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Weakened Reporting? The Effect of Clawback Regime and Bonus Compensation on Fraud Reporting | Full Article (PDF)
Kelsey Dworkis
Adam Greiner
Lisa Victoravich

Abstract: The Dodd-Frank Act (DF) includes a clawback provision that introduces the possibility that an executive would be required to forfeit incentive-based compensation if a tip leads to a restatement, regardless of the executive’s involvement in the restatement. We study whether an executive observer is less likely to report fraudulent financial reporting when a higher level of bonus compensation is subject to clawback under the DF clawback regime relative to not being subject to clawback under the Sarbanes-Oxley Act (SOX) regime. Our experiment incorporates two reporting outlets available at public companies—a company’s internal hotline which does not offer a monetary incentive to report fraud and the SEC hotline which offers a monetary incentive. For both reporting outlets, we find that an observer is less likely to report fraud when a higher level of bonus compensation is subject to clawback under DF versus not subject to clawback under SOX. We discuss implications of our findings for auditors, compensation committees, and policy makers.

Keywords: Whistleblowing; executive compensation; clawback; Dodd-Frank Act
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An Exploration of Internal Controls and Their Impact on Employee Fraud in Small Businesses | Full Article (PDF)
Kent Lachney

Abstract: The purpose of this qualitative study is to gain greater understanding of the current practices of the internal control systems of small businesses and to explore the effectiveness of their systems in comparison with anti-fraud activities recommended by forensic accountants. Five small businesses were selected from members of the Central Louisiana Regional Chamber of Commerce who had fewer than 100 employees. The researcher interviewed the owners and/or managers of the businesses, reviewed and analyzed company documentation, interpreted data, made observations, and offered recommendations. Each participant was asked to respond to questions related to the five elements of the model developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO): control environment, risk assessment, control activities, information and communication, and monitoring. The study discovered that there were more internal controls utilized by the businesses that participated in this study than were depicted in a review of current literature. Also, several themes of best practices of internal controls were discovered:  anti-fraud training; written code of conduct; risk assessment; hiring and onboarding process; approval processes and authorization levels; separation of duties; information and communication; and monitoring. Six recommendations for action are: establishing internal controls; addressing personnel issues; conducting anti-fraud training; revising personnel manuals; assessing risk; and monitoring COSO standards.

Keywords: Small businesses;best practice; employee fraud; internal controls; Committee of Sponsoring Organizations of the Treadway Commission (COSO)
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Early Evidence on the AS 3101 Critical Audit Matters Disclosure | Full Article (PDF)
Dana Hollie

Abstract: As the deadline looms for companies to comply with AS 3101, the new critical audit matters (CAM) disclosure in the independent auditor’s report, this study evaluates how June 30 fiscal year-end large accelerated filers have already met the deadline with reported CAMs, and provides some insights to companies still looking ahead to this part of the audit process. Firms reported between one and four CAMs each, with the average disclosure consisting of 1.74 CAMs, with 100% of the firms disclosing at least one CAM. We found that 48% of the CAMs reported for these firms were related to (1) revenue recognition and (2) the assessment and impairment of intangibles. And, 57% of the CAMs categorized as acquisition-related issues was related to assessing intangibles as part of an acquisition. Additionally, 84.5% of the firms fall within the manufacturing (51.7%) and services (32.8%) industries. As auditors are firming up their audit work for firms, this study provides auditors and firms with insights into what CAMs we may expect to see with 2019 December year-end firms, and with 2020 year-end firms that are both large and non-large accelerated filers that were previously not required to report CAMs in 2019.

Keywords: Critical audit matter, PCAOB, CAM, AS 3101
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Blockchains Impact on Risk Assessment Procedures | Full Article (PDF)
Sean Stein Smith

Abstract: This article examines how blockchain integration can, and is, changing risk assessment procedures as they connect to attestation engagements. Drilling into the implications of blockchain from a risk assessment perspective allows this research to discuss terminology as well as to also identify situations and applications for practitioners. Specifically, this research examines the implications associated with changing risk assessment criteria, fraud, smart contracts, considerations that should be embedded into an analysis of data access mechanisms, and how different aspects of audit and attestation can potentially be disrupted by the integration of blockchain technology. Additionally, an examination of audit and assessment risk are included within this study, both on a standalone basis as well incorporating blockchain into the analysis.

Keywords: Blockchain; accounting; auditing; attestation; smart contracts
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Accountant’s Advice in the Context of Midco Transactions: Do Larger Accounting Firms Give Better Tax Advice? | Full Article (PDF)
John R. McGowan

Abstract: Midco tax shelters have been used by shareholders to avoid corporate taxes on liquidations of appreciated assets. For many corporate taxpayers, the use of Midco tax shelters to avoid corporate taxes appeared to be an opportunity too good to let slip away. In early cases, the Tax Court exonerated taxpayers of liability for corporate taxes based on their lack of constructive or actual knowledge of any fraudulent scheme. After a string of initial taxpayer successes, the courts awarded numerous victories to the IRS claiming that taxpayers must have known about the constructive fraud. The focus of this article is the advice provided by tax accountants and attorneys in the context of Midco tax shelters. The goal is to determine if there is any qualitative difference in the advisors’ advice based on firm size. Bobek et al. (2017) analyzed survey evidence to find a relatively stronger ethical climate at Big-4 accounting firms when compared with industry and smaller accounting firms. This study provides evidence that is consistent with this proposition. Based on the sample of decisions analyzed in the research in the context of Midco tax shelters, tax advisors from larger Big-4 accounting firms exhibit more due diligence and care than their counterparts at small accounting firms. Moreover, attorney advisors garner low due diligence scores, regardless of size

Keywords: Midco tax shelters; transferee liability; due diligence; advisors’ advice; ethics
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The Automation of Financial Statement Fraud Detection: A Framework Using Process Mining | Full Article (PDF)
Tiffany Chiu
Yunsen Wang
Miklos A. Vasarhelvi

Abstract: Process mining is used for auditing and internal control risk assessment as an audit analytical tool. This article provides a framework on how process mining can be applied to identify fraud schemes. Specifically, the proposed framework captures how the patterns in process mining can be used to detect potential fraudulent transactions. This study contributes to the existing literature by associating notable variants/activities with potential fraud schemes, which can be used as an automatic tool to detect the potential fraud of the transactions.

Keywords: Process mining; financial statement fraud detection; fraud schemes; event logs
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Audit Firm Tenure, Corporate Tax Avoidance, and Firm Value | Full Article (PDF)
Li (Lily) Z. Brooks
Pei-Yu Sun

Abstract:Regulators express concerns on the negative impact of audit firm tenure on the monitoring role of external auditors. We propose that tax avoidance should increase firm value if extended audit firm tenure facilitates managers to advance shareholder wealth. Conversely, extended audit firm tenure should decrease firm value if extended audit firm tenure exacerbates managers’ opportunistic behavior for rent extraction. Even though tax avoidance may not necessarily enhance firm value, we find a positive moderating effect of audit firm tenure on the association between tax avoidance and firm value. Our results imply that mandatory audit firm rotation may have unintended consequences to external auditor’s monitoring role.

Keywords: Audit firm tenure;tax avoidance; firm value; corporate governance
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Internal Control Violations at Thor Industries: What Are the Lessons? | Full Article (PDF)
Srinivasan Ragothaman
Tyler Custis

Abstract: This article describes the implementation of an “Internal Control Violation/Fraud Case Study” in two auditing classes and an undergraduate business law class. The authors developed an instructional case based on the major (repeated) internal control violations and financial fraud at Thor Industries. This case study exposes students to several auditing and ethics related concepts including: 1) internal control violations; 2) fraud red flags; 3) internal control evaluation (AS 5); 4) design of new controls (COSO 2013); 5) ethical reasoning and utilitarian, justice, and rights principles; 6) SEC investigations and complaints (SEC 2011a); 7) analysis of AAERs (SEC 2011c); and 8) professional skepticism. Different questions were posed in different classes. Students were required to access professional literature (not just the textbook) including Accounting and Auditing Enforcement Releases, SEC complaints in the U.S. District Court in Washington DC, and auditing standards. Student groups found several red flags associated with the fraud perpetrated at Thor Industries and suggested many new internal controls. They also answered questions on ethical issues/theories, materiality determinations, professional skepticism, SEC investigations, risk assessment, governance issues, and regulatory issues. Student opinion surveys also were conducted about the learning outcomes of this decision, and the survey results indicate strong student engagement, group learning, and knowledge enhancement.

Keywords: Internal control; ethics; SEC oversight; materiality; control weaknesses
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Corporate Governance Characteristics of FCPA Violators | Full Article (PDF)
Obeua S. Persons

Abstract: This study’s motivation is to identify corporate governance characteristics that are significantly related to a violation of the Foreign Corrupt Practices Act (FCPA) which is the anti-bribery law of the United States (U.S.). Seven corporate governance characteristics were collected from: (1) 125 U.S. and foreign public companies (violators) that were targets of the U.S. Securities and Exchange Commission (SEC)’s FCPA enforcement actions from 1996 through 2016, and (2) 125 non-FCPA-violating companies matched with the violators on the basis of industry, size, and home region. Applying conditional logit regression analysis to FCPA violators and their matched non-violators, this study finds that FCPA violators had fewer audit-committee meetings, less board-of-directors (BOD) independence, a shorter-tenure general/legal counsel, fewer female executives, less profitability, a shorter-tenure chief executive officer, and a lower percentage of audit-committee accounting experts. A robustness test of Sarbanes-Oxley Act (SOX) impact indicates a stronger negative relation between FCPA-violation likelihood and audit-committee accounting experts, and board-of-director independence. This study has four contributions. First, top management and board of directors can use these findings to improve their company’s corporate governance so as to decrease the likelihood of FCPA violation. Second, the findings can help regulators identify potential FCPA violators for investigation and prosecution. Third, investors may want to avoid potential FCPA violators that fit the corporate-governance profile identified by this study. Fourth, this study contributes to the FCPA and corporate governance literature as it is the first one to empirically examine the relationship.

Keywords: Bribery; Corporate governance; Foreign Corrupt Practices Act; General Counsel, audit committee, director independence.
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Profiling HMRC and IRS Scammers by Utilizing Trolling Videos: Offender Characteristics | Full Article (PDF)
Calli Tzani-Pepelasi
Mirjana G. Nilsson
David Lester
Ntaniella R. Pylarinou
Maria Ioannou

Abstract: Fraud has become a global problem, with victims of fraud suffering financially, psychologically, and emotionally; to the extent that some individuals even attempt suicide due to embarrassment, shame, and anger. HM Revenue and Customs (HMRC) and Internal Revenue Service (IRS) scams are one type of fraud that has risen significantly in the past few years. Many of these scams originate in countries where the police have limited resources to tackle them, whilst the Western countries that suffer huge financial losses have no jurisdiction in the countries where the scammers are based. Consequently, there is limited available research on tax scams, limited information on the characteristics of the offenders who execute them, and a great need for more awareness and public protection.

The present exploratory study used 30 YouTube videos where internet trolls engage with HMRC/IRS scammers. The internet trolls attempted to preoccupy the scammers by making the HMRC/IRS scammers believe they have identified a potential victim, a potential “win,” thus wasting their time and potentially stopping them from victimizing someone else. The qualitative analysis of the 30 YouTube videos indicates that individuals should be vigilant when they receive calls from persons with foreign accents and poor English spoken vocabulary, alleging they are from the HMRC or IRS tax institutions. These scammers issueunrealistic, personal threats, use erroneous grammar and foul language, phish for personal information, demand secrecy over the transaction, and show disrespect and disdain for the victim. They also request immediate payment over the phone by means that are not HMRC/IRS approved.

Keywords: Cybercrime; scammer traps; YouTube videos; boiler rooms; trolls
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