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Volume 10: Issue 3, July–December, 2018

Table of Contents

Star Employee Occupational Fraud: Treatment and Subsequent Effects | Full Article (PDF)
Scot E. Justice
Jeffrey R. Cohen
Dana R. Hermanson

Abstract: This study investigates how organizations treat star employees who engage in occupational fraud and how the organization’s response to this behavior affects the treatment of other employees as well. We first examine the effect that the type of employee (star employee/average employee) has on the decisions that managers make when an employee has engaged in occupational fraud. Based on an experiment involving 119 managers, we find evidence that participants perceive that most managers they have worked with, treat star employees more leniently than average employees. Second, and reflecting the primary focus of the study, we examine the consequences for management control systems when an average employee subsequently commits occupational fraud after top management has previously tolerated/not tolerated a star employee’s similar behavior. In this second experiment, using 108 managers who did not participate in the first experiment, we find that managers are more lenient with an average employee when a star employee has been allowed to get away with a similar act previously, reflecting the consequences of a weak tone at the top for management control systems. Overall, we find evidence suggesting that treating star employees more leniently than average employees can lead to future leniency for average employees as well, which may serve to spread occupational fraud throughout the organization and weaken established management control systems. We discuss implications for policy makers and practitioners and avenues for future research.
Keywords: star employee; occupational fraud; causal attribution; management control systems; tone at the top

U.S. Listed Chinese Reverse Mergers: Fraud Prediction Measures and Audit Characteristics | Full Article (PDF)
Khim L. Sim
Eric Lohwasser Jr.
Robert Lee
Anthony P. Curatola

Abstract: This study examines the association of fraud prediction measures, audit characteristics, and firm attributes with Chinese Reverse Merger (CRM) fraud on U.S. listed exchanges. Results suggest that certain measures and characteristics, which do not require access to private firm information, can provide predictive ability. Most notably, we find CRM fraud firms have elevated F-Scores, high auditor and director turnover, high levels of non-Big4 audit firm selection, significant and lengthy quality control problems in audit firm inspections by regulators, and alleged financial reporting violations to which regulators have expressed concern (e.g., inflated revenues and related party transactions). Additional considerations are also provided in our analyses. Our study adds to the literature by highlighting the need for, and providing evidence of, publicly available fraud signals and red flags in CRMs.  
Keywords: Chinese reverse mergers; CRM; fraud; sec litigation; auditors; governance

The Association Between Audit Fees and Accounting Restatement Resulting from Accounting Fraud and Clerical Errors | Full Article (PDF)
Daniel Gyung Paik
Taewoo Kim
Kip Krumwiede
Brandon B. Lee

Abstract: Theory predicts that audit effort (measured by audit fees) and financial report restatements should be negatively associated because more audit effort means that auditors should be more likely to find fraud and errors or other issues that could lead to later restatement. However, there is an ongoing inconsistency between the theory and empirical findings in this area. This study is unique in that it focuses on restatements caused by fraud and by errors. It also considers auditors’ and managers’ behavior regarding the economic bonding of auditors with clients and managers’ attempts to lower audit fees. We find evidence that restatements due to errors (i.e., unintentional misapplications of GAAP or mistakes in data analysis) and those due to frauds (i.e., intentional and deliberate misreporting), both have higher ex ante unexplained audit fees during the restatement period than firms without fraud or error restatements.  
Keywords: audit fee; restatement; fraud; accounting error; audit effort

The Impact of Moral Identity and Societal Culture on Whistle-Blowing: A Comparison Between the United States and France | Full Article (PDF)
Guy McClain
Deborah Seifert

Abstract: Whistle-blowing has been shown to be more effective in identifying fraud than are vendor and customer tips, internal audits, external audits, other internal controls, notification by police, or accidental discovery (ACFE 2008). Therefore, it is important to understand the factors affecting whistle-blowing. Prior research has shown that several individual, situational, and organizational factors can affect whistle-blowing. This study extends the literature on individual and situational factors by examining the influence of moral identity (both symbolization and internalization) and societal culture on the perceived likelihood of whistle-blowing. The subjects for this study are students in the U.S. and France. The results of this study are that both moral identity and societal culture positively influence the perceived likelihood of whistle-blowing. Within moral identity, specifically, symbolization is positively associated with whether the third party in the vignette would whistle-blow, while internalization is positively associated with whether the respondent would blow the whistle.
Keywords: whistle-blowing; moral identity; culture; accounting fraud

Healthcare Data Sources and Fraud Research Opportunities | Full Article (PDF)
Renee Flasher
Melvin A. Lamboy-Ruiz
Abstract: The healthcare industry in the United States comprises a significant portion of the U.S. economy; however, there is incidence and even expectation of pervasive fraud within this sector. Thus, research focused on understanding the determinants, detection, and consequences of fraudulent behavior in healthcare merit study. We highlight federal and state data sources of potential use for mostly archival fraud research. We acknowledge the existence of additional data sources beyond those described in our study, but we believe that the sources we highlight can provide an impetus for more healthcare fraud research. We also suggest some directions this research might take using the data available in these sources. There is an opportunity for accounting researchers to have a tangible impact on public policy in the healthcare sector of our economy due to the significant number of annual fraud cases and to answer questions in this unique setting that are generalizable to other industries. 

Keywords: healthcare fraud; databases; fraud waste; breaches

Environmental Uncertainty, Managerial Ability, Goodwill Impairment, and Earnings Management | Full Article (PDF)
Joseph A. Johnston
Li Sun
Joseph H. Zhang

Abstract: Understanding the determinants of goodwill impairment is an important research area. Due to the unverifiable nature of goodwill impairment, relatively few studies have examined how the operational environment of a firm affects the occurrence and magnitude of goodwill impairment loss. Our study shows that firms faced with more volatile environments are more likely to incur goodwill impairment. We also explore the impact of managerial ability on the relationship between environmental uncertainty and goodwill impairment because prior research suggests that managers play an important role in determining goodwill impairment. We show that more-able managers mitigate the relationship between environmental uncertainty and goodwill impairment, relative to less-able managers. Additional tests reveal that the above relationship becomes stronger in small firms and firms with first-time goodwill impairment. Further, we find that more-able managers engage in less earnings management through goodwill impairments and strengthen the association between goodwill and future cash flows, relative to less-able managers.  
Keywords: environmental uncertainty; goodwill impairment; ASC 350-20; managerial ability; earnings management

Above the Law: A Short Story about Privilege and the Potato Chip Theory | Full Article (PDF)
Eddward T. Herron

Abstract: An ostensibly typical bank audit is troubled with a twenty-seven-year-old ongoing loan/financial statement fraud, cognitive biases, references to the author’s “Potato Chip Theory,” and even links to judicial privilege. From SWAG to reverse-psychology, the bank president tried to influence the audit team’s work. Although suspicions were aroused, the case was solved through more intensive investigation in three primary areas. That work, in turn, was only possible because a senior regulatory executive set-aside production time tables and provided both cover and resources for the in-charge to pursue proper completion of the examination. This short story is an almost verbatim account of the actual fraud, but names and limited other information were changed since the case was settled out of court.
Keywords: fraud; fraud auditing; forensic; bank fraud; audit scheduling

Healthcare Fraud and Abuse: An Investigation of the Nature, and Most Common Schemes | Full Article (PDF)
Nas Ahadiat
Mohamed Gomaa

Abstract: In recent years, fraud against Medicare/Medicaid and private insurance companies has continued to increase. Payments on fraudulent claims by providers and payments to the various agencies involved with the enforcement of healthcare laws had continued to drain a significant amount of the federal government’s health care budget. Healthcare fraud is committed against both public and private agencies; however, the primary emphasis for prevention and reporting of fraud is on the public side (Rosenbaum et. al., 2009). The current study investigates whether there are any differences in public attitudes towards fraud committed against public agencies versus private insurance companies. We randomly select two equal samples and mail a survey to each group. The survey includes similar questions pertaining to either Medicare/Medicaid or private insurance companies. The study results showed that the scheme with the highest rating against Medicare/Medicaid is incorrect reporting of diagnosis or procedures, while against private insurance companies, the scheme with the highest rating is billing for unnecessary services. Both groups ranked unbundling services, misrepresenting dates of service and substitution of generic drugs lower than other schemes. Officials can use the results of this study to help focus the use of their limited resources towards looking into the fraud schemes that are most important.

Keywords: healthcare; fraud; Medicare; Medicaid; insurance companies

A Forensic Accounting Case: A Data Analytic Mindset | Full Article (PDF)
Chih-Chen Lee
Clifford Nuxoll

Abstract: This case engages students in an interactive in-class activity to learn about the mindset of data analytics. Most teaching cases for data analytics focus on data manipulations. However, the key to successful application of data analytics is critical thinking skills. Critical thinking mindset, coupled with data manipulation ability, is the key to success of data analytics. Students are provided with a brief case scenario and asked to identify questions to be answered using a data analytics mindset. The case contains two phases. Students read phase one material and complete phase one requirements before coming to class. Instructors provide additional information in class for phase two. It is recommended to use this case as an in-class exercise.  
Keywords: data analytics; critical thinking skills; case study; data manipulation

Teaching Students Financial Statements’ Assertions: Crisp-Drinks Case | Full Article (PDF)
Fatima Alali 

Abstract: Using cases in teaching forensic accounting, auditing, fraud examination, and internal auditing courses is much needed to develop students' professional judgment, critical and analytical thinking skills, and communication skills. Presently, there is a shortage of brief cases that focus on understanding and applying financial statements’ assertions. An audit partner at a national CPA firm indicated that learning the meanings of the assertions helps new CPAs develop professionally and personally. Because once the assertions are learned, practitioners not only know the how but also the why. Thus, cases provide a rich tool to understand financial statement assertions and enforce students' learning of these assertions and identify how a forensic accountant, auditor, or fraud examiner would uncover these misstatements.
Keywords: management assertions; financial statements assertions; PCAOB assertions; auditor responsibilities; audit procedures; forensic accounting; fraud examination 

Book Reviews
BookFaster, Higher, Farther: The Volkswagen Scandal
Jack Ewing, 2017, 352 pp.
W.W. Norton & Company, Inc.
500 Fifth Avenue
New York, N.Y. 10010 
Faster, Higher, Farther: The Volkswagen Scandalpresents the Volkswagen emission scandal from a mostly historical perspective without much lengthy discussion on engineering technicality. Jack Ewing, a New York Times journalist, has devoted a considerable portion of the book on telling the story of Ferdinand Piëch—the key leader of Volkswagen (VW) delving into a wide range of VW’s pivotal events in connection with the Piëch and Porsche family. Meanwhile, he maintains a parallel storyline regarding the technological and regulatory developments in the United States. The later part of the book is largely an analysis of the scandal per se including the direct confrontation between the VW (and its legal team) and the regulators and judiciaries who are underpinned by the findings from academic research.

As the title of the book has ostensibly alluded to, one of the main ideas conveyed seems to be how VW’s tone at the top has shaped the firm’s corporate identity, and thus by extension, the creation of the scandal and how its management has dealt with it. Curiously, a practitioner might ask whether everything that might be said about the Volkswagen emission scandal has not already been well covered in various court documents and media coverages, and what professional or academic values could this book offer? 

A practitioner could use this book as another case study opportunity to have a cohesive review of a recent debacle that sheds new lights on many classic corporate malfunctions. For salutary lessons, one would find the author’s description of some problems relating to VW’s internal controls to be of interest, especially the inadequacy of segregation of duty, the lack of engineering regulatory knowledge in the legal department, and the limits of VW’s whistleblower system, among others.

There are many other noteworthy high-level risk management insights included in the book; one is that VW’s reputation of being “green”, attention to detail, and striving for high quality has, over the years, attracted highly-educated customers, whom in turn would not react well to corporate malfeasance or deception. Therefore, a recognized brand image of meticulousness combined with an epic exposé of internal flaws or perceived ill-intention could do much more damage to public confidence. Ineffective cooperation with a regulator as a result of corporate misfunction is another daunting risk which remains difficult to manage, even in a well-established institution. VW’s predicament highlights the gravity of such risks in a global competitive landscape.

The book also contains a plethora of examinations on the web of inter-corporate and inter-personnel relationships, and thus it provides many behind-the-door views of an intriguing global empire with so called “provincial” mentality. For example, the author portrays the auto-workers at VW to be an enormously influential corporate force, backed by politicians, a powerful union, and prerogatives guaranteed in German laws. In this regard, the author provides various stories how upper-management handles worker and mid-management relationships in the contexts of the firm’s unique environment. Additionally, there is no shortage of examples of hindsight suggestions on how, via some actions at top or mid-management level, the emissions scandal could have been prevented or remediated before it morphed into a dire catastrophe. Notwithstanding the astute analysis, this work could have been more value-adding to forensic accountants and internal auditors had the author gone through a more in-depth examination into the extent in which worker or worker vis-à-vis top management bond has directly affected the emission debacle. Such value would also have been greater had he presented a more comprehensive analysis on the roles of internal and external auditors in context of the firm’s historical culture or the roles they specifically played in the emission debacle. Where there red flags that were missed?

Perhaps the most salient quality of this book’s valuable to a practitioner is the collection of the author’s own extensive analysis. While many companies build defeat devices to handle emission tests, why was VW “singled out” for punishment? While there were other graver violations in which direct death had resulted, why was VW’s emission violation, which had resulted in no direct deaths, punished to such a substantial level? The author has methodically addressed such questions, putting forward his own insightful conclusions. This book contains many cautionary tales; chief among them is that a firm’s culture is one of the most important advertisements for the products that the firm has to offer. Tone at the top is important.

By Jimmy Ma

BookThe Darkening Web: The War for Cyberspace
Alexander Klimburg, 2017, 420 pp.
375 Hudson Street
New York, N.Y. 10004 
The future of the internet is not bright, as it is being used as a weapon and a means of domination by countries eager to exploit or curtail global connectivity to further their national interests. The author explains the consequences of countries’ ambitions to project power in cyberspace, and why we underestimate them at our own peril.

Hacking and cyber operations have fundamentally changed the nature of political conflict—ensnaring states in a struggle to maintain a precarious peace that could rapidly collapse into an all-out war. The rise of covert influencing and information warfare has enabled countries their own distorted versions of reality, in which anything is possible. At stake are not only our personal data or the electrical grid, but the internet as we know it today—and with it the very existence of open and democratic societies.

Klimburg states that the debate about the different aspirations for cyberspace is nothing short of a war over global values.

BookEthics Playbook: Winning Ethically in Business
Aaron Beam and Greg Womble, 2015, 180 pp. 
The author went from a high-flier to a felon because of the massive three million-dollar HealthSouth fraud. Throughout his book he provides twenty-five ethical plays, such as “it’s okay to talk about ethics” or “finishing without baggage is the goal.” Aaron indicates that every time we cheat a little, we are taking the first step on the slippery slope. What is the right amount of cheating on an expense report, padding an insurance claim, or cheating on a test? What is the right amount of insider trading, the right amount of cooking the books, the right amount of lying to your investors? His answer is zero.

He believes that taking dishonest shortcuts, defrauding stockholders, hiding from regulators, making phony public statements, and cooking the books does not just result in disaster for the offending enterprise—it is a disaster for all of us. These unethical lapses crash stocks and drain retirement savings. They decrease trust in our institutions and swell the unemployment rolls.

Every CEO should read this book and invite Aaron to speak to their executives.

BookMoney to Burn
James Grippando, 2010, 260 pp.
HarperCollins Publisher
10 East 53rd Street
New York, N.Y. 10022
This financial thriller is about Michael Cantella, who is a financial wizard for a Wall Street investment bank. On the eve of his first wedding, his wife disappears, later to be found in a shark’s stomach.

Four years later, Michael is married with a fortune; but after a surprise thirty-fifth birthday party, he finds all his accounts have vanished through an identity theft. The story revolves around the sub-prime mortgage market collapse, and he is blamed for the meltdown of his brokerage firm Saxton Silvers. To make matter worse, he is the prime suspect in the murder of his first wife and a financial reporter. Plus, a really bad guy is attempting to kill him (or at least frame him). Money, Wall Street, spyware, bankruptcy, cancelled charge cards, and more make the novel an excellent read.

BookThe Danger Within Us
Jeanne Lenzer, 2017, 330 pp.
Little, Brown, and Company
1290 Avenue of Americas
New York, N.Y. 10104 
Tens of millions of people in the U.S. have medical devices within them: pacemakers, artificial hips, cardiac stents, and breast implants. The author follows a whistleblower and discovers an industry with a shocking lack of oversight and with corporate corruption, kickbacks, and elaborate cover-ups.

She suggests that the industry is so powerful that the FDA, politicians, and even the Supreme Court bend to its will. So, millions of Americans are serving as unwitting test subjects to determine whether the devices in their bodies are safe. The author makes suggestions as to what should be done.

BookHow to Fix the Future
Andrew Keen, 2018, 330 pp.
Atlantic Monthly Press
154 West 14th Street
New York, N.Y. 10011 
There are those who believe that the Digital Revolution has made the world more unequal and more unstable. This revolution has brought surveillance capitalism, big data monopolists, the ignorance of the online crowd, juvenile Silicon Valley billionaires, fake news, antisocial social networks, mass technological unemployment, digital addiction, and the existential risk of smart algorithms.

This “antichrist of Silicon Valley” suggests five combinatorial tools or reform strategies for fixing the future.

BookLeadership Lessons from the VW Saga
Steven Howard, 2017, 397 pp.
Caliete Press
1775 E. Palm Canyon, Suite 11
Palm Springs, CA 92264 
The VW emission cheating scandal, or emission-gate, began in September 2015, when the U.S. Environmental Agency issued a notice of violation of the Clean Air Act to the VW Group. VW and Audi diesel cars were equipped with computer software (i.e., a defeat device) that circumvented EPA standards in more than eleven million vehicles.

The Obama administration directed VW to recall almost a half-million cars, and VW stopped diesel sales in the U.S. Credit Suisse estimated that the total costs could hit eighty-seven billion dollars (more than the cost of the BP oil spill). By April 2017, VW had incurred around thirty billion dollars of penalties. A South Korean executive received a one year and six months prison sentence, and a VW engineer received a forty-month prison sentence in Detroit. Oliver Schmidt was sentenced to seven years in prison.

This author, a marketing consultant, identifies the far-reaching impact of the scandal on a wide range of parties. He provides the leadership lessons on corporate governance, branding, crisis communication, corporate responsibility, business ethics, and individual accountability relevant to leaders of any size organization. He indicates that this scandal is the benchmark for corporate cheating scandals. It was deliberate malfeasance on a grand scale and over a seven-year period.

Howard questions why no employees at VW reported the cheating scandal.

Was the Volkswagen workplace totally devoid of employees who take into consideration the health of fellow human beings? Is the engineering staff at Volkswagen so amoral that there was no individual or collective concern for the air pollutants their products would be emitting? Or did job security concerns overrule all other individual morals, ethics, and accountability standards?

BookThe Stark Law: Comprehensive Analysis + Practical Guide
C.B. Oppenheim, 5th Edition, 2014, 160 pp.
American Health Lawyers Association
1620 Eye Street N.W., 6th Floor
Washington, D.C. 20006
The Stark laws that govern referrals are complex. Now, with the completion of multiple rounds of rule-making, and the emergence of a growing body of case law interpreting the Stark law, there are new twists and turns to be contemplated by attorneys advising physicians, hospitals, and others involved with this intricate area of health law.

The author addresses the legal effect of the regulations and the regulatory process, and analyzes the implications of various federal cases on the development of the Stark law. He includes practical guidance for advising clients on complying with the current state of the law and regulations, as well as a look at what future direction the Stark regimen might take. Mr. Oppenheim covers several key themes that emerge in the regulations, including the tempering of the previous trend of broadening exceptions for compensation arrangements. He identifies key definitions and interpretive changes, illuminates many problem areas that remain, and suggests guidance for navigating each of them. The author includes analysis of group practices and the exceptions applicable to them, as well as recent developments in the area of self-disclosure.

Topics include:

  • The legal effect of the regulations and the regulatory process
  • The implications of various federal cases on the development of the Stark law
  • Discussion of several key themes that emerge in the regulations, including the tempering of the previous trend of broadening exceptions for compensation arrangements
  • Key definitions and interpretive changes
  • Problem areas that remain and guidance for navigating them
  • Analysis of group practices and the exceptions applicable to them
  • Recent developments in the area of self-disclosure
  • Myriad physician recruitment concerns
  • Models for Stark-compliant physician joint ventures
  • “Intractable” Stark problems
  • Suggestions for policies and procedures designed to prevent Stark compliance issues

2019 AAA Forensic Accounting Research Conference
The 2019 AAA Forensic Accounting Research Conference will be held March 1–2, 2019, at Westin, St. Louis, Missouri.
More information:

2019 NACVA and the CTI’s Annual Consultants’ Conference
2019 NACVA and the CTI’s Annual Consultants’ Conference will be held June 6–8, 2019, at the Grand America Hotel, Salt Lake City, Utah.
More information:

2019 LSU Annual Fraud and Forensic Accounting Conference
The LSU Fraud and Forensic Accounting Conference will be held July 17–18, 2019, at the Crowne Plaza Hotel, Baton Rouge, Louisiana. Registration for the 2019 conference is not open yet.
More information: