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Assessing the Intersection of Climate and Tax Risk: Insights from Utility Firms Using AI | Full Article PDF
Tony L. J. Lin
Anthony P. Curatola

Abstract: This exploratory case study leverages the GPT-4 AI model to investigate utility companies within the Russell 3000 Index during the critical fiscal years of 2019 to 2020, a period marked by heightened environmental sustainability awareness and increased regulatory scrutiny. Utilizing the latest GPT-4 model, released in November 2023, we calculate tax risk scores and contrast them against climate risk scores from the Ceres Climate Risk database (Berkman, Jona, and Soderstrom, 2023). The selection criterion focuses on the two highest and two lowest non-zero climate risk scores, providing a deliberate contrast in our analysis. Our methodology reveals a nuanced interrelation between environmental impact and tax strategies within the utility sector.
The findings suggest that utility companies with elevated climate risk scores may experience corresponding increases in tax risks, while those with lower climate risks demonstrate reduced tax implications. Recent research by Kim, Muhn, and Nikolaev (2024) underscores the reliability of GPT-4 in financial analysis, validating our approach. By integrating advanced AI analysis with comprehensive climate risk data, this study enriches the discourse on ESG factors in corporate financial strategies and highlights AI's potential to uncover complex risk patterns. The results have significant implications for forensic accounting, offering new insights into sophisticated tax strategy analysis and contributing to the development of innovative instructional methods in the field.

Keywords: Climate risk scores; tax risk scores; gpt-4 language model; utilities sector forensic accounting; artificial intelligence in financial diagnostics

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Corporate Social Responsibility and Lawsuit Risk and Settlement | Full Article PDF
Tatiana Salikhova
Li Sun
Zhenze Xing

Abstract: We utilize data on lawsuit settlements, as reported in the special items on income statements, to investigate whether and how corporate social responsibility (CSR) relates to lawsuit characteristics (e.g., the probability of lawsuit and the magnitude of settlement). We utilize logistic regression(clustered standard errors OLS regression)to examine the relation between CSR and the probability of lawsuit (the magnitude of settlement). With a large percentage being manufacturing firms, our sample consists of 21,761 observations, representing 2,437 unique public firms in the United States.
Building on the stakeholder view of CSR and drawing on prior research and anecdotal evidence, we posit and find that high CSR firms are less likely to be involved in lawsuits and tend to receive favorable settlement outcomes (e.g., larger settlement gain or smaller settlement loss), relative to low CSR firms. We also find that the relation between CSR and the probability of lawsuit becomes weaker for firms with more cash holdings, suggesting that firms with more cash are more likely to be involved in lawsuits. Additionally, our primary findings are less pronounced in manufacturing firms. Lastly, we find that the primary results are driven by firms with settlement loss (i.e., usually the defendants in lawsuits).

Keywords: Corporate social responsibility; lawsuit; lawsuit settlement; special items

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The Long-Term Effects of Occupational Fraud on Perpetrators: Initial Evidence | Full Article PDF
Dana R. Hermanson
William Lyle
Kara M. Obermire

Abstract: While much is known about fraud methods, victims, and perpetrator characteristics, little to no research examines the long-term effects of occupational fraud on perpetrators. Based on in-depth interviews of seven former fraud perpetrators who served time in prison, we provide initial qualitative evidence of significant negative impacts on fraud perpetrators, especially their career and financial standing, some family relationships, many friendships, and their mental health. One notable positive area is spiritual aspects of the perpetrators’ lives. These effects appear largely consistent with the effects of incarceration in general, highlighting the severe penalties for occupational fraud. The most severe overall consequence of fraud is most commonly the impact on children and family. Most participants view the consequences of their actions as fair, but most do not believe that their consequences will deter others from committing occupational fraud. The participants are quite unified in their negative views of the criminal justice system, especially the lack of focus on rehabilitation and restitution. We offer implications and future research avenues.

Keywords: Occupational fraud; fraud; perpetrators; consequences of fraud; criminal justice

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Fraud Characteristics and the SEC’s Enforcements Against the Independent Auditors | Full Article PDF
Erlina Papakroni

Abstract: This study examines whether the U.S. Securities and Exchange Commission’s (SEC) auditor-related findings, namely charged, silent or concealed, are associated with fraud scheme characteristics, as argued under an outcome-penalty accountability framework. The results indicate a weak association between the fraud characteristics and the SEC’s auditor-related findings. Fraud amount and collusion among perpetrators increase the probability of the SEC charging the auditor, as compared to the probability of being silent.

The perpetrator’s executive position decreases the probability of the SEC charging the auditor, as compared to the probability of being silent. Overall, only a few fraud characteristics affect the SEC’s auditor-related findings, which is not consistent with the outcome-penalty accountability framework. In contrast, the auditor type, being a Big N auditor or not, significantly affects the SEC’s findings. Specifically, the SEC is more likely to remain silent or find that the fraud scheme is concealed for Big N than non-Big N auditors, as compared to charging the auditor. Thus, this evidence is consistent with a process-reward accountability framework.

Keywords: Auditors; fraud characteristics; SEC investigations

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Will PCAOB’s Access to Auditors of Chinese-Based Firms Reduce the Risk of Fraudulent Activities? | Full Article PDF
D. Larry Crumbley
Amanda M. Grossman
Steven D. Grossman

Abstract: In the first decade of this century, there were at least 150 Chinese reverse mergers that significantly increased U.S. market investors’ exposure to companies based in, or with a majority of operations in, the People’s Republic of China (China). By the second decade of this century, China had continued to restrict the ability of the Public Company Accounting Oversight Board (PCAOB) to inspect and investigate Chinese-based issuer auditors increasing the risk to stakeholders.

Prior attempts by the PCAOB and the SEC to elicit Chinese cooperation regarding foreign auditor inspections had gone unheeded. In 2020, upon threatening to delist Chinese companies on U.S. stock exchanges, the U.S. Congress passed the Holding Foreign Companies Accountable Act (HFCAA), which empowered the PCAOB to investigate, inspect, and if necessary, sanction registered public accounting firms within any jurisdiction. On August 6, 2022, the PCAOB signed a Statement of Protocol with China allowing the PCAOB to have open access to inspect and investigate the registered firms.

 On the heels of such historic and unpreceded access, the PCAOB, after inspecting eight Chinese audit engagements, sanctioned three firms and four individuals on November 30, 2023, for fraudulent activities. These would not be the last sanctions on China or Hong Kong based auditors. While the increased scrutiny of Chinese-based auditor firms will certainly improve audit quality and possibly reducing stakeholder risk, Big Four audit member firms may find themselves disengaging from the Chinese company audit space.

Keywords: PCAOB; Holding Foreign Companies Accountable Act; Chinese auditing; reverse mergers; Big Four

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Decrypting the Investigation of Cryptocurrency Fraud: A Discussion of Challenges, Recommendations, and Future Research | Full Article PDF
Michael Killey
Stephanie Walton
Oscar Harvin

Abstract: Both virtual currency utilization and cryptocurrency fraud are rapidly proliferating (Kerr et. al., 2023). Businesses, investors, taxpayers, and other stakeholders often prefer the decentralized system for monetary transfers based on the perceived benefits of anonymity, transactional ease, and freedom from government manipulation (Soni, 2021; Association of Certified Fraud Examiners (ACFE), 2022). Lamentably, the numbers, types, and monetary losses of cryptocurrency fraud victims also are increasing at an alarming rate (Federal Bureau of Investigation [FBI], 2023). Given global concerns pertaining to the security of the digital medium of exchange, we review blockchain technology as well as the current regulatory and enforcement framework pertaining to cryptocurrency. Next, appropriate fraud models for exploring internal cryptocurrency-based frauds are considered. Challenges to cryptocurrency-based fraud investigations also are explicated. Based on our analysis, we then develop strategies and recommendations for successfully investigating and prosecuting frauds pertaining to digital currencies. Finally, we provide suggestions for future research studies pertaining to illicit activities involving cryptocurrency.

Keywords: Cryptocurrency; fraud; blockchain technology; digital currency; fraud diamond

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Discounts: Present Value Theory Applied | Full Article PDF
James A. Lisi

Abstract: Studies of differences in liquidity and control made in past decades have provided valuable information for discount analysis, but the data has been interpreted on a single-study basis and often explained with perfect-market concepts. When real-world market frictions are recognized and the different holding periods in the studies are compared, the independent variables of the investor’s discount rate are seen. These variables are needed to better appraise stranded partial interests in private businesses.

Two cash flows received by an investor govern non-controlling security value: dividends during the holding period and cash proceeds from an exit. The magnitude of the exit, its timing, and the company’s capital structure usually provide most of the security’s value. To solve the appraisal problem, a discounted cash flow analysis of a security’s cash flows to its owner (an investor) is matched with an investor’s discount rate. A company’s discount rate cannot be paired with investor cash distributions. Nor can the investor’s discount rate be matched with the company’s cash flows, which are several degrees removed from the investor.

When company equity is appraised to include the effects of ownership behavior, the investor discount rate is based on the risk-free rate in the same way that put option models are based on the risk-free rate. After the risk-free rate base, additional risk components for lack of control, value floor, company earnings stage, and dividend policy contribute. These differentiating elements are related to a company’s tendency to consume additional cash of its investors, reinvest cash into the company, or distribute cash to its investors.

Unless a company is sold immediately, current company value has no direct bearing on the value of the company’s securities because all the investor benefits are in the future. When an investor discount rate is defined, an appraiser can model expected cash distributions delivered to any company security and get a reliable result.

Keywords: Valuation; appraisal; fair market value; non-controlling interest; discount; DLOL; DLOC; DLOS; DLOM

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Wells Fargo Bank: When Sales Incentives and Management Pressure Lead to Widespread Fraud | Full Article PDF
Maggie Hao
Constance Lehman
Michael Lacina
Haeyoung Shin

Abstract: This instructional case discusses the Wells Fargo scandal. The learning objectives include: 1) recognize the conditions that increase the potential for fraudulent activity, 2) identify the “red flags” indicating where fraudulent activity could occur, 3) understand the protections available to whistleblowers (e.g., Dodd-Frank Act and Sarbanes-Oxley Act protections), 4) discuss ways to discourage executives from engaging in unethical behavior and to promote a culture of integrity, and 5) develop recommendations to mitigate the identified risk areas. The case is appropriate for graduate or undergraduate level fraud examination, forensic accounting, and auditing courses.

The case study was classroom tested, and feedback from students’ surveys suggested the students enjoyed working the case. Students agreed that after working on the case, they could better identify red flags for fraudulent behavior, and they understood the importance of the control environment with a better understanding of whistleblower protections available to employees. The case also enhanced their awareness of the effect that the control environment has in setting a culture to discourage fraudulent behavior.

Keywords: Organizational culture; fraud triangle; whistleblower protection; risk assessment; control environment

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A Proposed New Multi-Dimensional Factor Fraud Framework for International Non-governmental Organizations (INGOs): A Vietnam Perspective | Full Article PDF
Khanh Nguyen
John Sands
Karen Trimmer

Abstract: A systematic literature review methodology reviewed not only Cressey’s fraud triangle, and associated theoretical studies during 1950–2023, to identify gaps in the literature, but also International Standard on Auditing (ISA) 240, and practice. A new holistic fraud frameworkhaving broader scope and criteria contributes at the international level for the INGO/NPO sector in Vietnam to prevent accounting fraud.First, the new framework is the first global scope fraud evaluation framework dedicated to the INGO/NPO sector. Second, the new framework includes different fraud occurrence stages criteria (undetected, suspected, actual/detected, and future) that uses a multi-dimensional approach (individual-level, organizational-level, industry-level, and country-level factors) for addressing these fraud stages.

The SLR methodology helps demonstrate that the multi-dimensional approach is likely to contribute to fraud evaluation in the Vietnamese INGO/NPO sector. This new holistic fraud framework may make a timely multiple contribution to the literature. First, the new framework may enhance the quality of the ISA 240 standard revision process, which is currently being in progress, with the final approval due in the first half of 2025. Finally, the new international fraud framework has practical implications for future research for Vietnam, and elsewhere. Future research should not only investigate accounting fraud prevention but also the array of fraud occurrences, including predicting future fraud.

Keywords: Multi-dimensional factor fraud framework; international non-governmental organization (INGO); not-for-profit organization (NPO); Vietnam.

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Cost Accounting for Law Firms: Fixed Cost v. Hourly Rates and Their Effects on Ethical Behavior and Fraudulent Billing | Full Article PDF
Svetlana Vlady

Abstract: Costs are the most common cause of complaints or dissatisfaction by consumers of legal services. The key underlying causes of such dissatisfaction are unethical behavior and poor management of costs. The present multiple-case study investigated this vital issue and compared the effects of flexible hourly fees and fixed fees on lawyers’ ethical behaviors and fraudulent billing. This study examined the real-life tax invoices of a private Australian client who has dealt with law firms. The study found that hourly billing makes legal services too expensive. Moreover, hourly billing may incentivize lawyers to bill client cases with excessive hours, which can lead to billing fraud accusations and ethical violations. Also, hourly billing could reward inefficiency and damage lawyer–client communication and trust. Fixed billing could reduce costs and moral hazards by reducing lawyers’ incentives to overbill. Overall, fixed-fee pricing provides clients with cost certainty and incentivizes efficiency and effective communication.

Keywords: Law firm; ethics; fraudulent billing; fixed cost; hourly rate; information technology

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Soft Cues and Hard Evidence – What to Look for When Things Look Too Good | Full Article PDF
Eddward T. Herron
J. Alexander Smith

Abstract: A series of bank frauds at the Gravois Bank & Trust (GB&T) persisted over a period of six decades, despite annual visits by both bank examiners and external auditors. Recent research in behavioral auditing suggests that those frauds went undetected due to examiners’ or auditors’ failures to make changes in the nature of their procedures. Since fraudsters typically understand examination or audit methodology and procedures, they can effectively fly below the radar. The authors illustrate that small changes in the nature of procedures, even when fraud is not initially suspected, may open possibilities to catch fraudsters red-handed. The actual case study was developed from an otherwise typical training assignment for a small-town financial institution.

Keywords: Auditing; bank fraud; fraud auditing; forensic accounting; auditing planning and procedures

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Book Reviews

AI Snake Oil: What Artificial Intelligence Can Do, What It Can’t, and How to Tell the Difference Arvind Narayanan and Sayash Kapoor, 2024, $24.95 Princeton University Press 41 William Street Princeton, NJ 08540    These two authors tell you what you need to know about AI and how to defend yourself against bogus AI claims and products. There is a whole new litigation area called AI washing (like ESG washing), and few things are surrounded by so much hype, misinformation, and misunderstanding. The SEC has already gone against two companies for falsely claiming they used AI, and there are more than seven shareholder lawsuits against companies for misrepresenting their abilities to use algorithms and technology for their products and services. The authors provide a book to identify AI snake oil and AI hype. They make the argument that predictive AI does not work today but will likely never work because of inherent difficulties in predicting human behavior. Only time will tell if their prediction will come true.

Generative AI and LLMs for Dummies David Baum, Free on the internet Snowflake Special Edition John Wiley & Sons, Inc.   Artificial Intelligence (AI) and Large Language Models (LLMs) are the wave of the future as we are told. The author provides an introductory overviw of Generative AI and LLMs, along with technique for training, turning, and deploying machine learning (ML) models. The book does not get into “the weeds.” You can learn about the differences between traditional AI and GenAI.

Generative AI in Action Amit Bahree, 440 pp., Free on the internet Sponsored by Anaconda Manning Shelter Island    According to the author, GenAI can both impress and fail spectcularly. He presents concrete examples, insights, and techniques for using LLMs and modern AI technologies. So, to have Einstein under our bed, we must become good prompt engineers. Bahree provides: Best practices for deploying GenAI apps. Production-quality retrieval augment generation (RAG). Adapting GenAI models to your domain.

The Greatest Hoax on Earth: Catch Truth While You Can Alan C. Logan, 2020, 470 pp. Alan C. Logan, Publisher    Many of us have met him, heard him speak, read the book titled Catch Me If You Can, saw the 2002 movie by the same name produced by Steven Spielberg and portrayed by Leonardo DiCaprio, or saw the musical, his talks on Google Lectures, or on TV’s To Tell The Truth (if you are old enough). By now you have guessed I am talking about Frank W. Abagnale, Jr. But is much of his life a myth? Yes, according to Alan C. Logan, The Crime Reel, the Javier Leiva podcasts, Abagnale’s Wikipedia pages, and Ron Stevenson’s article in Movies (2024). Logan unmasks the myth and shows how Abagnale turned a failed life of minor crimes into a celebrity life. This book is a fascinating and informative read about the fabricated version of Abagnale’s life. I met Frank many years ago and still believe he is one of the best speakers I have ever heard. He still asks $27,000 for a 75-minute talk. Forensic accountants and Certified Valuation Analysts are supposed to be skeptical, and this story provides us with an example of why we always should be suspicious and not accept anything without good evidence (which is hard to do). This self-published book helps explain how companies can cook their books for many years and not be caught.

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Events
2025 LSU Annual Fraud & Forensic Accounting Conference
LSU is having their two-day Fraud & Forensic Accounting Conference on July 24, 25, 2025. Please mark your calendars!  https://www.lsu.edu/business/accounting/fraud.php
 
NACVA and the CTI’s 2025 Business Valuation & Financial Litigation Super Conference
September 11–12, 2025 | Salt Lake City, UT | Hyatt Regency| https://www.nacva.com/conferences