R. Brody, Todd DeZoort, Gaurav Gupta, Michael Bret Hood
This paper evaluates the effects that cognitive bias can have on fraud examiner judgment and decision-making. We draw on extant literature in accounting, auditing, and psychology to describe 11 specific biases that can undermine fraud examiner performance. Specifically, we use real-world examples from highly experienced anti-fraud professionals to consider each distinct bias given the unique engagement objectives, methods, relationships, and standards of evidence found in fraud examinations. We then discuss specific avoidance and mitigation strategies that fraud examiners can use to manage cognitive bias effects and improve their judgments and decisions. We conclude by suggesting the need for initial and continuing education in the area for professionals and future research to increase understanding in the area.
{"title":"The Effects of Cognitive Bias on Fraud Examiner Judgments and Decisions","authors":"R. Brody, Todd DeZoort, Gaurav Gupta, Michael Bret Hood","doi":"10.2308/jfar-2020-030","DOIUrl":"https://doi.org/10.2308/jfar-2020-030","url":null,"abstract":"This paper evaluates the effects that cognitive bias can have on fraud examiner judgment and decision-making. We draw on extant literature in accounting, auditing, and psychology to describe 11 specific biases that can undermine fraud examiner performance. Specifically, we use real-world examples from highly experienced anti-fraud professionals to consider each distinct bias given the unique engagement objectives, methods, relationships, and standards of evidence found in fraud examinations. We then discuss specific avoidance and mitigation strategies that fraud examiners can use to manage cognitive bias effects and improve their judgments and decisions. We conclude by suggesting the need for initial and continuing education in the area for professionals and future research to increase understanding in the area.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122117486","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Case Task 1, students will act as forensic accounting services professionals (AICPA SSFS No. 1; IIA et al. Guide 2008; NIJ Guide 2007), using data analytics (AICPA Guide 2017) to investigate possible thefts of cash. In Case Task 2, students will act as internal auditing services professionals (IIA Framework 2017), using attribute estimation sampling to evaluate the effectiveness of internal controls in responding to the fraud risk regarding the alleged thefts of cash (IIA Standards 2130.A1; COSO 2016). The case meets three primary Case Learning Objectives. 1. Improve students’ “click and play” learning experience about cash theft investigation and evidence documentation (AACSB A5 2018). 2. Increase students’ higher-order cognitive skills in deductive reasoning and inference about evidence (AICPA Exhibit 1 2016). 3. Teach students to document workpapers professionally, clearly, and concisely. The case implementation guide suggests ways to create multiple versions of the case and includes two case extensions.
{"title":"Cash Theft Investigation and Evidence Documentation","authors":"F. Choo, Kim B. Tan","doi":"10.2308/jfar-2019-507","DOIUrl":"https://doi.org/10.2308/jfar-2019-507","url":null,"abstract":"In Case Task 1, students will act as forensic accounting services professionals (AICPA SSFS No. 1; IIA et al. Guide 2008; NIJ Guide 2007), using data analytics (AICPA Guide 2017) to investigate possible thefts of cash. In Case Task 2, students will act as internal auditing services professionals (IIA Framework 2017), using attribute estimation sampling to evaluate the effectiveness of internal controls in responding to the fraud risk regarding the alleged thefts of cash (IIA Standards 2130.A1; COSO 2016). The case meets three primary Case Learning Objectives. 1. Improve students’ “click and play” learning experience about cash theft investigation and evidence documentation (AACSB A5 2018). 2. Increase students’ higher-order cognitive skills in deductive reasoning and inference about evidence (AICPA Exhibit 1 2016). 3. Teach students to document workpapers professionally, clearly, and concisely. The case implementation guide suggests ways to create multiple versions of the case and includes two case extensions.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-07-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130455235","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate whether audit fees are higher for firms that allegedly committed fraud and for firms with ongoing FSF challenges and high short interest. We find a positive association between audit fees and FSF disclosures, and this association increases with the level of short interest. The results suggest that auditors either increase their efforts in searching for further FSF from firms with previous FSF incidents or increase their risk premium for firms with a high fraud risk. Auditors also consider ongoing FSF challenges reflected in the level of short interest when determining their audit fees. We find, however, that short sellers do not consider increased audit fees associated with the public disclosure of alleged FSF. Short sellers do not appear to contemplate audit risk in analyzing the business risk of alleged FSF. Our study has policy, practical, and educational implications for auditors, short sellers, and forensic accountants who investigate FSF.
{"title":"The Effect of Alleged Financial Statement Fraud on Audit Fees and Short Interest","authors":"S. Lee, Z. Rezaee","doi":"10.2308/jfar-2020-005","DOIUrl":"https://doi.org/10.2308/jfar-2020-005","url":null,"abstract":"We investigate whether audit fees are higher for firms that allegedly committed fraud and for firms with ongoing FSF challenges and high short interest. We find a positive association between audit fees and FSF disclosures, and this association increases with the level of short interest. The results suggest that auditors either increase their efforts in searching for further FSF from firms with previous FSF incidents or increase their risk premium for firms with a high fraud risk. Auditors also consider ongoing FSF challenges reflected in the level of short interest when determining their audit fees. We find, however, that short sellers do not consider increased audit fees associated with the public disclosure of alleged FSF. Short sellers do not appear to contemplate audit risk in analyzing the business risk of alleged FSF. Our study has policy, practical, and educational implications for auditors, short sellers, and forensic accountants who investigate FSF.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-07-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125895742","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The study experimentally examines the usability of a participant’s writing style in email inquiries for fraud (misrepresentation) risk assessment by determining whether auditors can detect appropriate language-based risk factors in an email. The results suggest risk factors are present in emails, but auditors fail to use them for risk assessment. For example, shorter emails arouse skepticism when, in fact, this language feature is an insignificant risk factor. More fitting linguistic-based risk factors are lack of specifics and overuse of qualitative descriptions. Guidance may improve auditors’ recognition of appropriate linguistic-based risk factors in email text. Alternatively, risk factors may be too vague to perceive, suggesting a need for techniques to strengthen them in an email inquiry.
{"title":"Usability of Language Features of Emails for Detecting Misrepresentations","authors":"Chih-Chen Lee, Robert B. Welker","doi":"10.2308/jfar-2021-009","DOIUrl":"https://doi.org/10.2308/jfar-2021-009","url":null,"abstract":"The study experimentally examines the usability of a participant’s writing style in email inquiries for fraud (misrepresentation) risk assessment by determining whether auditors can detect appropriate language-based risk factors in an email. The results suggest risk factors are present in emails, but auditors fail to use them for risk assessment. For example, shorter emails arouse skepticism when, in fact, this language feature is an insignificant risk factor. More fitting linguistic-based risk factors are lack of specifics and overuse of qualitative descriptions. Guidance may improve auditors’ recognition of appropriate linguistic-based risk factors in email text. Alternatively, risk factors may be too vague to perceive, suggesting a need for techniques to strengthen them in an email inquiry.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-06-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116080848","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Initial coin offering (ICO) has attracted a lot of attention from the public in recent years due to its association with potentially fraudulent activities. In order to offer practical implications to investors and regulators when evaluating ICO projects, this study examines the use of textual analysis in detecting potential ICO fraud cases. By using Linguistic Inquiry and Word Count (LIWC), we extracted the textual characteristics of 1,402 English whitepapers that may have been indicators of potential fraud based on the prior literature, including first-person plural pronouns, adverbs, and certainty, and formed a risk index for potentially problematic ICOs. Our findings suggest that the use of these words reflects the warning signals raised by the Securities and Exchange Commission (SEC) about potentially problematic ICO projects, which can therefore be used by regulators and investors when evaluating ICOs. Implications are discussed.
{"title":"Using Textual Analysis to Detect Initial Coin Offering Frauds","authors":"Tiffany Chiu, Victoria Chiu, T. Wang, Yunsen Wang","doi":"10.2308/jfar-2021-001","DOIUrl":"https://doi.org/10.2308/jfar-2021-001","url":null,"abstract":"Initial coin offering (ICO) has attracted a lot of attention from the public in recent years due to its association with potentially fraudulent activities. In order to offer practical implications to investors and regulators when evaluating ICO projects, this study examines the use of textual analysis in detecting potential ICO fraud cases. By using Linguistic Inquiry and Word Count (LIWC), we extracted the textual characteristics of 1,402 English whitepapers that may have been indicators of potential fraud based on the prior literature, including first-person plural pronouns, adverbs, and certainty, and formed a risk index for potentially problematic ICOs. Our findings suggest that the use of these words reflects the warning signals raised by the Securities and Exchange Commission (SEC) about potentially problematic ICO projects, which can therefore be used by regulators and investors when evaluating ICOs. Implications are discussed.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"82 3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123236303","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The use of restricted stock compensation to supplement or to give a bonus to executives is on the rise. What happens when things go wrong? Research finds that those in private companies are less likely to whistleblow than those in public companies overall. Literature also reveals that restricted stock may positively influence whistleblowing when large financial rewards are present. Further, vesting period and strike price influence whistleblowing for those with stock option compensation. Yet, little is investigated regarding whistleblowing related to the vesting period of the restricted stock and the type of organization -public or private- granting this compensation. We find that for those in public companies, whistleblowing tends to increase as the vesting period of the stock compensation is farther in the future. Those in private companies have the opposite behavior. Agency theory focused within whistleblowing theory helps resolve this seeming juxtaposition. Implications for practice and policy are offered.
{"title":"Restricted Stock is on the Rise: What Does this Mean for Whistleblowing?","authors":"Andrea M. Scheetz, Joseph Wall, Aaron B. Wilson","doi":"10.2308/jfar-2020-017","DOIUrl":"https://doi.org/10.2308/jfar-2020-017","url":null,"abstract":"The use of restricted stock compensation to supplement or to give a bonus to executives is on the rise. What happens when things go wrong? Research finds that those in private companies are less likely to whistleblow than those in public companies overall. Literature also reveals that restricted stock may positively influence whistleblowing when large financial rewards are present. Further, vesting period and strike price influence whistleblowing for those with stock option compensation. Yet, little is investigated regarding whistleblowing related to the vesting period of the restricted stock and the type of organization -public or private- granting this compensation. We find that for those in public companies, whistleblowing tends to increase as the vesting period of the stock compensation is farther in the future. Those in private companies have the opposite behavior. Agency theory focused within whistleblowing theory helps resolve this seeming juxtaposition. Implications for practice and policy are offered.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"192 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116647506","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
J. Foy, Vijay S. Sampath, Rachel Raskin, Frimette Kass-Shraibman, P. Gopalakrishna
In an experimental setting, we examine consumer reactions in daily deal transactions when they are overcharged sales tax. The overcharges arise when the daily deal operators subsequently provide additional discounts to consumers unbeknownst to the merchants. Drawing on social status and attribution theories, we posit that consumers will ascribe causes for the overcharges to the merchants because of their lower status when compared to the higher status of the daily deal operators. We then examine the main and moderating effects of the overcharges on the behavioral intentions of consumers to repurchase from merchants. Merchants’ ability to verify correct sales prices, descriptive social norms, and the trust placed in tax accountants explain variations in repurchase intentions. Overall, the results suggest that ethical norm violations by higher-status entities results in the transfer of negative consequences to lower-status entities. Forensic accountants can be instrumental in helping businesses to understand these effects.
{"title":"Taken for Suckers: Causal Attributions of the Consequences of Overcharging Sales Tax in Daily Deal Transactions","authors":"J. Foy, Vijay S. Sampath, Rachel Raskin, Frimette Kass-Shraibman, P. Gopalakrishna","doi":"10.2308/JFAR-2021-006","DOIUrl":"https://doi.org/10.2308/JFAR-2021-006","url":null,"abstract":"In an experimental setting, we examine consumer reactions in daily deal transactions when they are overcharged sales tax. The overcharges arise when the daily deal operators subsequently provide additional discounts to consumers unbeknownst to the merchants. Drawing on social status and attribution theories, we posit that consumers will ascribe causes for the overcharges to the merchants because of their lower status when compared to the higher status of the daily deal operators. We then examine the main and moderating effects of the overcharges on the behavioral intentions of consumers to repurchase from merchants. Merchants’ ability to verify correct sales prices, descriptive social norms, and the trust placed in tax accountants explain variations in repurchase intentions. Overall, the results suggest that ethical norm violations by higher-status entities results in the transfer of negative consequences to lower-status entities. Forensic accountants can be instrumental in helping businesses to understand these effects.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125231875","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
SOX requires the establishment of anonymous whistleblowing channels for public companies, but private companies are free to implement the channel(s) of their choosing. Although anonymous channels have long been considered a “best practice”, the evidence on their efficacy is mixed, creating confusion as to how private companies should proceed. Additionally, most studies comparing non-anonymous and anonymous channels have used a within-participants design, where both channels are available, limiting their ability to determine the incremental effectiveness of different whistleblowing systems. We find that offering either an anonymous channel or dual channels improves reporting intentions, relative to a non-anonymous channel, but primarily when tone at the top is weak. When tone at the top is strong, reporting intentions are not statistically different across the three systems. We also find no evidence that dual channels improve whistleblowing intentions relative to an anonymous channel, regardless of the tone at the top.
{"title":"The Availability of Reporting Channels, Tone at the Top, and Whistleblowing Intentions","authors":"M. Hayes, D. Lowe, K. Pany, Jian J Zhang","doi":"10.2308/JFAR-2020-008","DOIUrl":"https://doi.org/10.2308/JFAR-2020-008","url":null,"abstract":"SOX requires the establishment of anonymous whistleblowing channels for public companies, but private companies are free to implement the channel(s) of their choosing. Although anonymous channels have long been considered a “best practice”, the evidence on their efficacy is mixed, creating confusion as to how private companies should proceed. Additionally, most studies comparing non-anonymous and anonymous channels have used a within-participants design, where both channels are available, limiting their ability to determine the incremental effectiveness of different whistleblowing systems. We find that offering either an anonymous channel or dual channels improves reporting intentions, relative to a non-anonymous channel, but primarily when tone at the top is weak. When tone at the top is strong, reporting intentions are not statistically different across the three systems. We also find no evidence that dual channels improve whistleblowing intentions relative to an anonymous channel, regardless of the tone at the top.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130875262","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study analyzes the impact of the local crime environment on the likelihood of a firm engaging in financial misconduct. Using the Benford Score metric, which assesses the extent to which a firm’s financial statement number distribution diverges from a theoretical distribution, I find that firms headquartered in high crime areas are associated with greater financial misconduct. The link is more pronounced in firms that offer more stock-based executive compensation to their executives or practice weak corporate governance, and change in the crime rate is associated with change in the firm’s financial misconduct. My results support the social norm, social learning, and environmental criminology theories, as well as the fraud triangle, and are robust to a number of alternative specifications and approaches. The evidence implies that a firm’s environment influences the level of corporate financial misconduct.
{"title":"Local Crime Environment and Corporate Financial Misconduct Using Benford’s Law","authors":"J. Golden","doi":"10.2308/JFAR-2021-003","DOIUrl":"https://doi.org/10.2308/JFAR-2021-003","url":null,"abstract":"This study analyzes the impact of the local crime environment on the likelihood of a firm engaging in financial misconduct. Using the Benford Score metric, which assesses the extent to which a firm’s financial statement number distribution diverges from a theoretical distribution, I find that firms headquartered in high crime areas are associated with greater financial misconduct. The link is more pronounced in firms that offer more stock-based executive compensation to their executives or practice weak corporate governance, and change in the crime rate is associated with change in the firm’s financial misconduct. My results support the social norm, social learning, and environmental criminology theories, as well as the fraud triangle, and are robust to a number of alternative specifications and approaches. The evidence implies that a firm’s environment influences the level of corporate financial misconduct.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"88 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122755434","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Based on a real world, public company, $30 million embezzlement and financial statement fraud, this case helps students recognize red flags, analyze a situation using the fraud diamond, perform research and reflect on their own work experiences to support a belief, and conduct financial statement analysis. Its variety of activities are suitable for both undergraduate and graduate accounting students, and in-class and out of class learning. Because it is based on an actual fraud, it includes an epilogue with links to news stories and court documents, which improves student engagement with the material.
{"title":"Who’s the BOSS? Analysis of a Fraud","authors":"E. Taylor","doi":"10.2308/JFAR-2020-022","DOIUrl":"https://doi.org/10.2308/JFAR-2020-022","url":null,"abstract":"Based on a real world, public company, $30 million embezzlement and financial statement fraud, this case helps students recognize red flags, analyze a situation using the fraud diamond, perform research and reflect on their own work experiences to support a belief, and conduct financial statement analysis. Its variety of activities are suitable for both undergraduate and graduate accounting students, and in-class and out of class learning. Because it is based on an actual fraud, it includes an epilogue with links to news stories and court documents, which improves student engagement with the material.","PeriodicalId":149240,"journal":{"name":"Journal of Forensic Accounting Research","volume":"183 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126950916","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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