Current Issue

Volume 15: Issue 2, July–December 2023

Table of Contents

• “Let’s Have a Chat:” Applying ChatGPT and Other Large Language Models to the Practice of Forensic Accounting
• Cybersecurity Risk Disclosure Quality: Does It Affect the Cost of Debt?
• How Rules-Based Standard-Setting Facilitated the 2008 Subprime Crisis: Lessons from the “Qualifying Special-Purpose Entity Concept”
• Fraud Brainstorming Sessions and Interviews in a Remote World: Initial Evidence
• Canada’s Li-Cycle Holding Corporation: Innovative Technology and Innovative Accounting for Off-Take Agreements
• Self-Reporting Cash Tip Income for Income Tax Purposes
• In-House Preparation, Outsourcing, or Offshoring of Tax Services to Third-Party Service Providers: Does Disclosure to the Client Matter?
• Diffusion of Valuation Standards among Forensic Accountants Operating in Italian Courts: Exploring Some Inhibiting and Facilitating Factors
• What are the Determinants of Earnings Management for Misrepresentation? Evidence from Japan
• Book Reviews

“Let’s Have a Chat:” Applying ChatGPT and Other Large Language Models to the Practice of Forensic Accounting | Full Article (PDF)
Daniel Street
Joseph Wilck

Abstract: ChatGPT has captured the popular imagination because of its conversational voice, its wide scope of ‘knowledge’, and far-ranging abilities. In this article, we use an innovative interview method to introduce CPAs to ChatGPT, its development, and the current state of its capabilities. We then draw upon our own expertise to discuss the evolution of large language models (LLMs), suggest applications of LLMs in the field of accounting, critically evaluate LLMs’ current strengths and weaknesses, and propose five principles to effectively and safely leverage LLMs in the accounting domain.

Keywords: ChatGPT; large language models; Chatbots; AI

Back to Top
Cybersecurity Risk Disclosure Quality: Does It Affect the Cost of Debt? | Full Article (PDF)
Dan Harris
Cemil Kuzey
Christine Naaman
Najib Sahyoun

Abstract: Since 2011, the SEC has required public firms to disclose their risks related to cybersecurity. Due to an increase of cyberattacks on U.S. firms, the SEC issued additional guidance to public firms on cybersecurity risk disclosure in 2018. This study investigates the association between the quality of cybersecurity risk disclosures and the cost of debt. We contribute to the literature by focusing on the U.S. debt market, which has been growing at fast rates in the last decade, whereas most of the extant research focuses on the equity market. Cybersecurity risk disclosures that are lengthy, more difficult to read, and contain litigious language decrease disclosure quality. We find that the lower the quality of cybersecurity risk disclosure, the higher the cost of debt. Our empirical results have important implications to management, board of directors, and regulators. The study demonstrates that cybersecurity risk disclosures need to be simplified, easy to read, and without boilerplate language that could be applicable to any firm.

Keywords: Cybersecurity risk disclosure; cost of debt; data breach; digital forensics

Back to Top
How Rules-Based Standard-Setting Facilitated the 2008 Subprime Crisis: Lessons from the “Qualifying Special-Purpose Entity” Concept | Full Article (PDF)
Alejandro Hazera

Abstract: Despite the strong post-Enron accounting reforms, banks repeated Enron-style earnings manipulation in the years leading up to the 2008 subprime bubble by using a loophole, known as the Qualifying Special Purpose Entity (QSPE), to move subprime loans off their balance sheets. In the post-bubble period, the Financial Accounting Standards Board (FASB) eliminated QSPEs (SFAS 166 and 167) and forced some big banks to re-recognize QSPEs' subprime loans. In some cases, high amounts of re-recognized loans forced the institutions to accept bailout assistance to remain solvent. Given these practices, this article examines accounting standards and exposure drafts regarding QSPEs to assess whether, in the years leading up to the bursting of the subprime bubble, constituent lobbying forced the FASB to delay reforms to the QSPE concept.

The issue addressed is whether the FASB attempted to resolve problems with QSPEs at the standard-setting level that could have been resolved more effectively, through auditor judgment, at the engagement level. Also, the effective failures of Bear Stearns and Citigroup are examined to explore whether auditors based unqualified audit opinions on the institutions' literal compliance with the QSPE rules rather than on the auditors' judgment regarding the economic substance of loan transfers to the banks' QSPEs. The chronology provides evidence that the FASB's deference to a knowingly faulty concept delayed needed reforms. Also, the cases suggest that auditors issued unqualified opinions on banks' literal compliance with the QSPE concept rather than on auditors' judgment. The review of standards and cases indicates that, during the emergence of asset bubbles and the current bank troubles, independent forensic and investigative auditors should review troubled banks' loans to assess non-fraudulent factors that may inflate troubled banks' loan portfolios. These lessons also apply to circumstances such as the recent collapse of Silicon Valley Bank, which require a deeper evaluation of long-term, accepted standards than is required by routine, periodic financial audits.

Keywords: Subprime crisis; rules-based accounting; bank loan accounting; special purpose entities; earnings manipulations

Back to Top
Fraud Brainstorming Sessions and Interviews in a Remote World: Initial Evidence | Full Article (PDF)
Gillian Rose Barnes
Dana R. Hermanson

Abstract: This study provides initial evidence about the perceived impact of the COVID-19 remote work environment on auditors’ fraud brainstorming sessions and fraud-related interviews. Interviews with 19 auditors from primarily local/regional accounting firms reveal that the remote environment is not significantly impacting auditors’ fraud brainstorming sessions. However, auditors perceive remote fraud-related interview sessions to be less effective than, but as efficient as, face-to-face interviews. Auditors’ inability to read non-verbal cues in the remote environment is hampering remote fraud-related interviews. Despite the recent challenges with fraud-related interviews, the interviewees typically believe that their ability to fully identify and consider all significant fraud risks and to maintain overall audit quality is not impaired. Rather, audit efficiency has declined as firms adjusted to remote work. Beyond the insights into auditors’ fraud-related procedures, the interviews also suggest that the remote environment is enhancing auditors’ personal flexibility but impairing the training of newer auditors. We encourage future research to complement the initial evidence in this article.

Keywords: Fraud; brainstorming; interview; auditor

Back to Top
Canada’s Li-Cycle Holdings Corporation: Innovative Technology and Innovative Accounting for Off-Take Agreements | Full Article (PDF)
Kang Cheng
D. Larry Crumbley

Abstract: To eliminate fossil fuel dependence, there is global pressure to move to all-electric vehicles, which calls for stronger batteries and an efficient recycling industry. Canada’s Li-Cycle Holding Company, allegedly the leader in battery-recycling with innovative technology, was initially listed on the NYSE on August 11, 2021, and successfully raised more than half a billion in capital. Within months, shareholders sued the company for questionable accounting and other business practices. This article addresses accounting issues raised in the class-action lawsuit.

The focus of the lawsuit is on an off-take agreement and the revenue recognized under this agreement. The issues are whether the contracted party is a customer or a broker; whether the sales are final; if so, then when and how to recognize revenue; and is it appropriate to subsequently adjust recognized revenue. Those issues are specifically addressed by the FASB Codification Topic 606 and IFRS 15. Contracts with third-party customers involved, such as Li-Cycle’s off-take agreement, are becoming more popular and complicated, and the appropriate accounting is open to debate. Reviewing this study helps clarify the lawsuit and the accounting treatments regulated by established accounting standards.

Keywords: Li-Cycle Holding Company; off-take agreement; take-or-pay agreement; Traxys; principal-agent relationship; contract with customers; Topic 606: Revenue Recognition; IFRS 15

Back to Top
Self-Reporting Cash Tip Income for Income Tax Purposes | Full Article (PDF)
Peter Kipp
Julia Mathew
Kayla N. Sapkota
Pradeep Sapkota

Abstract: In this study, we explore why college students that work in tip-producing jobs underreport tip income for tax purposes. While the IRS has provided clear and adequate guidelines on what constitutes tip income, the magnitude of underreporting is surprising, even if the IRS primarily relies on individuals self-reporting this type of income. Based on our survey data, we find that workplace culture plays a significant role in reporting practices. Most students are influenced by groupthink (rather than individual decision-making) when deciding not to report tip income. In addition, we conduct semi-structured discussions with the students and find that most students do not know the rules that pertain to self-reporting of tip income.

Keywords: Tip income; college students; income tax; tax evasion; tax avoidance

Back to Top
In-House Preparation, Outsourcing, or Offshoring of Tax Services to Third-Party Service Providers: Does Disclosure to the Client Matter | Full Article (PDF)
Renu Desai
Vikram Desai
Julia Davidyan
Andrew Felo

Abstract: The AICPA’s Code of Professional Conduct (the “Code”) requires that if a member intends to use the services of a third-party service provider (TPSP), the client should be informed. However, the wording in the Code is not mandatory via the use of must. In addition, there is no differentiation between disclosures of outsourcing tax return preparation versus offshoring tax return preparation. This vagueness could be considered a significant area of concern because there are ethical considerations with disclosure, or lack thereof, and the economic considerations involved in offshoring of returns that are distinctly different from outsourcing returns within the U.S. This study presents direct evidence using experiments about how individual taxpayers might react to disclosures made by tax-preparers regarding their outsourcing or offshoring relationships with TPSPs. The findings confirm that taxpayers are not indifferent between outsourcing and offshoring of their returns. In addition, taxpayers would prefer clear disclosure of TPSP usage, including information about the TPSP’s location. Finally, results suggest the AICPA should require members to obtain clients’ specific consent (an opt-in option) to outsource tax return preparation to TPSPs.

Keywords: AICPA Code of Professional Conduct; tax preparation; disclosure; outsourcing; offshoring

Back to Top
Diffusion of Valuation Standards among Forensic Accountants Operating in Italian Courts: Exploring Some Inhibiting and Facilitating Factors | Full Article (PDF)
Matteo Manera
Mariateresa Torchia
Gregory Moscato

Abstract: By reducing subjectivity and arbitrary decisions in courts, valuation standards are a powerful instrument, which can contribute to a fair trial. Nevertheless, adoption of valuation standards is not mandatory for forensic accountants in Italy. In this article, we explore the diffusion (a social process by which an innovation is communicated over time) of valuation standards among Italian forensic accountants, in terms of motivations, perceived benefits, and perceived barriers. We do this with the theoretical lenses of isomorphism and—as corollaries—of agency theory and signaling theory. This study relies on qualitative, exploratory research, based on 12 semi-structured interviews with expert forensic accountants conducted in 2021, aimed at exploring the perceptions of these professionals around valuation standards, in the five years that followed the introduction of Italian Standards of Valuation (PIV); that is from 2016 onwards. Our findings suggest that, although the vast majority of our small sample of forensic accountants praise the great work of the Italian standard setters in introducing valuation standards, most of them perceive that far less than 50 percent of the population of forensic accountants may use valuation standards in Italian courts. Waiting for future (quantitative) research to corroborate or refute our (purely qualitative) findings, which are based on a limited panel of interviewees, we propose a “trilogy” of recommendations for initial consideration by Italian stakeholders involved in the process of the diffusion of valuation standards.

Keywords: Italian forensic accounting; Italian Standards of Valuation; valuation standards adoption and diffusion; motivations; benefits; barriers

Back to Top
What are the Determinants of Earnings Management for Misrepresentation? Evidence from Japan | Full Article (PDF)
Masumi Nakashima

Abstract: This study explores whether six categories of earnings management determinants such as useful-decisions, financial performance, accounting standards, governance and internal controls, auditors, and law enforcement influence earnings management for misrepresentation simultaneously to validate the relationships. This study contributes to literature in the following ways. First, this study employs a structural equation modeling (SEM) by using the responses from the survey of 115 questionnaires from Chief Financial Officers (CFOs) of the public firms in Japan. It is likely that the sample comprises management from non-fraudulent firms that do not detect accounting fraud based on the textual analysis of MD&A disclosures. Second, this study presents a new framework that incorporates the theoretical concepts by applying the Theory of Planned Behavior, Protection Motivation Theory, and the Deterrence Theory to explain how variables influence earnings management for misrepresentation. The results of the analysis show that while accounting standards have a significant negative effect on earnings management for misrepresentation, governance and internal controls have a positive effect on earnings management to misrepresent earnings.

Keywords: Structural equation modeling; attitudes/rationalization; misrepresentation; earnings management; planned behavior theory; protection motivation theory