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Volume 10: Issue 1, January–June 2018

Table of Contents

The Significance of Whistleblowing as an Anti-Fraud Measure  | Full Article (PDF)
Chad O. Albrecht
Daniel V. Holland
Bradley R. Skousen
Christopher J. Skousen

Abstract: Whistleblowing is a phenomenon that has been given significant attention by academics, governments, and society (Miceli and Near, 1984; Near and Miceli, 1985; Near and Miceli, 1996; Patel, 2003). Much of the research on whistleblowing has focused on the whistleblower in an attempt to better understand why some observers of corruption and unethical acts choose to report unethical acts while others do not (Dozier and Miceli, 1985; Miceli and Near, 1988). In this study, we focus on the organizational context in which whistleblowing, as a detection method of financial fraud, seems to thrive. Specifically, we note that whistleblowing is most likely to occur when the number of perpetrators is increasing, the firm has anti-fraud measures in place, control weaknesses within the company exist, and when background checks are performed by company management.

Keywords: Fraud; Whistleblowing; Control Weaknesses; Background Checks

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Are Individuals More Likely to Misappropriate During Economic Recessions or Expansions? An Examination of the Relative Impact of Pressure and Opportunity  | Full Article (PDF)
D. Kip Holderness Jr.
Eric M. Negangard
Jahangir Sultan

Abstract: Asset misappropriation is a serious and costly problem. Traditional fraud theory suggests the decision to misappropriate requires both pressure and opportunity, and that more pressure and opportunity normally leads to increased asset misappropriations. Furthermore, many have suggested that various combinations of pressure and opportunity are likely to occur as a result of macroeconomic events such as expansions and recessions. We make use of an interactive multi-stage simulation to investigate the relative importance of pressure and opportunity on an individual’s propensity to misappropriate assets. Results indicate that opportunity plays a greater role than pressure in both the frequency of asset misappropriations and the total dollar amount of misappropriations. Contrary to reports of increased misappropriations during recessions, and an overall belief that recessions lead to more misappropriations, our results suggest that the initial decision to misappropriate may be more likely to occur during an economic expansion. Asset misappropriation’s detection, however, may be more likely during an economic recession.

Keywords: Asset misappropriation; embezzlement; internal controls; fraud triangle

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Identity Theft Tax Refund Fraud: An Analysis of the Fraud Schemes Using IRS Investigation Summaries | Full Article (PDF)
Mark J. Nigrini
James S. Peters

Abstract: Identity theft (IDT) tax refund fraud occurs when a fraudster files a fraudulent income tax return in the name of a real person, in which they manipulate the withholdings, deductions, and credits such that the return shows a refund due. The refund is directed to a bank account or an address that allows the fraudster to divert the refund dollars for their own benefit. The Internal Revenue Service (IRS) estimated the loss from this type of fraud to be $2.24 billion in 2015. This estimate does not include the unknown or undetected amounts of IDT tax refund fraud. This article gives a short history of these schemes, and then describes these frauds in greater detail based on Government Accountability Office reports and testimonies, newspaper articles, IRS investigation summaries, and documents from various court cases. The article includes a taxonomy of these fraud schemes based on the source of the taxpayer’s personal identification information, an essential component of every fraud attempt. The discussion also covers measures to prevent and detect IDT tax refund fraud, and suggests areas for future research.

Keywords: Identity theft; income tax refunds; fraud schemes; false claims; fraud detection

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Cartel Cash: Attacking the Financial Operations of the Mexican Drug Cartels | Full Article (PDF)
Zane Hunter Frederick
Gregory Huckabee
Steve Feimer

Abstract: “Cartel Cash” examines the current problem of extensive drug money laundering within the Mexican drug cartels by reviewing the process of money laundering and how it happens within banks and financial institutions in the U.S. The authors provide a brief background on money laundering in the U.S. and other countries that are affected by Mexican drug money laundering. The preferred method of money laundering for the cartels is exposed, as well as how our current law enforcement agencies can stop them. The research includes an extensive discussion on the Bank Secrecy Act in the United States, including its relationship to drug money laundering. International relations and cooperation with American authorities on anti-money laundering initiatives also is discussed. There are two interviews with professionals working within various disciplines of anti-money laundering efforts in the U.S., including a former U.S. Attorney. The goal of the article is to expose how the Mexican drug cartels launder their money, why it happens and how it can be stopped in the United States.

Keywords: Drug cartels; forensic accounting; financial crimes; money laundering

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Assessing and Responding to Cyber Risk: The Energy Industry as Example  | Full Article (PDF)
Barbara Apostolou
Nicholas Apostolou
Ludwig Christian Schaupp

Abstract: The G-20 has identified cyberattacks as one of the most serious threats to the global economy. Investments in security have increased dramatically in recent years without deterring the incidence of cyberattacks, both in number and sophistication. Unfortunately, advances in technology also lead to new opportunities for cyber criminals, leading to significant threats to assets, personal data, intellectual property, and critical infrastructure. The energy industry offers a rich example to explore cyber risks and management responses. The article covers cyber risk and the darknet in the context of the energy industry, referring to those operational risks relevant for information and technology assets that have consequences affecting the confidentiality, availability, or integrity of information systems. These risks are illustrated by describing actual cases of cyberattacks and the weaknesses that allowed them to occur.

Keywords: Cybersecurity; darknet; cyber risk; information systems; oil and gas industry; energy industry

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Toward the Integration of Big Data into Forensic Accounting Education  | Full Article (PDF)
Zabihollah Rezaee
Jim Wang
LAM Mo Brian

Abstract: Big Data skills and knowledge have become increasingly important for forensic accountants. We examine the integration of Big Data topics into forensic accounting education by: (1) reviewing prior literature to identify a list of Big Data topics or courses that could be incorporated into forensic accounting education; (2) investigating the forensic accounting syllabi of universities worldwide in their coverage of Big Data topics; and (3) presenting suggestions for the development of forensic accounting curriculum with Big Data and data analytics focus. We reviewed forensic accounting and Big Data programs of twelve universities in China and nineteen universities in the United States. Our analyses of these programs suggest the integration of Big Data and forensic accounting education at the graduate level. Our results detail the importance of integrating Big Data content into the forensic accounting curriculum to advance forensic accounting education worldwide.

Keywords: Big Data; forensic accounting education; accounting profession

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Effects on Auditees of Electronic versus Face-to-Face Interaction in Continuous Auditing  | Full Article (PDF)
George C. Gonzalez
Vicky B. Hoffman

Abstract: Fraud detection and prevention systems rely ever-increasingly on automated technology such as continuous auditing. Are fraud risks affected when controls traditionally performed by humans become automated in a continuous auditing system? This experimental study examines how computerizing certain aspects of continuous auditing affect auditees’ perceptions, feelings, and fraudulent behavior. Specifically, we examine the relative effects of monitoring system (computerized, human) and communication feedback (computer-mediated, human) on: auditees’ perceived opportunity to commit fraud; their negative affect (feelings); and their fraudulent behavior. We find that (1) a computerized fraud monitoring system is more effective at reducing the perceived opportunity to commit fraud than a human fraud monitoring system, (2) when receiving feedback about audit discrepancies, participants feel more uncomfortable when the feedback is communicated by a human in a face-to-face interaction than when it is communicated via computer, and (3) in a continuous auditing environment, the greatest deterrence to auditee fraud behavior is when computerized monitoring is combined with face-to-face human communication feedback. Findings are discussed in the context of accounting and auditing practices.

Keywords: continuous auditing; continuous monitoring; fraud risk management; fraud triangle

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Breaking the Code of Silence: A Broader View of Compensatory Damages to Whistleblowers Under Sarbanes-Oxley  | Full Article (PDF)
Ricardo Colon

Abstract: Congress enacted the Sarbanes-Oxley Act to protect investors, deter corporate fraud, and improve accountability. In a concerted effort to shatter the “code of silence” prevalent in corporate America, Congress legislated to protect employees who report fraud and misconduct from retaliation by employers. Sarbanes-Oxley’s effectiveness hinges on the protections afforded to employees who come forward and report issues involving corporate misconduct or potential violations of the federal securities laws. However, Section 806 of Sarbanes-Oxley has been interpreted inconsistently by both the U.S. Department of Labor and courts. The uncertainty regarding the interpretation of Section 806 has a chilling effect on whistleblowers and hampers fraud investigations. To mitigate this situation, this article argues that Section 806 sanctions awards of compensatory damages for emotional distress and injury to reputation to whistleblowers.

Keywords: Whistleblowers; compensatory damages; code of silence; Section 806 sanction awards

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The Utah White Collar Crime Registry: A Model for National Change  | Full Article (PDF)
Chelsea Dye
Jennifer Harrison
Ron Mano

Abstract: In 2016, the state of Utah enacted a White-Collar Crime Registry—the first and only such registry in the United States. The Utah State Legislature, in consultation with the State Attorney General, designed the White-Collar Crime Registry after sex offender registries found in many states. The registry requires offenders of specific white-collar crimes (typically financial frauds) to enroll with their name, picture, age and a description of the specific crime. This article reviews specifics of the registry and the legislation that led to its creation. Additionally, this article highlights some of the highest profile white-collar crimes committed in Utah over the last forty years, crimes that likely influenced the perceived need for the registry. The limitations of the law, as well as proposed additions receive analysis, including brief descriptions of the initial individuals enrolled thus far.

Keywords: White collar crime registry; white collar crime; fraudsters

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CEO Compensation and Tax Loss Carrybacks  | Full Article (PDF)
Pei-Yu Sun
D. Larry Crumbley
Ken Reichelt

Abstract: Erickson, Heitzman, and Zhang (2013) results indicate that firms engage in tax-motivated loss recognition, in order to offset previously recorded income. Since Erickson et al., (2013) use GAAP earnings as their proxy for net operating loss (NOL), NOL reporting can impose significant personal costs on CEOs. Thus, firms must motivate the CEO to accelerate loss recognition if the firm expects to benefit from the cash inflows generated by the tax refund. In this study, we examine whether firms systematically change CEO cash-based compensation consistent with shielding behavior to motivate CEOs to engage in tax-motivated loss shifting. Contrary to ex-ante predictions, the results are consistent with changes in CEO cash-based compensation being associated with current period earnings, instead of being consistent with shielding behavior. Thus, our results are consistent with either CEOs being motivated via non-compensation mechanisms and/or NOL reporting being associated with poor financial performance, rather than tax-motivated loss recognition.

Keywords: Net operating loss; cash flow; loss carryback; cash-based compensation; tax motivated loss recognition

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Book Reviews
BookThe History of the U.S. in Five Crashes
Scott Nations, 2017, 336 pp.
Harper Collins Publishers
195 Broadway
New York, N.Y. 10007

The Panic of 1907 was fostered by lax regulation of a new financial contraption—the trust company. The meltdown of 2008 was fueled by lax regulation of a new financial device—mortgage-backed securities being peddled by bankers.
The Panic of 1907 unfolded over eighteen months, but the Flash Crash of 2010 occurred over minutes with computers and financial communications systems. When one investment manager, using a runaway computer algorithm that was dangerously unstable and poorly understood, reacted to the economic turmoil in Greece, the stock market took an unprecedentedly sudden plunge, with the Dow shedding 998.5 points (roughly a trillion dollars in valuation) in just minutes.

The author believes that “when speed and financial complexity take another leap, it will be time to watch for the phenomena that attend each crash: a robust stock market rally that pushes stock prices beyond reason, a financial vehicle that will foster selling at the worst possible time, a catalyst that will start the selling, even a warning that may seem odd but will later seem oddly prescient.”

BookMachine Platform Crowd: Harnessing Our Digital Future
Andrew McAfee and Erick Brynjolfsson, 2017, 402 pp.
W.W. Norton & Company
500 Fifth Avenue
New York, N.Y. 10110

The authors identify the three essential aspects of the modern digital revolution: the rebalancing of minds and machines, of products and platforms, and of the core and the crowd. In all three cases, the emphasis is shifting to the second element of the pair, with massive implications for how we run our businesses and live our lives.

Digital machines, in the form of everything from self-driving cars to drones to 3D printers to neural networks, are blowing past their previous limitations and assuming new roles.

Online platforms are changing cost structures, improving how supply meets demand, and creating formidable new competitors in industries ranging from recorded music to urban transportation to computer hardware to group exercise.

The chapter on “The Dream of Decentralizing All the Things” is about bitcoins and blockchain. The first known purchase of a couple of pizzas gave the new currency $0.003 per bitcoin. A bitcoin has been higher than $19,000 in 2017. The chapter covers an excellent history. The authors believe that the blockchain might well be more important than bitcoins. Its open, transparent, global, flexible, and immutable ledger is clearly valuable, especially if it is combined with smart contracts and other digital innovations.

The most remarkable thing about bitcoins and the blockchain might be how they enable a global crowd of people and organizations, all acting in their own interest, to create something of immense shared value.

BookLife 3.0: Being Human in the Age of Artificial Intelligence 
Max Tegmark, 2017, 364 pp.
Alfred A. Knopf
1745 Broadway
New York, NY 10019

Will machines eventually outsmart us at all tasks, replacing humans in the job market and perhaps altogether? Will AI help life flourish like never before or give us more power than we can handle?

The author gives an example of two horses looking at an early automobile in the year 1900 and pondering their future.

“I’m worried about technological unemployment”
“Neigh, neigh, don’t be a Luddite: our ancestors said the same thing when steam engines took our industry jobs and trains took our jobs pulling stage coaches. But we have more jobs than ever today, and they’re better too: I’d much rather pull a light carriage through town than spend all day walking in circles to power a stupid mine-shaft pump.”
“But what if this internal combustion engine really takes off?”
“I’m sure there’ll be new jobs for horses that we haven’t yet imagined. That’s what’s always happened before, like with the invention of the wheel and the plow.”

The U.S. equine population collapsed from around twenty-six million in 1915 to three million in 1960. With no need for horses, they were slaughtered.

So, will accountants disappear, and what advice should be given to students? The author suggests asking three questions:
  • Does it require interacting with people and using social intelligence?
  • Does it involve creativity and coming up with clever solutions?
  • Does it require working in an unpredictable environment? 

2018 NACVA and the CTI’s Annual Consultants’ Conference
The 2018 NACVA and the CTI’s Annual Consultants’ Conference will be held June 20–22, 2018 at Caesars Palace, Las Vegas, Nevada.
More information:

2018 LSU Annual Fraud and Forensic Accounting Conference
The LSU Fraud and Forensic Accounting Conference will be held July 19–20, 2018, in Baton Rouge, Louisiana, at the Crowne Plaza Hotel.  Registration for the 2018 Conference is not open yet.
More information: