims Act, retention of overpayments is fraud and subject to criminal prosecution and triple penalties.

The anatomy of this fraud is explored first—why and how it happened, and how the fail-safe measures designed by the Federal Government failed. Using a tool that translated premium payments to treatment costs, the fraud was detected and led to the eventual recovery of over $500 million dollars in overpayments in one state. Thirty-five other states opted to expand Medicaid, and a conservative estimate of similar overpayments awaiting recovery in those states is $100 billion. Of course, fraud has a statute of limitations, and time is of the essence in recovering these overpayments.

Keywords:Medicaid; fraud; ACA; Affordable Care Act; overpayments; CareMaps; digital forensics

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Think First, Act Later, or Act First, Think Later: Does the Fraud Triangle Hold When Individuals Are Impulsive? | Full Article (PDF)
Alyssa S. J. Ong

Abstract: This study examines whether the rationalization attribute of the fraud triangle applies to impulsive individuals. According to the fraud triangle theory, opportunity, pressure, and rationalization are present when individuals decide to engage in fraudulent activity. However, this theory might not hold true for impulsive individuals. Prior research suggests that when individuals have the sudden urge to do something, individuals with high levels of trait impulsivity translate that impulse into behavior more rapidly than individuals with low levels of trait impulsivity. Manipulating the pressure and opportunity attributes of the fraud triangle, this study examines if individuals actually rationalize their fraud behavior prior to the fraud act by investigating the time taken for individuals to arrive at the decision to commit or refrain from fraud. Results of the simulation suggest that impulsive individuals were quicker to make decisions to engage in or refrain from fraud behaviors than non-impulsive individuals. Impulsive individuals bypass any consideration for the potential consequences; whereas non-impulsive individuals are more deliberative when presented with the opportunity to commit fraud.

Keywords:Impulsivity; fraud triangle; rationalization; neutralization

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Tyrannical Rex: Psychopathic Corporate Leadership and White-collar Crime | Full Article (PDF)
Frank S. Perri

Abstract:Historically, scholarship on corporate leadership focused on positive attributes of what is commonly referred to as authentic leadership that is leadership displaying traits of integrity, competence, and charisma. However due to past and present corporate scandals, scholarship has focused some attention to psychopathic corporate leadershipthat display a lack of respect for the law by engaging in various white-collar crimes to satisfy motives, exploiting corporate resources for self-gain, with negative outcomes for various stakeholders. This article considers the links between white-collar crime and psychopathy and how psychopathy facilitates corporate leadership ascension that produces the opportunity to participate in organization-wide white-collar crime. Although corporate fraud various interrelated risk factors such as the role subordinates play enabling fraudulent behaviors, isolating leadership for study is warranted given the financial and emotional devastation capable of being inflicted on investors, employees, and society at large due to the power they wield.

Keywords: Psychopathy;corporate leadership; white-collar crime; fraud

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Can Forensic Accounting Experts Save Athletes from Becoming Fraud Victims? | Full Article (PDF)
Richard G. Brody
Gaurav Gupta
Ryan Knight
David Byrne
Jerrold Colton

Abstract: Athletes around the world continue to become victims of fraud at the hands of their trusted business advisors. The purpose of this research is to critically appraise the role of forensic accountants (and other fraud experts) in minimizing the likelihood that professional athletes will be victimized by unscrupulous advisors and money managers who have gained their trust and operate with limited or no oversight. The article explores some high-profile incidents involving defrauded athletes and makes the case for hiring the services of forensic accountants in protecting the fortunes of professional athletes who often rely on and trust others with their money. We suggest that the services of a forensic accountant can be extremely helpful for professional athletes who may become victims of financial fraud. Independent anti-fraud professionals will serve as the watchdog over the finances of professional athletes. Additionally, enhancing financial literacy knowledge of professional athletes can be extremely helpful for professional athletes to save themselves from being duped out of their earnings and savings. While little or no similar research exists, this study benefits from having a long-time professional sports agent as well as one of the only fraud experts who focused his business on helping professional athletes. Fraud involving athletes has been a problem for many years and it appears to be getting worse. The time has come for some practical solutions and this article provides them.

Keywords: Professional athletes; financial fraud; financial literacy; forensic accounting

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How to Avoid Inadvertently Violating the Foreign Corrupt Practices Act Abroad | Full Article (PDF)
B. Anthony Billings
D. Larry Crumbley
Cedric L. Knott

Abstract: International bribery payments by U.S. individuals and multinational corporate entities have long been a problem for the U.S. government. As such, in December 1977, the United States enacted the Foreign Corrupt Practices Act (15 U.S.C. § 78dd-1, et seq.) to prohibit U.S. individuals and businesses from bribing foreign officials, including entities, for personal or business gain. The Act applies to both domestic and foreign government practices in discouraging bribes from government officials. However, the lengthy process of investigations results in high costs on the targets of FCPA violations, the U.S. Department of Justice (DOJ), and the Securities and Exchange and Commission (SEC). Further, individual violators of these laws can face stiff fines and possibly jail time. This article reviews essential provisions of the Foreign Corrupt Practices Act (FCPA) for informing financial professionals involved in foreign commerce of how the Act is enforced to help in avoiding running afoul of the FCPA.

Keywords:Foreign Corrupt Practices Act; transnational bribery payments; FCPA violation; Securities and Exchange Commission; efficient and ethical markets; and Financial Crimes Enforcement Unit

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An Examination of Fraud Risk at Oil and Gas Companies | Full Article (PDF)
Marcus Burger
Katherine Taken Smith
L. Murphy Smith
Justin Wood

Abstract: This article examines fraud risk at oil and gas companies. This examination includes anecdotal evidence of major fraud cases and a statistical analysis of fraud risk at major U.S. petroleum firms. In addition, some key experts are presented who can help firms prevent fraud. Specific measures that can be used to estimate fraud risk include sales growth, leverage, and Altman Z-scores. In the oil and gas industry, below-industry-average sales growth, above-industry-average leverage, and low Altman Z-scores indicate potential financial distress and thereby higher fraud risk. All types of companies, including oil and gas companies, must be wary of fraud risk and take steps to detect and prevent fraud in their operations and financial reporting.

Keywords: Oil and gas firms; fraud; fraud prevention; fraudulent financial reporting

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The Joint Effect of Investor Protection Regimes and Big 4/non-Big 4 Auditors on Audit Quality: Evidence from Initial Public Offerings in the U.S. Market | Full Article (PDF)
Norman Massel
Jungeun ‘JP’ Park

Abstract: We investigate whether audit quality is jointly affected by the investor protection regime and the firm’s choice of a Big 4/non-Big 4 auditor. We use financial restatements as a proxy for a low-quality audit, in a within-country setting of U.S. firms before and after their IPO. We first find that the likelihood of a client restatement is higher in the pre-IPO year, when investor protection is stronger. This result suggests that the investor protection regime does not solely increase audit quality. We then find that Big 4 clients are less likely to issue a restatement of pre-IPO financial statements than non-Big 4 clients, suggesting that Big 4 auditors enforce the stronger investor protections present pre-IPO. Furthermore, we find that clients of non-Big 4 auditors are more likely to have a restatement of the pre-IPO financial statements than the post-IPO financial statements, leading to the conclusion that the higher likelihood of a client restatement in the pre-IPO period is driven by IPO firms with non-Big 4 auditors. These results suggest that non-Big 4 auditors, having less reputational capital at risk, either acquiesce to the issuer’s incentive to report strong financial performance in the pre-IPO time period, or they are less able to detect materially misstated financial statements. By using a difference in difference research design to compare audit quality of the same client pre-IPO and post-IPO, we are able to hold client characteristics constant. This research design addresses the concern that Big 4 and non-Big 4 audit quality differences may be driven by client characteristics.

Keywords: Audit quality; initial public offerings; investor protection; risk premium; restatements; STEM IPO

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Management Earnings Forecasts, Earnings Management, and the Sarbanes-Oxley Act | Full Article (PDF)
Yuan Shi
Dongfang Nie
Lin Chen

Abstract: Prior literature finds that managers substitute downward earnings forecast and real earnings management (REM)for accrual-based earnings management (AEM). We extend this stream of literature by (1) investigating the effect of the Sarbanes–Oxley Act (SOX) on the likelihood of income increasing AEM, (2) examining how SOX affects such substitutions, (3) exploring the relation between REMand downward forecast guidance. We find that the likelihood of income increasing AEM increases after SOX. We show that SOX increases the two substitutions. We further find that downward forecast guidance complements income-increasing REM, after controlling for the effect of income-increasing AEM.

Keywords: Earnings management; management earnings forecast; the Sarbanes–Oxley Act

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Integration of Big Data into Forensic Accounting Education and Practice: A Survey of Academics in China and the United States | Full Article (PDF)
Zabihollah Rezaee
Jim Wang

Abstract: Forensic accounting has advanced as an important field of accounting with a specialization in fraud and non-fraud (valuation, litigation consulting and expert witnessing) practices and education. Prior studies document that China lagged the United States regarding the coverage of big data and data analytics in forensic accounting education. We conduct our examination of the global coverage of big data in forensic accounting in two stages. In the first stage, we investigate the impact of institutional factors on the use of big data in forensic accounting practices in China, and conclude that economic, legal, social-cultural, political, and professional factors affect the use of big data in forensic accounting services in China. In the second stage, we examine the coverage of big data and data analytics in forensic accounting education by surveying a sample of academics from China and the United States. The results of the survey show that academics from both China and the United States have similar views regarding the importance, demand, relevance, benefits, coverage and use of big data in forensic accounting education. The results have implications to advance forensic accounting practice and education worldwide.

Keywords: Forensic accounting education and practice; big data; data analytics; business and accounting curricula; China

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Personal Skills and Educational Qualifications for Practicing Forensic Accountants in Saudi Courts: Exploratory and Qualitative Semi-Structured Interviews | Full Article (PDF)
Mohammed Alzahrane

Abstract: This study identifies the knowledge, personal skills, and educational qualifications of practicing forensic accountants in Saudi courts, that specialize in forensic services that meet the needs of the judicial system and their clients. The present study aims to obtain a deeper understanding of the perceptions and practices of forensic accountants in supporting judges and the judicial system in Saudi Arabia. In addition, our objective is to explore forensic accounting in depth through the opinions, thoughts, concerns, conceptualizations, and experiences of Saudi judges. Seven judges with an average of 15 years of experience in the commercial court of appeals and commercial courts were interviewed from four different regions in Saudi Arabia. The selected judges are routinely involved in forensic accounting cases requiring expert testimony, in cases involving, but not limited to, fraud, insurance claims, contract disputes, business loss estimation, and intellectual property claims.

The results of seven interviews with the forensic professionals' services of Saudi judges are comprehensive and complicated. With a difference in opinion regarding the best practice concerning financial accounting, all the samples agreed on the importance of forensic professionals. Additionally, judges suggest that as part of undergraduate or graduate programs, forensic accountants need good working skills, such as oral and written communication skills, technology, and analytical skills.

Keywords: Forensic accounting; education qualification; specialized forensic knowledge; personal attributes; soft skills; Saudi Arabia

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Fresenius Medical Care: A Case Study on the FCPA | Full Article (PDF)
Devon Baranek
Maria Sanchez

Abstract: This case study examines the Foreign Corrupt Practices Act (FCPA) enforcement action for Fresenius Medical Care AG and Co. KGaA (FMC), the world’s largest provider of kidney dialysis equipment and services. In 2019, FMC agreed to resolve a joint Department of Justice-Securities and Exchange Commission investigation by paying $231 million for its participation in various corrupt schemes to obtain business in at least 17 different countries between 2007–2016. The FMC case is unique in the depth and breadth of the fraud, with illegal schemes that were many and varied. Some of these fraudulent arrangements included concealing payments through joint ventures, utilizing sham consulting contracts, making fraudulent payments to charities and third-party distributorships, fake commission agreements, excessive gifts and travel payments, paying bribes to customs officials, paying publicly employed doctors, etc.

The case exposes auditing students to the dual provisions of the FCPA provides them an opportunity to describe how the extensive corruption at FMC violated these provisions. The importance of implementing and maintaining a system of internal controls in connection with the prevention and detection of fraud is highlighted. Students will identify the various negative consequences associated with FMC’s FCPA violations and describe the remediation efforts undertaken in order to promote compliance. The role of internal and external auditors is discussed, as well as a review of the regulatory guidance provided for auditors as it relates to fraud. The case identifies unique ethical issues faced by accountants and reinforces the importance of ethical behavior.

Keywords: Foreign Corrupt Practices Act; bribery; fraud; corruption; accounting and anti-bribery provisions

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