CAP Forum on Forensic Accounting in the Post‐Enron World: Education for Investigative and Forensic Accounting*/FORMATION ET JURICOMPTABILITÉ

Recent financial scandals have raised the awareness that accountants should be alert to potential fraud and other economic disputes and can provide significant assistance in preventing, investigating, and resolving such matters. Forensic accountants provide these services with knowledge of court requirements and proceedings so that effective legal action is possible, even though most actions are concluded without the involvement of the courts. Although forensic accounting was growing in importance even before Enron and the Sarbanes‐Oxley Act, the ensuing tightening of the securities regulations in both Canada and the United States triggered recognition that accounting students and professionals need a fuller understanding of fraud and other economic crimes, and how to find, prevent, and resolve them, as well as the career choices that could be involved. While some of this material is covered in auditing texts and courses, emerging expectations will require the enhancement and restructuring of forensic accounting education within university programs, and will encourage more interest in graduate specialist professional designations. This paper has two objectives: to offer insights into the design and delivery of forensic accounting programs, and into the availability of professional programs; and to provide some exploratory evidence on the type of services currently rendered by investigative and forensic accountants in Canada.     

Fraud at a public authority

This case describes a fraud committed at a public authority which operated a municipal facility that was used for sporting events and concerts. The fraud was committed by the authority’s chief accounting officer who stole tens of thousands of dollars in cash over a period of several years. The case describes how the cash was stolen and concealed by the authority’s chief accountant. Case questions ask students to identify internal control weaknesses that allowed the fraud to be committed, recommend improvements to internal controls, and identify how the auditor should have searched for the fraud. Assessment evidence indicates that the case is effective in meeting identified learning objectives. The case has been used in the first auditing course, and it would also be suitable for use in a forensic accounting course.     

Financial scandals: a historical overview

I examine the incidence of fraud from c.1720 to 2009 and relate it to the occurrence of significant financial scandals. Focusing on the UK, and US prior to Enron, and using a detailed dataset of significant events and news content, underpinned by examination of specific watershed scandals, the paper highlights the regulatory response to scandals and the implications for accounting and financial reporting. The evidence reveals the incidence of fraud and financial scandal to be historically contingent and skewed towards certain sectors, particularly banking and finance, facilitated by complex group structures and international capital mobility, and mediated by managerial incentives and ownership concentration. Financial reporting and auditing can mitigate fraud opportunities in all sectors and businesses without complex group structures, and the accounting profession achieved some success in this respect up to the mid-1970s. Since then, the profession has been increasingly challenged by, and to some degree implicated in, the development of interconnected and international business networks, which, combined with wider financial deregulation, has led to a resurgence of fraud and financial scandal not previously experienced since the mid-nineteenth century.     

Business Continuity in the Face of Fraud and Organisational Change

We examine business continuity in the context of fraud and accounting for an organisation as a going concern. The issues addressed are timely and focus on two points. First, fraudulent activities in business are increasing worldwide with related costs reaching trillions of US dollars. Second, the conventional accounting concept of a going concern that typically signifies business continuity is arguably formed on a static view of business. As such, this view does not help mitigate opportunities for fraudulent statements of account. We contribute to the accounting literature by emphasising the dynamic nature of business and in doing so extend the discussion on Type 1 and Type 2 going concern errors. In that context we provide evidence of a possible Type 3 going concern error in an organisation's financial reporting. Drawing on an international fraud case involving an Indian company, Satyam, we illustrate the adaptive behaviour of resilient business organisations. The findings of our study show that even in the face of fraud dynamic, adaptive organisations can achieve business continuity.     

Climate for Scandal: Corporate Environments that Contribute to Accounting Fraud

We examine the governance characteristics, earnings quality, growth rates, dividend policy, and compensation structure of 97 firms recently under investigation by the Securities and Exchange Commission (SEC) for accounting fraud. Our results show that the corporate environment most likely to lead to an accounting scandal manifests significant growth and accounting practices that are already pushing the envelope of earnings smoothing. Firms operating in this environment seem more likely to tip over the edge into fraud if there are fewer outsiders on the audit committee and outside directors appear overcommitted.     

Auditing and crisis management: The 2010 Melbourne Storm salary cap scandal

In this paper, we investigate the way in which auditing was mobilised during the 2010 Melbourne Storm salary cap scandal, through a textual analysis of media coverage associated with the crisis. Using ‘t Hart’s power-symbolic analytical framework, we document the initial public framing of the auditing-based response as well as rhetorical strategies to mask, and counter, public criticisms of audits commissioned by the National Rugby League (NRL) and News Limited in the immediate aftermath of the salary cap breach announcement. We illustrate that these audits formed a key element of the crisis management response of both organisations. We also provide evidence of the way that the NRL sought to use the audit exercise to re-legitimate its ongoing monitoring and enforcement of the salary cap. In spite of various challenges to the scope, due process, timeliness, transparency, independence and resourcing of the audits, the audit programs and their associated narratives endured. The paper contributes to understanding the role of auditing in crisis management and how this role can be implicated in shaping the social construction and contestation of organisational crises.     

A Framework for Identifying (and Avoiding) Fraudulent Financial Reporting*

This commentary analyzes the relationship of fraud risk assessments to other risk assessments by auditors. The Public Company Accounting Oversight Board notes that this is a problem area of current practice. Effective detection of fraudulent financial reporting requires an integrative accounting/auditing conceptual framework. As a result, this paper is as much about accounting theory as it is about auditing. To simplify the development of such an integrated framework, this paper uses an expanded risk model. This effectively results in a risk perspective on fraudulent financial reporting. There are many potential implications but the major findings are as follows. First, the study identifies the crucial role of benchmarks based on acceptable levels of risk to help differentiate between intentional and unintentional misstatements. Such differentiation is critical to successfully implementing the American Institute of Certified Public Accountants' Statement on Auditing Standards (SAS) No. 99 and international standards ISA Nos. 240, 540, and 700. Second, the paper shows the importance of not allowing the major categories of risks identified here from getting too high. This paper explains the need to set acceptable levels of these risks, either by standard‐setters as a matter of broad policy, or by individual practitioners as part of the terms of specific engagements. I propose that a major factor in the concept of “present fairly” be the acceptable levels of accounting risks that are defined here, especially the risks due to intentional forecast errors. Third, this paper clarifies how the fraud risk of SAS No. 99, and similar international standards, relates to the current audit risk model framework.     

论上市公司审计舞弊原因及治理

在证券市场中上市公司审计舞弊屡有发生,早期的“中天勤-银广夏”案件和近期刚被查处的“中磊-万福生科”案件都严重影响了审计公信力.也损害了投资者支资本市场的信心,导致近年来中国股市一直处于熊市状态.本文阐述了上市公司审计舞弊及其危害性,基于注册会计师法律道德及会计师事务所产权维度分析了法律风险偏低、职业道德失范、会计师事务所产权不合理是导上市审计舞弊的主要原因.并提出强化注册会计师的法律责任,加强注册会计师职业道德建设以及完善会计师事务所产权等治理审计舞弊的相关建议.     

后安然时代的会计与审计——评美国《2002年萨班斯—奥克斯利法案》及其对会计、审计发展的影响

针对安然等公司会计造假案件所暴露的会计、审计、公司治理、证券监管等问题 ,美国国会作出了迅速反应 ,制定了《2 0 0 2年萨班斯—奥克斯利法案》。法案对会计行业的监管、审计独立性、财务信息披露、公司责任、证券分析师行为、证券交易委员会的权利和职责、违法违规行为的法律责任等方面进行了重大改革和重新规范。本文重点阐述了该法案所规定的会计、审计框架及其对后安然时代会计、审计发展的影响。     

Conservatism,SEC investigation,and fraud

We present evidence on the relationship between firms that have engaged in fraudulent financial reporting and accounting conservatism. We empirically investigate the extent to which US firms identified by the SEC in their Enforcement Releases demonstrate higher levels of conditional conservatism in order to mitigate information asymmetry and agency problems. Specifically, by assessing the timing of changes in the litigation risk environment for fraud firms, we document how differences in heightened legal liability guide changes in conservative accounting behavior. Compared to a matched non-fraud control sample, we document that fraud firms have significantly lower levels of accounting conservatism in the pre-fraud period. Consistent with changes in potential legal liability, we find an increase in accounting conservatism for fraud firms during the SEC investigation period. Subsequently, during the public discovery of fraud, any increases in accounting conservatism are marginal and appear to converge back to lower levels compared to the SEC investigation period. Overall, our findings suggest more temporary changes in conservative reporting in the short-term for fraud firms. We also document that increased levels of accounting conservatism for fraud firms are not due solely to the passage of the SOX Act. Our findings aid in explaining fraud firms’ incentives and opportunities for accounting conservatism and lend support for why standard setters, regulators and auditors should continue to monitor and re-evaluate conservatism’s short-term effects that are conditioned on changes in a firm’s risk environment.     

Using real-world cases to illustrate the power of analytical procedures

Accounting instructors often introduce analytical procedures (APs) to students as a series of techniques that help to reduce audit time and cost. However, they do not generally provide students with sufficient real-world cases that encourage students to use data from multiple sources, exercise judgment, and evaluate risks. This paper uses MiniScribe Corporation to illustrate how a real-world case might be incorporated into an auditing class to achieve some of the recommendations of the Accounting Education Change Commission and, at the same time, highlight the efficiency and effectiveness of APs. The case also reinforces the joint importance of qualitative and quantitative factors in detecting management fraud     

Critical thinking about creative accounting in the face of a recent scandal in the Turkish banking sector

In the last two decades, serious accounting scandals occurred in large companies (e.g. WorldCom and Enron) and in the banking sector (e.g. BCCI, Barings, Allied Irish Bank and Baninter). Then the problem of creative accounting with its legal and illegal aspects has come into agendas of business firms and governments. In this paper, a certain type of creative accounting practices (i.e. fraud) has been examined in the light of a Turkish case (i.e. the Imarbank Scandal). It has been found that deficiencies in the legal frameworks for banking and accounting, inadequacies in the autonomy of governmental regulation and supervision bodies, practical difficulties in enforcing legal and ethical rules due to the slow functioning of the judicial system are significant reasons for creative accounting practices in addition to the personal greed of both owners&top management of Imarbank and its customers. However, the intention and capability of political power in combating such kind of corruption are also crucial.     

The London Whale Scandal under new Scrutiny: A Critical Appraisal of the Concept of Retro-causality

This paper aims to extend the purview of the retro-causality concept, by exploring a complex and under-researched financial accounting scandal, namely the London Whale, a group of traders that operated on account of the London subsidiary of JPMorgan Chase & Co in 2012. We specify the conceptual articulation underlying the discourse on the scandal, between the intentions, the actions and the temporality in which the events have taken place. We then elaborate upon philosophers Elizabeth Anscombe and Donald Davidson. We show the limitations of rationalization as a causal deterministic explanation of actions in light of a methodical review of the JPMorgan Chase Task Force Report in 2013. We put forward the idea that the scandal features flows of awareness, reminiscent of Bergson's duration. The articulation between intentions, actions and causes is performed, by mobilizing quantum macroeconomic theory developed by the economist Bernard Schmitt. We show the relevance of retro-causality for central debates in contemporary accounting (e.g. fair value accounting and the efficient market hypothesis). Our empirical study abundantly draws on Ludwig Wittgenstein's language games, and retro-causality insights borrowed from quantum physics. Our results confirm our theoretical intuitions: there is a common thread and guiding reflection throughout the accounting scandal, namely the idea that the future might influence the past, under certain assumptions. Finally, some groundbreaking consequences are derived for the accounting profession regarding the global crisis in 2008.     

Bayesian Fraud Risk Formula for Financial Statement Audits

In this article we extend the work of Loebbecke et al. (1989 ) and illustrate the use of an evidential reasoning approach for developing fraud risk analysis models under the Bayesian framework. New formulations facilitating fraud risk assessments are needed because decision tree approaches previously used to develop analytical models are not appropriate in complex situations involving several interrelated variables. To demonstrate the evidential reasoning approach, a fraud risk assessment formula is derived and illustrated. The fraud risk formula captures the impact of the presence or absence of and interrelationships between the three ‘fraud triangle’ risk factors: Incentives, Attitude and Opportunities. The formula includes the impact of risks and controls related to these three fraud risk factors as well as the impact of forensic audit procedures and relevant analytical and other procedures that provide evidence for the presence or absence of fraud. This formula may be used in audit practice both to help plan the audit and to assess fraud risk sequentially as audit evidence is obtained.     

基于财务报表审计的会计舞弊揭示机制研究

目前企业会计信息失真主要因会计舞弊引起,CPA能否有效揭示重大会计舞弊已经直接影响到CPA行业的生存价值。中注协因此发布了大量的新准则,试图借鉴国外先进的审计技术,将风险导向审计理念引入到我国的审计实践中来,以提高CPA揭示会计舞弊的能力。但CPA不能有效揭示重大会计舞弊主要的不是技术问题,本文在借鉴国外经验的基础上,分析我国CPA不能有效揭示会计舞弊的原因,提出应将CPA审计和政府审计相结合,共同揭示企业会计舞弊。     

Problem-centred research and knowledge-based theory in the professional accounting setting

The paper discussess the emerging need for theory development and much more extensive task and context analysis with respect to cognition in the professional accounting setting (“accounting” being taken to include the various accounting, auditing, tax and related subjects about which accounting professionals exercise judgment). The paper examines how such theory development and task and context analysis can improve the research and its contribution to understanding the professional settings that are the province of accounting research. Our analysis reflects our proposal that accounting judgment research contribute more strongly to the general body of accounting research, and deal better with practitioners' problems. From our analysis, we conclude that the lack of theory development is associated with several problems in the research, including an over-emphasis on transference of simplified models from psychology, inappropriate use of normative criteria for evaluating performance, and an over-emphasis on accountants and auditors rather than accounting and auditing. We offer a large number of constructive comments about task analysis, theory development and other steps to guide future accounting judgment research.     

A rule-based fuzzy reasoning system for assessing the risk of management fraud

Detecting management fraud and assessing the risk of management fraud are significant issues confronting the auditing profession. Considerable theoretical and empirical research (Loebbecke, Eining, and Willingham, 1989; Bell, Szykowny, and Willingham, 1993; Fanning, Cogger, and Srivastava, 1995; and Hansen, McDonald, Messier, and Bell, 1996) has been accomplished investigating these issues. Building on this research, we demonstrate the construction of a rule-based fuzzy reasoning system to assess the risk of management fraud. The paper illustrates how fuzzy sets can be used intuitively to measure red flags on a categorical or interval scale, how different red flags can be combined using fuzzy rules, and how a single measure of the risk of management fraud can be derived. The knowledge base for this fuzzy reasoning system is developed by using the causal model of management fraud developed by Loebbecke, Eining and Willingham (1989), the empirical investigation of this model by Bell, Szykowny, and Willingham (1993), other researchers’ efforts and the authors’ judgments, using XpertRule software. The fuzzy reasoning system is tested using the fraud data provided by KPMG Peat Marwick. We discuss methods to magnify the knowledge base of this fuzzy reasoning system to make it a viable auditing tool, the costs and benefits of building a fuzzy reasoning system, and further extensions of this research. Copyright © 1998 John Wiley & Sons, Ltd.     

Blockchain and other distributed ledger technologies: Where is the accounting?

In a recent survey of academic research, Fintech related topics, broadly classified as crypto-currency studies, were by far the most researched topics in the social sciences. However, we have observed that, perhaps surprisingly, even though crypto-currencies rely on a distributed accounting ledger technology, relatively few of those studies were conducted by accounting academics. While some of the features of a system like Bitcoin do not necessarily rely on a traditional accounting knowledge, this knowledge is key in designing effective real-world distributed systems. Building on a foundational framework developed by Risius and Spohrer (2017), we provide support for their hypothesis that to date, research in this area has been predominantly of a somewhat narrow focus (i.e., based upon exploiting existing programming solutions without adequately considering the fundamental needs of users). This is particularly reflected by the abundance of Bitcoin-like crypto-currency code-bases with little or no place for business applications. We suggest that this may severely limit an appreciation of the relevance and applicability of decentralized systems, and how they may support value creation and improved governance. We provide supporting arguments for this statement by considering four applied classes of problems where a blockchain/distributed ledger can add value without requiring a crypto-currency to be an integral part of the functioning system. We note that each class of problem has been viewed previously as part of accounting issues within the legacy centralized ledger systems paradigm. We show how accounting knowledge is still relevant in the shift from centralized to decentralized ledger systems. We advance the debate on the development of (crypto-currency free) value-creating distributed ledger systems by showing that applying accounting knowledge in this area has potentially a much wider impact than that currently being applied in areas limited to auditing and operations management. We develop a typology for general distributed ledger design which assists potential users to understand the wide range of choices when developing such systems.     

When LIBOR becomes LIEBOR: Reputational penalties and bank contagion

We study whether commonality of incentives and opportunity to commit fraud trigger reputational contagion from culpable firms to nonculpable firms. Relying on a sample of 30 banks involved in fixing the London Interbank Offered Rate (LIBOR) and a control sample of 30 banks, we find that banks' reputations suffered substantial damage upon the announcement of their involvement in the scandal. We also document reputational contagion spread from banks that manipulated LIBOR to banks that shared the same incentives and opportunity to commit the fraud. The reputational contagion is more pronounced for large derivatives dealers who have had the strongest incentive to commit the fraud.