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Volume 11: Issue 1, January–June, 2019

Table of Contents

The Legend of Weighted Average Return on Assets and Benchmarking Purchase Price Allocation Data | Full Article (PDF)
Matthew D. Crane

Abstract: Two general assumptions used for purchase price allocations are that intangible rates of return require a premium above the weighted average cost of capital (WACC) as the discount rate and the value conclusion for intangibles as a percentage of total consideration can be compared to industry averages (benchmarking) to support a fair value. After consideration of the premiums for the intangibles, the weighted average return on assets (WARA) for all assets monetary, tangible, and intangible, the weighted average should reconcile to WACC. According to this intuition, WARA and benchmarking provide auditors with proper support. Although the rationale for this intuition is reasonable, it still needs to be validated. This article concludes based upon private company data, the value weightings of intangible assets generally do not have a statistical relationship to WACC, making WARA somewhat flawed, and the use of benchmarking as audit support is a myth. As investors rely on fair value measurements, potential misuse of discount rates and audit testing of intangible value can lead to fair value misstatements and ensuing shareholder disputes. Lawsuits claiming damage of brand or business reputation are also becoming increasingly common, and the initial recorded value is an important point of reference for auditors, litigators, and forensic accountants. Although the WARA process is flawed, it is established practice for financial reporting. Yet, WARA can be improved by using market data and assessing the variation to support a selection of discount rates in conformity with accounting guidance. Consequently, this article outlines an alternative methodology to better support the intangible rates of return.

Keywords:benchmarking intangibles; intangible discount rates; fair value; purchase price allocation; weighted average cost of capital; weighted average return on assets

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The Influence of Expert Witnesses on Jurors' Decision-Making in an Accounting Context | Full Article (PDF)
Sunil Lakhani

Abstract: The purpose of this study is to determine the influence of expert witnesses on juror decision-making in an accounting context. The focus is on the effects of expert witness testimony on juror decision-making regarding financial statement reliability. The design of the study is experimental, and the hypotheses were tested to find out whether jurors were likely to adjust their decisions when expert testimony was introduced. The findings suggest that expert witnesses have a significant influence on juror decision-making in relation to financial statement reliability. Also, expert witnesses have more influence on juror decision-making when appearing for the defense. Understanding how expert opinion can influence jurors in an accounting context is a topic which should attract future research.

Keywords: juror decision-making; expert witness; financial statement reliability

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Application of Underutilized Theories in Fraud Research: Suggestions for Future Research | Full Article (PDF)
Kalana Malimage

Abstract:Behavioral research focusing on fraud has used only a few theories to investigate antecedents of fraudulent behavior. Several theories from sociology, criminology, and other disciplines provide many opportunities for researchers to gain further insights into factors influencing individuals to commit fraud. In this study, we discuss the Fraud Triangle Theory (FTT) and its variants and introduce theories from non-accounting disciplines such as Protection Motivation Theory (PMT), General Deterrence Theory (GDT), and Neutralization Theory. How these theories can extend fraud research beyond the Fraud Triangle Theory is discussed along with the applicability and suggestions for future fraud research.

Keywords:behavioral accounting; behavioral theories; protection motivation; general deterrence; neutralization

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Is Bribery Worth It? An Analysis of Companies Subject to FCPA Enforcement Action | Full Article (PDF)
Obeua S. Persons

Abstract: This study uses two approaches, a regulator approach and a financial-performance approach, to examine whether the illegal conduct of bribery is financial advantageous to multinational corporations that violated the Foreign Corrupt Practices Act (FCPA). The regulator approach examines the relation between the amount of bribe, illicit profit and penalty of companies that violated FCPA. This approach indicates that: (1) penalty and illicit profit are significantly and positively correlated, (2) penalty significantly exceeds illicit profit, and (3) self-report violators are subject to lower penalties than non-self-report violators. The financial-performance approach involves an investigation of financial (accounting) performance of violators versus their matched competitors during FCPA violation. This approach finds that FCPA violators did not have better financial performance than their matched peers that did not engage in bribery. This finding serves to dispel the concern that companies will be commercially disadvantaged if they refuse to bribe. In sum, both approaches support the notion that bribery is not worth it punitively and economically.

Keywords: bribery; Foreign Corrupt Practices Act; FCPA violation; FCPA enforcement; illicit profit; penalty; self-report; financial performance

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Business Ethics and Financial Reporting: Earnings Management During Periods of Economic Recessions | Full Article (PDF)
Alison Markmann
WaQar Ghani

Abstract: This study investigates managements’ efforts to manage earnings during economic recessionary periods. We employ the modified Jones model (1991) to detect discretionary earnings management for a sample of twenty-nine firms that were prone to or had a higher likelihood of earnings manipulation during stressful economic times. We examine three distinct economic recessionary periods (1990–91; 2001; 2008–2009) spanning 1990 to 2009. Our results show that our suspect firms employed far higher levels of accruals in absolute terms during the 2008–2009 recessionary (test) period than they did during the non-recessionary (control) period. This difference was statistically highly significant. We did not observe the same results for the other two test periods (1990–1991; 2001). Our reclassified results based on positive and negative discretionary accruals show much higher magnitude during the test period 2008–2009 as compared to the magnitude of positive and negative DA, respectively, during the 2002–2007 control period; this difference is statistically highly significant. The results suggest that management’s temptation to indulge in shenanigans is far higher during stressful economic times.

Keywords: earnings management; discretionary accruals; recessionary periods; earnings manipulation; business ethics; economic incentives

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Hindsight, Foresight, and Insight into Global Corruption Issues | Full Article (PDF)
Wilson E. Herbert

Abstract:Corruption is a major concern throughout the world. This concern is about its negative consequences on countries, industries, individuals and societies, national and global economies, and on international trade and investment. In a perfect economy, corruption, if it exists at all, will be grossly ineffectual. Because corruption thrives mainly in imperfect economies, it progressively impedes socioeconomic and political development and is frequently the cause and effect of structural decay in most developing countries. Conceptually, corruption encompasses all forms of irregular, unethical, immoral, and/or illegal conduct and practices in handling private or public transactions or in the performance of official duties, including abuse of entrusted power—economic, political and administrative—for personal benefit at the expense of another party (individual, group or the society as a whole). Corruption literature has commonly proceeded as though in the beginning there was no corruption. While Biblical evidence suggests that corruption predates modern human race, the mainstream discourse is silent on both this trajectory and historicity. The narrative of hindsight, foresight, and insight into global corruption issues draws intellectual eclecticism from a distinctive worldview on which received orthodoxy is silent or ignores completely. Although the literature is mute on the idiosyncratic knowledge, skills and technical abilities required to fight corruption, I affirm that the needed technical and professional proficiencies are precisely the same as those of fraud auditors and forensic accountants. Global corruption issues cannot be solved from the same level of consciousness that created them nor can they be explained from the simplistic conditionalities of the fraud triangle. This article argues that the modelling apparatus of received micro theory is insufficiently microanalytic to deal with the spate and scale of grand corruption and fraud in developing countries.

Keywords:bribery; corruption; Corruption Perception Index; developing countries; fraud and forensic accounting; Nigeria; OECD Convention; Sub-Saharan Africa;Transparency International; World Economic Forum; United Nations

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Securities Class Actions in the U. S. and Canada against Chinese Companies and their Auditors: An Empirical Investigation | Full Article (PDF)
Nancy Chun Feng
Ross D. Fuerman

Abstract: This article provides the first detailed empirical evidence documenting the determinants and outcomes of private securities class action lawsuits filed in the U.S. and Canada against Chinese companies and their auditors.
The results show that auditor litigation is positively associated with the use of an auditor with its engagement team office based in the U.S. or Canada, the use of a reverse merger to go public, and fraud. Company size is negatively associated with auditor litigation.
Aggregate Chinese companies’ settlements are positively associated with the occurrence of an auditor settlement and with class period length. Auditor settlements are associated with several factors, the most remarkable—and not previously disclosed—is that no mainland China CPA firm has ever paid to settle a private securities class action filed in the U.S. or Canada.  

Keywords: securities class actions; auditor litigation; audit quality; reverse mergers; China

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The Caterpillar Case: Effective Tax Planning or Scam? | Full Article (PDF)
D. Larry Crumbley
Christine Cheng
Amy J.N. Yurko

Abstract: The Caterpillar case provides students with a real-world example of international tax planning, its benefits, and pitfalls. This multidimensional case introduces students to several important legal issues, but also several interesting characters. The human element of this case helps to keep it both interesting and understandable. The learning objectives are to develop critical thinking skills, student awareness of ethical considerations in all business decisions, and effective communication skills. The case study can be a valuable tool in undergraduate or graduate tax, legal research, or cap stone accounting courses. The case can be adapted for individual written work, an in-class group project with active learning, or an excellent mock trial. Implementation guidance and teaching notes are provided to aid instructors.

Keywords: Caterpillar, Inc; economic substance test; tax fraud; mock trial; Daubert/Frye challenges; transfer pricing; whistleblower

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A Tax Return is Worth More Than a 1,000 Words: The Case of the Interview with the IRS-CI | Full Article (PDF)
David O’Bryan
Jeffrey J. Quirin
Mary Jo Goedeke

Abstract: The tax return is often a key piece of evidence in a forensic accountingengagement. Therefore, forensic accounting students need to understand what a tax return can tell its reader about the taxpayer. This case study is designed for an introductory course in forensic accounting and supports the call for case instruction as a means to attaining student experience objectives in this growing practice area (Heitger and Heitger, 2008). Students are placed in the hypothetical role of a person interviewing for an entry-level position with the IRS-CI. The employer provides them with a personal tax return and asks them to prepare a memo describing what they can learn about the taxpayer from their return. Successful completion of this assignment demonstrates a student can translate a tax return into a financial story about the taxpayer. It also requires the student to utilize their written communication skills.

Keywords: Forensic accounting; fraud examination; taxation; financial profile; financial investigation

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Mitigating Cyberattacks: An Active Learning Instructional Resource | Full Article (PDF)
David C. Hayes
Ann D.O’Brien
Chelley M. Vician

Abstract: This article presents an instructional resource developed around the U.S. Department of Defense CyberProtect simulation. Students actively learn about cyberattacks and potential mitigation strategies when playing the CyberProtect simulation game. Students assume the role of a systems administrator purchasing tools and experimenting to defend against possible random cyberattacks for one round of simulation (approximating four quarters of a fiscal year). Results from a repeated measures study suggest that students significantly increased their level of understanding of cyberattacks by deploying more effective mitigation tools in the post test. Additionally, the majority of students reported that they enjoyed the assignment.

Keywords: cybersecurity; Department of Defense CyberProtect simulation; hands-on active learning

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Case Studies in (Alleged) Embezzlement and Fraudulent Accounting Practices by Company Controllers | Full Article (PDF)
Dan Harris

Abstract: Case studies are an effective way to learn embezzlement detection and prevention. Three actual case studies of alleged embezzlement by company controllers are examined through the three causal elements of the embezzlement triangle (more commonly referred to as, the fraud triangle)—opportunity, motive (or pressure), and rationalization—in addition to five common questions. All three of the alleged embezzlers met each of the causal elements of the embezzlement triangle. Further, each of the companies/owner(s) for whom the controllers worked shared a combination of characteristics that made them inherently susceptible to embezzlement, including but not limited to, small accounting departments, lack of segregation of accounting duties, lack of accounting sophistication by upper management, and absence of certain basic control procedures. Both accounting firms and companies themselves can benefit from both awareness of the vulnerabilities companies analyzed herein and the remedial recommendations. These actual case studies detail specific examples of alleged embezzlement by controllers, their patterns, and similarities.

Keywords: embezzlement; embezzlement triangle; fraud triangle; controller; embezzler

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Book Reviews
BookBig Data in Practice
Bernard Marr, 2016, 320 pp.
John Wiley
111 River Street
Hoboken, NJ 07030 
After defining big data as the fact that we can now collect and analyze data in a way that was simply impossible even a few years ago, fueling this big data movement is the fact we have more data on everything and our improved ability to store and analyze any data. For example, we currently search 3.5 billion times a day on Google alone.

The author then discusses how big data is used in U.S. entities and companies. For example, ETSY analytical routines also are deployed for fraud prevention, scanning the thousands of transactions that take place across their servers every day for telltale signs of dishonest activity.

Plantir uses big data to solve security problems ranging from fraud to terrorism. They initially worked on tools to spot fraudulent transactions made with credit cards, but soon learned the same pattern-analysis methods can work on disrupting all forms of criminal activities from terrorism to international drug trade.

Experian holds around thirty petabytes of data on people all over the world in their audit bureau database, and the data is growing at a rate of twenty percent per year. They believe that all sectors of society are being targeted by increasingly sophisticated hackers and scammers. Experian helps prevent fraud by matching incoming transactions against their fraud prediction model, which monitors 282 attributes—such as the value of the transaction, the geographical locations of those involved and their previous behavior—to offer real-time fraud detection. Should a transaction show a similar profile to previous transactions that were known to be fraudulent, it can be flagged up for manual review or real-time intervention.

BookCostly Reflections in a Midas Mirror
D.L. Crumbley, D.L. Ariail, J.M. David, V. Paz, 2019, 194 pp.
Carolina Academic Press
700 Kent Street
Durham, NC 27701 
Lenny Cramer, a professor at Columbia University, is asked by his president to help a wealthy donor. Although a managerial professor, he uses his forensic accounting background to solve a “whodunit” plot. The novel mixes fraud, forensic accounting, expert witnessing, murder, art, ethics, humor, cost, and managerial accounting together to provide a better way of learning the managerial accounting process. Has been used in numerous classrooms over the years. The main co-author has written thirteen educational novels.

BookA Practitioner’s Guide to Business Analytics
Randy Bartlett, 2013, 271 pp.
2 Pennsylvania Plaza
New York, NY 
This three-part, twelve chapter how-to-do book is for those involved in business analytics, such as analytics-based decision makers, senior leadership advocating analytics, and those leading and providing data analysis. The author writes for a broad audience of analytics professionals and includes discussions on how to plan, organize, execute, and rethink a business. Since it is not a “stat” book, the author does not dwell on performing statistical analysis.

The author’s objective is to help others build a corporate infrastructure to better support analytics-based decisions. For example, Fig. 6.1 (on p.117) shows types of business analytics that can support decision making and organize business analytics projects. Figure 6.4 (p. 123) shows how to assess the relative technical difficulties of a set of business problems.

There are at least sixteen pages on fraud subjects. The fraud analysis problem boils down to analyzing millions of transactions that happened in a particular order at a particular time. A company can detect and report suspicious numbers to the auditors. In an audit of thirty-nine companies, the author demonstrates the potential of advanced analytics by comparing their ledgers to those of six corporations known to have committed fraud. Rather than describe each of these methods, in the aggregate, these approaches apply simplistic to sophisticated data-analytic techniques that will provide insight into potential fraud.

BookFuture Crimes: Everyone Is Vulnerable
Marc Goodman, 2015, 425 pp.
Doubleday Publishing
1745 Broadway
New York, NY 10019 
The author states that criminals constantly update their techniques to incorporate the latest emerging technologies into their modus operandi. They have evolved well beyond the days when they were the first on the street carrying pagers and using five-pound cell phones to send coded messages to one another. Today, they are building their own nationwide encrypted cellular radio telecommunications systems, like those employed by the narco-cartels of Mexico. Consider for a moment the sophistication required to establish such a fully functioning encrypted nationwide communications network—an amazing feat, especially because many Americans still can not get a decent mobile phone signal most of the time.

Goodman believes that technological advances have benefited our world in immeasurable ways, but there is an ominous flip side: our technology can be turned against us. Hackers can activate baby monitors to spy on families, thieves are analyzing social media posts to plot home invasions, and stalkers are exploiting the GPS on smart phones to track their victims’ every move. We all know today’s criminals can steal identities, drain online bank accounts, and wipe out computer servers, but that’s just the beginning. To date, no computer has been created that cannot be hacked—a sobering fact given our radical dependence on these machines for everything from our nation’s power grid to air traffic control to financial services. So even if accountants slowly disappear, forensic accountants still will be needed.

BookIn Vino Duplicitas: The Rise and Fall of a Wine Forger Extraordinaire
Peter Hellman, 2017, 346 pp.
The Experiment, LLC
220 East 23rd Street, Suite 301
New York, NY 10010-4674 
Rudy Kurniawan was sentenced to ten years in prison in 2013 for multiple counts of selling millions of dollars in fake rare vintages. He had a great palate which allowed him to identify wine blends. Chinese with an Indonesian name, he began buying and selling rare wine in the early 2000s.

When the rare wine supply began to dry up, he decided he could make the wine by mixing expensive wine with other high-quality California wine. The author explains how Rudy pulled off his massive wine forgery. He may have been responsible for as much as $150 million to $550 million worth of fake wine over ten years. Possibly as many as 12,000 bottles of fake wine was manufactured by Rudy in 2006 alone.

NACVA and the CTI’s 2019 Annual Consultants’ Conference
The NACVA and the CTI’s 2019 Annual Consultants’ Conference will be held June 6–8, 2019, in Salt Lake City, Utah, at the Grand America Hotel. Early registration discounts are available.
To learn more and register, visit, or call Member/Client Services at (800)677-2009.

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

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: