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Journal of
Forensic Accounting
D. Larry Crumbley
Editor-in-Chief
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RECENT CONTENTS
 Archival CD (Volumes I-V) now available ($519)
VOLUME VI NUMBER 1 (June 2005)
ARTICLES
Accountability and Evidence Evaluation in Two Audit Tasks
D.M. Matson
Although previous research finds that auditors generally focus on negative rather than positive evidence, in this study accountability did not influence the perceived importance of positive or negative items of evidence.
Fraudulent Financial Reporting Characteristics of the Computer Industry Under a Strategic-System Lens
C-H. Chen and J.T. Sennetti
A model which predicts nineteen of twenty out-of-sample accused companies, with an overall prediction rate for the accused and not-accused companies for 460 quarterly reports of about 91 percent.
Going Concern Report Modeling: A Study of Factors Influencing the Auditor's Decision
P. Lee, W. Jiang and A. Anandarajan
The authors identify variables with the most predictive power and develop a model that auditors can use in their decision to issue the modified report.
Institutional Investors, Managerial Ownership and Accrual Management
S. Mitra
By collectively owning a large percentage of outstanding common stock in a corporation, institutional investors mitigate the adverse effects of the agency problem arising out of separation of ownership and control of reported accounting numbers.
Fraud Surveys: Lessons for Forensic Accountants
N. Apostolou and D.L. Crumbley
Various fraud surveys are analyzed to provide insight into a corporation's vulnerability to fraud and the best techniques to detect such fraud. Although recent legislation has emphasized the importance of improving internal controls, these studies make clear the pervasiveness of fraud and the difficulty of detecting malfeasance.
Computer Forensics: Helping to Achieve the Auditor's Fraud Mission?
G.S. Smith
Since extended procedures often hinge on electronic evidence, it is important for these two professions - auditing and computer forensics - to assist one another in collecting and using digital evidence.
Detecting Fraud in Financial Statements: The Use of Digital Analysis as An Analytical Review Procedure
R.M. Reed and D.K. Pence
While digital analysis remains a viable tool in exploring data sets for manipulation of numbers, caution must be exercised when using it on aggregated data.
Industry-Wide Effects of the Sarbanes-Oxley Act of 2002
Z. Rezaee and P.K. Jian
The authors find that some industries are positively affected, while several others are negatively impacted by the passage of the Act. Results suggest that financial scandals were not limited to a handful of companies because investors perceived them to be an industry wide problem.
Off-the-Book Income and Self-Control Theory: An Exploratory Study of Income Tax Evasion
M.W. Gannon and J.J. Donegan
Behaviors that were considered indicative of high control, such as level of education, and those indicative of low control, such as having committed vandalism, possessed more explanatory power than attitude questions, except for a direct statement on attitude toward tax evasion.
Teaching Fraud Detection Skills: A Problem-Based Learning Approach
C. Durtschi and R.R. Fullerton
Problem-Based Learning (PBL), popularized in the medical field, consists of a team of students confronting a realistic problem in a simulated real-world setting, and can be usefully applied in the teaching of fraud detection.
Student Case: The Misguided Bond
S.C. Anderson, K. Capriotti and V. Shea
A dialogue format is used to present the issues, facts, and terminology of a case that an instructor may use to introduce a forensic component into the classroom.
COLUMNS & CURRENT COMMUNICATIONS
Identifying the Risk of Fraud in Non-Profit Organizations
M. Thomas
SSARS 10: Check Your Malpractice Insurance
H. Cendrowsky, L.R. Donaldson and J. Martin
Letter to the Editor (Response to Cendrowsky, et. al.)
A.M. Cohen and M.P. Glynn
Forensic Risk Management: Accountants and Bankruptcy Fraud
C. Pacini
For Your Forensic Bookshelf
S. Mitra
Forensic News
R.E. Flynn
Black Tech Forensics: Post-Enron Guidelines for Financial Frauds
G.S. Smith
VOLUME VI NUMBER 2 (December 2005)
ARTICLES
Valuing Privately-Held Businesses: A Comparison of the Pricing Accuracy of Common Valuation Models
M.F. Spivey and J.J. McMillan
The authors find that the excess earnings model was significantly superior to the earnings capitalization model in estimating the actual sale prices of privately-held businesses.
Financial Sleuthing Using Benford's Law to Analyze Quarterly Data with Various Industry Profiles
G.G. Johnson
When the digit probabilities are analyzed individually across the three data profiles investigated, it is shown that firms tend to "manage" small losses into small gains and/or report smaller negative earnings per share.
Unusual Patterns in Reported Earnings: Additional Evidence
L. Guan, C.J. Skousen and T.S. Wetzel
These results indicate that the incentives of rounding earnings are negatively associated with the distance of pre-rounded earnings to the next reference point. The findings of the study have significant implications for external auditors and audit committees of firms.
Accounting Expertise in Litigation and Dispute Resolution
N. Brennan
The practice of the courts is to permit evidence where there is a material matter at issue between the parties, the understanding of which would fall outside the general level of knowledge and expertise normal in society.
Identity Theft and the U.S. Postal Inspection Service
R.G. Brody, D.R. Hermanson and M.J. Hoffman
Cracking a complex ID theft ring.
Case Study of the Role of the Expert Witness Report in a Legal Dispute
T.A. Buckhoff and M.H. Taylor
A report which resulted in a successful settlement is discussed.
Assessing Demand for Directors' and Officers' Insurance Using Public Information
M.M. Boyer
Apart from the directors' total compensation, there appears to be little correlation between available public information and D&O purchase decisions or amounts of insurance purchased.
COLUMNS & CURRENT COMMUNICATIONS
Avoiding Fraud on Disaster Clean-up Projects
N.D. Opfer
A Corporate Dilemma: Unintended Effects of Goal Attainment
C.L. Kern and D.M. Greenwood
Whistleblowing: Who, What, When, Where, Why & How?
L.H. Clements
Megafrauds: Should the Auditors Have Known? - A Classroom Exercise
C. Pillsbury
Thacher on Columbus's First Voyage: How Much Did it Really Cost?
D. Satava
Forensic News
R.E. Flinn
Forensic Risk Management: Accountants and Bankruptcy Fraud - Part II
C. Pacini
Black Tech Forensics: Anti-Hacking Legislation from Around the World
G.S. Smith
Truth: The Indispensible Precondition of Business
M.B. Torres
VOLUME VII NUMBER 1 (June 2006)
ARTICLES
Examining for Fraud: A Case for a Larger Alpha
T.P. O'Keefe, J.R. Wambsganss and R.J. Dosch
A .05 level of significance is inadequate when attempting to detect a small pattern of fraudulent events.
Continuous Monitoring of Transactions to Reduce Fraud, Misuse, and Errors
D.R. Hermanson, B. Moran, C.S. Rossie and D.T. Wolf
An ERP system may be multi-dimensionally enhanced to continuously monitor and identify exceptional incidents, thus providing an opportunity for rapid incident resolution.
Professional Associations of Expert Witnesses
J.L. Colbert
With the growth of expert witness services in the U.S., thought should be given to emulating the UK model and establishing organizations devoted solely to the needs of experts.
Are Audit Opinion Modifications Associated with Future Financial Restatements?
M.J. Abdolmohammadi and W.J. Read
The authors find that certain audit opinion modifications (e.g., going concern, lack of consistency in application of accounting principles) might be relevant information to users of financial statements in assessing the possibility of future financial restatements.
A Cognitive Approach to Fraud Detection
S. Grazioli, K. Jamal and P.E. Johnson
Cognitive imperfections ("knowledge bugs") arising from application of generalized heuristics in an environment of potential deception may explain variation in the ability of auditors to detect financial statement fraud.
A Study of the Abilities of Accounting and Auditing Professionals in Recognizing Red Flags of Fraud
T.W. De Berry and M.E. Merritt
The authors evaluate the performance of professionals in recognizing fraud risk factors and fraud symptoms in four scenarios.
CPAs' Perceptions of Factors Influencing the Quality of Financial Statement Audits: Substandard Performance And Impaired Independence
G.D. Moyes and A. Anandarajan
The auditors find three conditions that may contribute to auditors realizing substandard performance and five conditions that may contribute to the problem of impaired auditor independence.
Certified Fraud Examiners: A Survey of Their Training, Experience and Curriculum Recommendations
R.D. Meservy, M. Romney and M.F. Zimbelman
The authors document the skills and knowledge that CFEs believe are most important for preventing and detecting fraud, and which skills and knowledge bases CFEs believe are deficient among financial statement auditors.
Can the 'Clan Effect' Reduce the Gender Sensitivity to Fraud? The Case of the IPO Environment
T.J. Shawver, P.C. Bancroft and J.T. Sennetti
The auditors find female initial public offering (IPO) accountants more sensitive toward and less likely than men to choose earnings management actions, even in the presence of other cognitive and ethical orientation measures.
Fraud in Community Health Centers
H. Snyder and D.K. Dietz
The authors examine reported incidents of fraud in community health centers (CHCs), and industry reaction to this research.
Case Study: The Use of Restructuring Reserves to Manipulate Reported Income at Sunbeam Corporation
A.A. Cherry
A student exercise which explores the strategy of manipulating restructuring reserves and the resultant financial statement effects.
COLUMNS & CURRENT COMMUNICATIONS
An Exploratory Survey of Password Re-Usage
K. Walsh, B. Ives, T. Louwers and H. Schneider
Fraud Auditing Small Businesses with the Wheel
J.A. Goldstine
What is Fraud and Who is Responsible?
M.D. Akers and J.L. Bellovary
Forensic News
R.E. Flinn
Forensic Risk Management: Forensic Accountants and Qui Tam Actions Under the False Claims Act
C. Pacini
Black Tech Forensics: Tools of the Cybercriminal? The Software Bots
G.S. Smith
VOLUME VII NUMBER 2 (December 2006)
ARTICLES
Fair Presentation in the Sarbanes-Oxley Era: An Assessment Framework and Opportunities for Forensic Accountants
F.T. DeZoort and J.D. Stanley
Building upon the "substance over form" recommendation of the GAO, a framework for the evaluation of information accuracy, completeness, and transparency is presented without using GAAP as the wholly sufficient criterion for fair presentation.
An Examination of Audit Responses to Fraud Risk
M.H. Taylor, L.R. Fuller, and B.M. Tuttle
A study of how auditors seek to control audit risk due to high management fraud risk. Results indicate that auditors adopt a comprehensive strategy and modify multiple aspects of the audit; in particular, the nature of the audit tests performed. This is one of the very first papers to suggest that proper auditing requires a qualitatively different set of audit tests to respond to management fraud risk.
Monitoring Techniques Available to the Forensic Accountant
M.J. Nigrini
A review of data interrogation techniques suitable for use as detective controls, audit tests, or investigation procedures in large data series environments. Application examples include franchisee reporting, electricity reporting, and election results.
Probative Value of Audit Evidence: A Framework and Synthesis
U. Gronewold
Correct evaluation of audit evidence is crucial in reaching a judgement as to the existence of possible fraud. This review introduces the concept of "probative value" for audit evidence - considering both reliability and validity, develops a conceptual framework for its consideration, and synthesizes over forty-five years of auditing theory research within this framework.
The Small Fraud Paradigm: An Examination of Situational Factors That Influence the Non-Reporting of Payment Errors.
S.L. Tate, C.W. Bame-Aldred, R. Krebs, and A. Suwandee
The results of this innovatively constructed controlled experiment suggest that unethical behavior may be deterred by the mere belief that transactions may be audited.
An Investigation of Auditor Assessment of Risk
S.A. Webber, D. Sinason, B. Apostolou, and J.M. Hassell
This study indicates that auditors significantly increase their fraud risk assessment when either or both of the fraud risk factors of motivation or opportunity were identified.
An Analysis of Auditor-Selection Decisions: The Case of Ex-Andersen Clients
Z. Rezaee and J.L. Turner
A report on various factors influencing the selection of a new audit firm by ex-Andersen clients, including decision processes and criteria used.
Pricing Small Businesses: An Application of the Edwards-Bell-Ohlson (EBO) Valuation Model
M.F. Spivey and J.J. McMillan
An examination of the pricing accuracy of the EBO model on a sample of small firms.
Board Oversight of Corporate Ethics Programs and Changes in Financial Disclosure Credibility
A.J. Felo
This study provides evidence which indicates that companies with ethics programs overseen by boards disclose more credible financial information, and suggests that such arrangements foster a more forthcoming attitude concerning financial disclosures.
Is There Manipulation of Self-Reported Yield Data in Crop Insurance? An Application of Benford's Law.
R.M. Rejesus, B.B. Little, and M. Jaramillo
This paper uses analytical techniques based on Benford's Law to determine whether there is evidence of yield data manipulation in crop insurance. Results suggest that there is yield data manipulation for insured non-irrigated cotton yields in the southeastern U.S.
Employee Purchase Cards: Use, Control and Detection of Fraud
T.E. Vermeer and H.A. Maguire
A comprehensive overview of purchasing cards, including a description of purchasing card system administration, controls for detection and deterrence of purchasing card fraud, best practices for audits of purchasing card systems, and typical patterns of purchasing card fraud.
Student Case: Noreen Naive and the Case of the Baffled Business Owner - A Grader-Friendly, Financial Statement Analysis Case
S. Bee and D. Hayes
A case exercise which encourages students to maintain a skeptical attitude as they utilize various analytical methods to perform financial statement analysis. Students are required to identify accounts where they would allocate time to seek additional information, and to specify the kind of information they would seek, in order to provide assurance on known risky accounts and procedures, and to uncover the "hidden stories" that might resolve deviations identified in the analytical phase.
COLUMNS & CURRENT COMMUNICATIONS
Divorce and the Self-Employed Meet Economic Reality
J.A. DiGabriele
Forensic News
R.E. Flinn
VOLUME VIII NUMBERS 1 & 2 (Combined June/December 2007)
ARTICLES
An Empirical Examination of Manipulation in Components of the Income Statement
C.B. Johnson and T.C. Ireland
This research indicates that components with the most noteworthy deviations include rental income and provisions for loan/asset losses (based on levels of statistical significance), and net sales and research and development expense (based on relative size).
Aligning Auditor Materiality Choice and the Needs of a Reasonable Person
J.L. Turner
Considers commonly used materiality heuristics and demonstrates that adherence to these often lead to earning per share misstatements and capital market inefficiencies. Proposes a revised metric for materiality that is capital market sensitive and promises uniform applicability and transparency.
Correlation of Complex Evidence in Forensic Accounting Using Data Mining
B. Kovalerchuk, E. Vityaev and R. Holtfreter
Outlines a new technique called Hybrid Evidence Correlation (HEC) whereby correlation of as few as two evidences with each other may reveal a rare suspicious pattern.
Where Have the Auditors Gone Wrong?: An Analysis of SEC Accounting and Auditing Enforcement Releases
J.M. D'Aquila
This study explores the specific underlying audit issues which resulted in alleged audit failures, and identifies several prevalent deficiencies, the nature of which relate primarily to the failure to exercise appropriate professional judgment.
An Examination of the Effectiveness of Sarbanes-Oxley Whistle-Blower Protection
C. Bame-Aldred, J.T. Sweeney and D. Seifert
An experiment which examines the effect of protection as afforded under Sarbanes-Oxley as a counterbalance to perceived potential retaliation on the likelihood of employee whistle-blowing.
Is There a Relationship Between Management Compensation and Revenue Misstatements?
H. Du, C.P. Cullinan and G.B. Wright
This study segregates compensation as a potential misstatement cause from the effects of misstatement on compensation by measuring compensation only in the time period immediately proceeding a misstatement period. Results reveal that cash compensation lowers the likelihood of a misstatement, while equity compensation increases this likelihood.
Forensic Accounting in Japan
T. Konishi, H.N. Pontell and G. Geis
Positions recent Japanese forensic auditing reform initiatives within an historical context and provides valuable insight into cultural and political influences.
An Experimental Investigation of the Application of Order Effects in Correctly Determining the Fairness of Accounts Receivable
R.A. Barra and M.E. Taylor
An experiment which explores the relationship between order of procedure selection and accuracy of auditor judgment on the fairness of accounts receivable, and which indicates there may be an evidential path of audit review procedures which lead to more accurate judgments.
The Evolution of Auditor Liability Under Common Law
C.R. Baker and D. Prentice
Traces the evolution of auditor third-party liability for, and within, negligence over time by tracking interpretations of common law legal theories, emerging precedents, and the resultant ambiguities.
The Use of Computer-Assisted Auditing Techniques in the Auditing Course: Further Evidence
F.J. Coglitore and D.M. Matson
A comprehensive report on the application of the Audit Command Language (ACL) auditing software package within a university auditing course, including consideration of instructor objective, selection, and implementation issues. Three brief cases designed to introduce students to the performance of technology assisted audit procedures, in particular those skills necessary for forensic accounting and fraud auditing, are included.
Earnings Management: The Game
L.M. Lovata
Presentation of an innovative game which is used to help students understand the motivation of managers in exploiting information asymmetries and the role of auditors in increasing the likelihood that such exploitations will be revealed.
Some Recent Fraud Survey Results: Similarities and Inconsistencies
N.G. Apostolou and D.L. Crumbley
A comparison of three recent fraud related surveys provides insights that extend beyond those addressed by the Sarbanes-Oxley legislation.
Have the Big Accounting Firms Lost Their Audit Quality Advantage? Evidence from the Returns-Earnings Relation
B.B. Lee, S. Cox and D. Roden
This study explores the relationship between an investor's ability to use audited financial statements of a firm to predict future firm earnings and the size of the firm auditor, and reveals that the relationship between auditor size and the ability to predict future earnings changes over the sample period, becoming not significant in the more recent years of the sample.
Earnings Conservatism and Audit Quality: An Examination of the Late 1990s
D.S. Jenkins, G.D. Kane and U. Velury
An investigation into the influence of auditors in affecting financial reporting conservatism, indicating that industry specialist auditors do a better job of preserving financial reporting integrity when incentives for aggressive reporting may be high.
Transition Method to Adopt Fair Value Accounting for Employee Stock Options: Economic Determinates and Consequences
F.F. Niu
An examination of firms' incentives to use one of the three alternative transition methods, as specified in FAS148, when adopting fair value accounting for employee stock options (ESOs). Taken together, the findings lend some support to claims that firms choose transition methods to manage financial reporting perceptions and to manipulate growth expectations.
The Usefulness of Fraud Warning Signs in Forensic Accounting
J.P. Osborn
A forensic accountant uses fraud warning signs retrospectively to build a case in an employee/employer dispute.
Case Study: Detecting Shell Companies with Dynamic Text Comparisons
M. Lehman and M. Weidenmier Watson
This Student Case requires the implementation of an advanced technology solution so as to undertake a specific audit procedure designed to uncover fraud, thereby encouraging students to develop technological solutions as enabling enhancements to any creative audit procedure.
Errata - Probative Value of Audit Evidence: A Framework and Synthesis
U. Gronewold
COLUMNS & CURRENT COMMUNICATIONS
Looking Behind the Financial Curtain
J.V. Rizzi
Forensic Risk Management: The Fight Against Trade Secret Espionage
C. Pacini
Using a Major Accounting Firm for Uncovering Fraud and Compliance Violations
R.A. Sibery
To Have and to Hold: An Empirical Investigation of Preferences for Valuation Methods of Closely Held Companies in the Matrimonial Court
J.A. DiGabriele
Using Computers to Detect Fraud
D.E. Mensel
General Literature on the Expectations Gap: What the Audit Profession Does and What the Public Perceive the Audit Profession Should Do
M. Ojo
Internet Sleuthing for Forensic Investigations
R.R. Tidd and D.E. Mitchell
VOLUME IX NUMBER 1 (June 2008)
ARTICLES
The Impact of Enterprise Risk Management on the Internal Audit Function
M.S. Beasley, R. Clune, and D.R. Hermanson
The authors provide evidence of the factors associated with the overall impact of enterprise risk management on the internal audit function's activities.
Whistleblowing: A Review of Previous Research and Suggestions for Best Practices
T.V. Eaton and W.T. Weber
An effective whistleblowing policy can help an organization convey its ethical practices to its employees and protect itself against fraud, negative public scrutiny, regulatory investigations, falling stock prices, and litigation.
Contemporaneous Risk Factors and the Prediction of Financial Statement Fraud
C.J. Skousen and C.J. Wright
Using significant risk factors, the authors develop a fraud prediction model that outperforms previously reported models that attempt to predict fraud using publicly available information.
The Legal Implications of Auditors Using a Fraud Decision Aid vs. Professional Judgment
S.H. Chan, D.J. Lowe, and L.J. Yao
The authors' findings suggest that reliance on a decision aid (regardless of its extent) can reduce jurors' assessment of loss responsibility and damages against the auditor.
Forensic Accounting in France: Emergence and Development
R. Labelle and M. Saboly
The observable differences between the historical evolution of FA in France and North America mainly stem from the early insertion of accounting into the French justice system and from a lesser involvement of courts in dispute settlement.
A Neural Networks Approach to Predicting Earnings Restatements
S. Ragothaman, A. Lavin, and T. Davies
Network models are valuable decision tools to help auditors in arriving at audit opinions as well as financial analysts and investors in evaluating securities.
Toward an Expanded Control Environment Framework
K.E. Hughes II, T.J. Louwers, and J.K. Reynolds
The authors provide anecdotal evidence suggesting that society's relatively weak control environment has allowed the numerous corporate failures to proliferate.
Internal Financial Controls in the U.S. Catholic Church
R. West and C. Zech
The authors analyze the effectiveness of the internal financial control mechanisms employed by the U.S. Catholic dioceses on one measure of their effectiveness -- the amount of embezzlement that has occurred in the diocese in recent years.
Non-Audit Fees, Auditor Independence and Auditor Litigation
H.W. Huang, C.C. Lee, and E.R. Green
The authors find that tax fees and audit-related fees are not significantly associated with auditor litigation.
Student Case: Auditing a Private Third-Party Claims Processor for Medicare
Y. Xiong and D.W. Law
This case study involves the relevant audit, fraud, and information technology issues associated with the third-party processing of government-insured medical claims.
COLUMNS & CURRENT COMMUNICATIONS
Computer Forensic Study Reveals Hardware Sellers are Selling More Than Expected
S. Peskaitis and J. Schultz
Forensic Accounting and the Martial Life Style Analysis
J.A. DiGabriele
Profile of Courage: Marilyn Stitt, KPMG and the Audit of Hollinger Inc.
K. Jamal and E. Marshall
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