Current Issue
Volume 14: Issue 2, July–December 2022
Table of Contents
- An Estimate of the COVID-Related Excess Deaths in 2020
- Money Does Matter: The Effect of the SEC Reward Provision and Anti-Retaliation Protection on Corporate Whistleblowing
- Is a Picture Worth a Thousand Words ... or Lies? The Impression Management Gimmicks that Forensic Accountants Must Know
- Sad Saga of the Financial Fraud of South Carolina’s Two Failed Nuclear Power Plants
- Tax Fraud Scheme Using Nonresidential Designation by U.S. Taxpayers in the Presence of Multinational Tax Jurisdictions
- Social Networking (Guanxi) and Whistleblowing Intentions: Does CSR Ring the Bell?
- Corporate Visits to the White House and Tax Aggressiveness
- Fraud Detection by Focusing on Readability of MD&A Disclosure: Evidence from Japan
- An Inventory Diversion Case: “It’s Only Inventory Shrinkage, Right?”
- The City of Nixa Fails to Nix a Fraud Conspiracy: Applying the Enterprise Risk Management Model to a Municipal Fraud Case
- Fake Accounts Scandal at Wells Fargo: What Are the Lessons?
- IL&FS—A Case of Accounting Misstatement and Financial Mismanagement
- Book Reviews
Mark Nigrini
Abstract: A reliable estimate of the current pandemic’s death toll assists public policy makers and others in determining the effectiveness of the strategies used to mitigate and suppress the disease. Excess deaths, being the difference between the observed deaths and the expected deaths, is an objective and comparable measure of the mortality cost. Statistical techniques, such as hierarchical Poisson regression models and machine learning approaches, have been used to forecast the expected deaths in studies that estimate the loss of life from the current pandemic and other disease-related and war-related events. This study adapts the construct of abnormality (e.g., earnings, returns, trading volumes, and accruals) used in accounting research and uses Holt-Winters time-series analysis to estimate the COVID-related excess deaths in 2020. The 2020 estimated death toll for the U.S. is 477,513 people, that is 23.87 percent higher than the Centers for Disease Control and Prevention’s official death toll.
Keywords: COVID-19; excess deaths; time-series analysis; Holt-Winters method; measuring abnormality
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Aaron B. Wilson
Diane M. Nelson
Abstract: The Sarbanes-Oxley Act introduced anti-retaliation protection for corporate whistleblowers. The discussion of whistleblower incentives was again revisited with the passage of the Dodd-Frank Act. The new legislation contains strengthened anti-retaliation protection as well as the introduction of a reward incentive. This study implements an experiment which manipulates the effects of increased anti-retaliation protection and reward incentive on reporting intentions. Findings suggest that while a reward incentive provided by an external governmental entity does have a significant main effect on reporting intentions, increased anti-retaliation protection is not significant. The findings for anti-retaliation protection are contrary to expectations as strengthened anti-retaliation protection is one of the key components of the Dodd-Frank whistleblower legislation. Additional research is needed to understand why increased anti-retaliation protection is not significantly affecting reporting intentions.
Keywords: Sarbanes-Oxley Act; Dodd-Frank Act; reward incentive; anti-retaliation protection; whistleblowing; reporting intentions
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Wei-Cheng Milton Shen
Chih-Chen Lee
Abstract: Data visualization enhances communication between information presenters and users. Most training on data visualization emphasizes its technicality and design principles from the presenters' perspective and presumes its purpose to be faithful representation. However, prior literature and empirical evidence suggest that data visualization presenters might exercise discretion on the availability or graphical design to bias users and create favorable impressions. By using actual data visualizations from corporate annual reports, this teaching case provides a unique learning opportunity from both presenters' and users' perspectives, aiming to develop students' knowledge and skill in creating appropriate data visualization, identifying potential design issues, and understanding the motivation of misleading data visualization. This teaching case is of particular interest and importance to forensic accountants or students because forensic accountants must efficiently visualize evidence in the courtrooms and frequently gather and evaluate evidence that has been calibrated/manipulated to bias, convince, or deceive.
Keywords: Impression management; data visualization; annual reports; financial reporting
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D. Larry Crumbley
Abstract: SCANA, an energy-based holding company, with its subsidiary South Carolina Electric & Gas Company (a regulated public utility), joined with Santee Cooper (S.C. Public Service Authority) to reach an agreement with Toshiba-owned Westinghouse Electric Company at the end of May 2008 to construct two nuclear power plants in Fairfield County, S.C. After S.C. passed a Based Load Review Act in April 2007, SCANA was able to add interest on debt and carrying costs to nine electric rate increases. When their contractor, Westinghouse Electric Company, went bankrupt, SCANA and Santee Cooper abandoned the project after spending $9 billion and passing $1.4 billion (15.6%) over to electric customers. Multiple lawsuits were filed against SCANA, Santee Cooper, Westinghouse, and Toshiba. The SEC filed a complaint against SCANA, SCE&G, Dominion Energy South, Kevin Marsh, and Stephen Byrne alleging that they drove up their stock by issuing false and misleading statements to investors and omitted material information concerning the progress, cost, and completion schedule of the nuclear construction company.
This article follows the tortuous and flawed construction progress leading to the financial fraud by the officers of the company trying to salvage eight years of nuclear tax credits and wasting $9 billion on the failed nuclear project. The implications for auditors are they not only must understand accounting and auditing, but also cost accounting and taxation. Deloitte is currently fighting an accounting malpractice lawsuit for not finding the fraud of showing construction costs as an asset rather than a liability and issuing unqualified opinions.
Keywords: Financial fraud; Base Load Review Act; Regulated Public Utility; nuclear power tax credit; SCANA; construction costs; class action lawsuit
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Rossen Petkov
Abstract: We outline a potential fraud scheme, which certain U.S. taxpayers, in the presence of multinational tax jurisdictions, could utilize to evade taxes on their worldwide earned income. This scheme consists of these taxpayers fraudulently claiming the ‘other country’ as their residential state and avoid being considered residents per the U.S. tax code. This claim provides an opportunity for taxpayer to evade being taxed on a higher rate on their worldwide earned income as well as to avoid certain U.S. financial disclosure requirements. Such a scheme could go undetected, at its initiation stage, as there are no proper tools to prevent and/or detect it. There is no international governing agency empowered to check on the selected status of the taxpayer. This monitoring is left to individual national jurisdictions, such as the U.S. Department of Treasury. The potential losses to governments, if the scheme is left unchecked, could be significant. Specifically, they could undermine taxing the worldwide income earned by individuals, used by many countries, as an effective tool for taxing residents. As many developed countries tax their residents using such systems, the exposure to this fraud scheme has significant implications.
Keywords: Fraud; resident; nonresident; multiple tax jurisdiction; worldwide income
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Ling Yang
Dina El Mahdy
Abstract: This study examines the mediating role of Chinese banking employees’ attitudes toward Corporate Social Responsibility (CSR). Specifically, it investigates the impact of individuals’ CSR attitudes on the relation between social networking (guanxi) with their banks’ supervisors and their whistleblowing intentions. Using structural equation modeling with data collected from banking employees in Chinese financial organizations, the study finds that individual attitudes toward CSR affect employees’ whistleblowing intentions. Specifically, participants with stronger beliefs in ethics and social responsibility (the stakeholder view) are more likely to blow the whistle internally and, conversely, participants with weak beliefs in ethics and social responsibility (the stockholder view) prefer to report wrongdoing through the external channels. This study provides empirical evidence of the mediating mechanism that individual attitudes toward CSR have on the influence of guanxi on employees’ whistleblowing intentions in China.
Keywords: Guanxi; CSR attitudes; PRESOR; whistleblowing; banking; structural equation modeling; mediation mechanisms
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Elio Alfonso
Abstract: Records show that frequent visitors to the White House include the CEOs of some of America’s largest corporations. This article studies whether the political visibility of visits to the White House affects a firm’s tax reporting behavior. All White House visitor logs from 2009 to 2014 were hand- counted from the White House Disclosure database. Firms which visit the White House were found to have lower discretionary book-tax differences and a lower likelihood of engaging in tax sheltering activities. Also, firms which visited the White House multiple times had lower tax aggressiveness and less tax sheltering activity than firms which have only one isolated visit. Lastly, these main findings are consistent when examining firms which operate in regulated industries and provide evidence that firms’ relations with the executive branch level of the federal government affects the level of tax aggressiveness.
Keywords: Political costs; political connections; tax avoidance; tax aggressiveness; White House visitor logs
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Masumi Nakashima
Yoshitaka Hirose
Hirohisa Hirai
Abstract: In this study, we use univariate analysis to examine whether there is a difference in reading ease manipulation and semantic manipulation between fraudulent and non-fraudulent firms, using the Japanese Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Disclosure. We examine 402 public firms in Japan that published fraudulent financial statements from 2007 to 2017 (Tokyo Shoko Research 2018). Therefore, the purpose of this study is to determine whether there are significant qualitative differences between the narrative information in the annual reports of fraudulent and non-fraudulent firms in our sample by comparing their MD&A disclosures. This study is significant because the results of studies on English-speaking countries may not apply to the Japanese setting, which varies not only in language but also corporate culture and reporting requirements. For example, management styles based on cultural factors, such as selflessness for the sake of a company’s survival and secrecy, may have caused the differences among the textual analysis results of English-speaking countries and Japan.
Keywords: Fraud; MD&A; obfuscation; readability; length; grade; Japan; univariate analysis
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Arthur J. Roth
Constance M. Lehmann
Abstract: We present a real-life inventory diversion fraud case committed at a phosphate mining/manufacturing operation. The case is meant to help students identify “red flags” for fraud in an unusual case of misappropriation of physical assets. The diversion of rail cars containing a product manufactured by the mining company resulted in the diversion (and eventual sale) of physical inventory in a collusion scheme. Unlike a typical case of embezzlement of money through accounting transactions, this case involved the diversion of physical inventory. The learning objectives for this case include: 1) identifying red flags for fraudulent activity in the inventory process, 2) considering the types of information from the accounting system that might have helped management detect the fraud, and 3) developing recommendations for activities that could mitigate the risk of inventory diversion fraud. This case is appropriate for students with a basic understanding of the inventory process, internal control activities, and the fraud triangle. Implementation guidance, learning objectives, and teaching notes are included. This study was classroom tested in an internal auditing class that included both upper-level undergraduates and graduate accounting students. Feedback from the students is included.
Keywords: Fraud Triangle; mining industry; collusion; inventory monitoring; misappropriation of assets; mitigation of risks; red flags
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George Schmelzle
Carl Keller
Janet C. Papiernik
Abstract: This case study examines an accounts payable fraud that occurred at a municipality along with the municipality’s response to the fraud. The fraud was committed by the supervisor of the Streets Department and one of his subordinates and occurred over a 4.5-year period The two employees set up three fictitious vendor companies and prepared fake documentation to induce the municipality’s accounts payable clerk to send checks to the three phony vendors, resulting in a loss of $750,000 to the municipality. The supervisor also received kickbacks from at least one actual vendor. City property also was stolen and then sold by the fraudsters. Students are required to apply the Enterprise Risk Management Model and to assess the risk in the internal environment of the municipality. Students are required to document the municipality’s accounts payable system and examine separation of functions and other internal controls in the organization to ascertain the effectiveness of the municipality’s organizational governance.
Keywords: Municipality; fraud conspiracy; kickbacks; Enterprise Risk Management Model; fictitious vendors; accounts payable fraud
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Srinivasan Ragothaman
Tyler Custis
Melissa Christianson
Abstract: This instructional case is based on the publicized fraud occurring at a large financial institution in the U.S. (Wells Fargo). Employees at Wells Fargo created more than 3.5 million unauthorized/ bogus deposit/credit card accounts over 5 years. This fake account scandal saddled Wells Fargo with billions of dollars in fines and settlements. In this case study, students assume the role of an external auditor and become familiar with several auditing, ethics, and accounting information systems concepts, including: (1) fraud, (2) ethical reasoning and utilitarian principles, (3) internal control evaluation, (4) governance issues, (5) Securities and Exchange Commission (SEC) investigations, (6) professional skepticism, and (7) regulation. Approximately 160 students from auditing, accounting systems, and accounting ethics courses participated in this case during a three-year period at a University in the Midwest. Assessment information and implementation suggestions are provided. The feedback from student opinion surveys about the learning outcomes of this case was positive.
Keywords: Wells Fargo; bogus deposit/credit cards; external auditors; fraud detection; SEC; ethics; skepticism
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Jagannath M.V.K.
Mehul Raithatha
Abstract: The case study presents an analysis of fraudulent practices adopted by Infrastructure Leasing and Financial Services Limited (IL&FS)–and its group of companies. Being an important entity in the financial institutions and non-banking financial company (NBFC) ecosystem, the defaults by the company aggregating Indian National Rupees (INR) 3761 Crore (Appx. USD 5.19 billion) led to a liquidity crunch in the financial markets as well as in the market for commercial papers. This case study contains a detailed discussion about the numerous reasons for the downfall of the company, which include but is not limited to financial mismanagement, poor credit culture, centralization of decision making confined to a cabal of a few individuals in the top management, lack of corporate governance, and blatant violation of rules and guidelines. The case acquaints students with white-collar crimes perpetrated in the corporate world.
Keywords: Fraudulent practices; banking; commercial papers; separation of duties; India; default impact
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