Current Issue

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Whistleblowing at Social Mission Organizations | Full Article (PDF)
Lauren A. Cooper
D. Kip Holderness, Jr.
Jiahui (Helen) Lu

Abstract: Employee whistleblowing plays a critical role in detecting fraud in organizations. In this study, we use the setting of for-profit social mission organizations (SMOs) to examine the effect of employees’ value congruence with the social mission of organizations on employees’ intentions to report asset misappropriation and fraudulent financial reporting at for-profit SMOs. We employ a vignette and within-subjects research design, and utilize two different approaches to measure employees’ value congruence. We hypothesize and find that at for-profit SMOs, employees who have stronger value congruence with the social mission of the organizations have greater intentions to report asset misappropriation and fraudulent financial reporting. Our findings extend the whistleblowing literature by documenting employees’ value congruence as a contributing factor of whistleblowing decisions in the context of for-profit SMOs. We also extend the SMO literature by identifying an incremental benefit of employing more value congruent employees at for-profit SMOs. The results of our study may also assist for-profit SMOs in detecting and reporting fraud and reducing their fraud-related losses.

Keywords: Social mission; whistleblowing; value congruence; fraud type

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The Unexpected Effect of Information Security Policies on Accounting Employees’ Information Security Violation Behavior | Full Article (PDF)
Randi Jiang
Cindy Greenman

Abstract: The study examines the impact of information security policies (ISPs) on the intentional violation behavior of accounting professionals. Drawing on the fraud triangle theory, the authors investigate how ISP controls, perceived ISP pressure and accountants’ idealism influence their intentions to violate ISPs. The results show that ISP controls reduce the perceived opportunity for violations but increase ISP-related stress. Surprisingly, ISP controls also negatively impact accountants’ idealism. Among the fraud triangle factors, only perceived ISP pressure is significantly related to violation intentions. The study also finds that work uncertainty positively moderates the relationship between ISP demands and ISP-related stress, while ISP self-efficacy negatively moderates this relationship. The findings provide important insights for accounting managers on balancing ISP controls and their impact on employee behavior. The study highlights the need to carefully consider the unintended consequences of ISP controls and address intentional yet non-malicious violations through means beyond just increased controls.

Keywords: Accounting professionals; fraud triangle theory; information security policies (ISPs); intentional violation behavior; ISP controls; perceived ISP pressure; idealism; ISP self-efficacy; perceived opportunity

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The Value of a Contentious Auditor | Full Article (PDF)
Christie L. Comunale
Peter Caprariello
Eileen Z. Taylor
Stephen Gara
Thomas R. Sexton

Abstract: Successful audit firms depend on employing auditors who exhibit integrity and are willing to challenge others when they observe internal wrongdoing. Our study extends prior research on auditor whistleblowing by introducing the multi-dimensional competitiveness personality trait. We examinethe extent to which two dimensions, contentiousness and enjoyment of competition, are associated with whistleblowing likelihood but in opposite directions. We find that contentiousness, in which winning is achieved through domination, is positively associated with whistleblowing likelihood, whereas the reverse is true for enjoyment of competition, in which winning does not come at the expense of conflict. We also examined the relationship between whistleblowing likelihood and power distance, finding that auditors were most likely to report on a peer, followed by a senior, and then a manager. Our research contributes to practice by identifying personality traits associated with building a robust governance system that addresses the risk of wrongdoing going unreported.

Keywords: Whistleblowing; competitiveness; contentiousness; power distance

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CEO Compensation, Compensation Disclosure Readability, and Accounting Fraud | Full Article (PDF)
Fang Yang
Yu Peng Lin

Abstract: This research examines the relation between the readability of compensation discussion and analysis (CD&A) sections and CEO compensation in the context of fraudulent financial reporting practice. We use both the traditional readability measure of the Fog Index and the five Coh-Metrix text feasibility principal component scores as proxies of readability in the analysis. The results show that within fraudulent firms, there is a negative relation between executive compensation and syntactic simplicity, and a negative relation between executive compensation and referential cohesion. Within non-fraudulent firms, there exists a positive relation between executive compensation and referential cohesion, and a negative relation between executive compensation and narrativity. The discovery of different correlation patterns may serve as a red flag for investors who rely on the disclosed compensation information to make voting decisions. The results may also offer valuable insights for government regulators and academic researchers in their efforts to prevent fraud.

Keywords: Textual analysis; Compensation Discussion and Analysis (CD&A); readability; executive compensation; fraud

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Navigating the ESG Landscape: Analysis of SEC Enforcement Actions Against ESG Fraud | Full Article (PDF)
Subash Adhikari
Louis P. Le Guyader

Abstract: In recent years, environment, social, and governance (ESG) considerations have surged in importance due to investor demand for sustainable investments and information regarding sustainable business practices. This attention has led to a rise in ESG-related disclosures and investments.However, alongside the expansion of ESG financing and reporting activities, ESG-related fraudulent activities have also risen. This increase has prompted the Securities and Exchange Commission (SEC) to take enforcement actions, establish the Climate and ESG Task Force, and issue controversial climate change disclosure rules. We examine the SEC enforcement actions identified by the Climate and ESG Task Force, shedding light on the nature of violations and penalties for ESG-related frauds. Our study offers insights into the prevalence of fraudulent ESG disclosures across sectors and SEC actions against the related violations. We inform investors, policymakers, and academics about ESG-related frauds and the trend within the realm of sustainable finance and disclosures.

Keywords: ESG; climate change; ESG disclosures; climate-related disclosures; SEC; Climate and ESG Task Force; FRR 33-11275

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The Prospect Theory and Managements’ Fraud Incentives in Financial Reporting: A Literature Review | Full Article (PDF)
Alireza Rahrovi Dastjerdi
Daruosh Foroghi
Eman Momeni

Abstract: Prospect Theory (PT) can explain why managers might commit corporate fraud, a key area in forensic accounting and corporate governance. We conducted a thorough review of the literature and found that while PT can be a valuable framework, it may not be the sole factor influencing managers' decisions to commit fraud. Cultural and legal elements also can influence fraudulent behavior. The article provides valuable insights into identifying financial crimes committed by managers and offers recommendations for various stakeholders, including companies, researchers, analysts, regulators, auditors, and legislators, on the practical application of PT in explaining the risk of fraudulent financial reporting by managers. Overall, this literature review underscores the significance of comprehending the psychological aspects influencing managerial decisions to commit fraud, which could lead to improved corporate governance practices if appropriately addressed.

Keywords: Fraud; fraudulent reporting; fraud incentives; risk aversion; risk seeking; prospect theory

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Do Measures of Earnings Management Capture Deception? | Full Article (PDF)
Lucas M. Dille
Sheela Thiruvadi
Kelly E. Carter

Abstract: We use textual analysis to link managerial judgment and intent, to deceive with respect to earnings management in an empirical manner. To our knowledge, our study is the first to link judgment and intent. The study uses a sample of 8,581 CEO firms and 8,442 CFO firms. We find evidence of deception in firms within and outside the traditional meet-or-beat thresholds. We also find a negative relationship between deception and abnormal production costs (a proxy for real activities management). We do not find an association between deception and other earning management measures, such as CEOs and discretionary accruals, and CFOs and discretionary accruals within the meet-or-beat thresholds. This absence suggests that earnings management measures must be more nuanced in their use or approach to accounting research. Also, this lack provides support for the ample amount of earnings management literature, but a small degree of real-world evidence of deceptive and fraudulent earnings management practices.

Keywords: Earnings management; textual analysis; content analysis; real earnings management; accruals earnings management

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Municipal Embezzlement: The Case of Half a Check | Full Article (PDF)
David O’Bryan
Jeffrey J. Quirin

Abstract: This case study is based on an actual case investigated by the lead author. “She stole half a check,” the city manager said in describing a problem discovered at a small municipality. The alleged perpetrator was a recently retired city treasurer who had worked for the city for nearly 40 years. Her successor noticed that a relatively large check for approximately $15,000 had been deposited in the bank, but only recorded on the books at an amount of approximately $7,500. Hence, the city manager’s comment about half a check. Further analysis revealed that the bank deposit amount for this time period equaled the receipts per book so the books balanced. First, students examine the red flags and develop a fraud hypothesis. Next, students determine how they could conduct an initial investigation to confirm or refute their fraud hypothesis. Finally, students develop an understanding of the types of transactions that occur in this entity to help them identify additional transactions that could be part of this fraud scheme. This case ultimately resulted in the retired city treasurer being indicted in federal court and pleading guilty to embezzling about $150,000 over the four-year period immediately preceding her retirement.

Keywords: Forensic accounting; fraud investigation; embezzlement; checks-for-cash scheme

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Accounting Chairs’ Perceptions of the Campus Climate: Implications for Academia and Practice | Full Article (PDF)
Douglas M. Boyle
James F. Boyle
Dana R. Hermanson
Douglas F. Prawitt

Abstract: We place the role of accounting and accounting education in a broader societal context. Specifically, we survey accounting chairs about their perceptions of the political, economic, and social views, as well as the level of academic freedom, prevailing on their campuses and how this campus “climate” affects their accounting programs. This broader environment may affect the delivery of accounting education on college campuses, including in the crucial areas of fraud and forensic accounting, which often deal with sensitive topics. We find that accounting chairs at AACSB-accredited business schools, on average, perceive university administrators and other (non-business) faculty to be politically and socially left of center, and neutral about capitalism. By contrast, accounting faculty, business faculty, business administrators, accounting professionals, and accounting students are viewed as significantly positive about capitalism and generally moderate or right of center on political and social issues. Importantly, accounting chairs perceive that the climate on their campuses is negatively affecting their accounting programs in ten of the fifteen areas we examine, with constraints on free speech being most notable. We find no evidence of positive impacts of the campus climate on accounting programs. We discuss implications for academia and practice. Finally, we encourage accounting instructors to clearly convey to their students the value of accounting, especially fraud and forensic accounting, in the larger context of contributing to and maintaining a free and open society that protects individuals and organizations.

Keywords: Accounting chairs; campus climate; political, economic, and social views; academic freedom; free speech

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Mini-Madoff? Anatomy of a Recent Ponzi Scheme | Full Article (PDF)
John Robert Sparger

Abstract: This study analyzes a Ponzi scheme and bankruptcy that is contemporaneous at the time of this writing and draws a comparison to the similarities between the Ponzi scheme and its perpetrator, M. Burton Marshall, to Bernie Madoff, and his Ponzi scheme. While the absolute magnitudes of the Marshall and Madoff Ponzi schemes differ significantly, there are similarities in their relationships with the communities that became their victims. By using possible warning signs for financial fraud, similarities between Marshall and Madoff’s personalities and business operations also can be identified. While the final legal outcome for the Marshall Ponzi scheme and bankruptcy is not known, it is possible based on the analysis and similarities to the Madoff Ponzi scheme and bankruptcy to draw preliminary conclusions about potential actions or outcomes in the Marshall Ponzi scheme and bankruptcy.

Keywords: Bankruptcy; forensic accounting; fraud, Ponzi scheme; Ponzi scheme presumption; trust creation

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Governance Failures at Nature’s Glass | Full Article (PDF)
Ken Abramowicz
Amy K. Cooper
Robert R. Logan
H. Charles Sparks

Abstract: Nature’s Glass (NG) was an artistic Not-For-Profit (NFP) organization that over its 20 plus years of existence had developed its signature winter event into a widely recognized event. Yet, by 2020 NG was insolvent. The financial report provided at the special NG Governing Board meeting in September 2020 showed liabilities in excess of assets by $700,000. The secretary recommended that the Board turn over all of its assets to its primary creditor, its former Board chair, to avoid personal liability, which the Board reluctantly did. The asset listing provided to the Board was grossly understated. In fact, a parcel of land that was at the center of the fraud scheme was listed below its acquisition cost. The forensic investigation totaled losses of $4.58 million and revealed that this failure was a scheme to use public funding to purchase land for private development. This research provides an investigation into governance failures leading to NG’s insolvency and provides important lessons regarding key governance functions. Entities must identify the causes for the failure, explain how proper governance failed to prevent them, and how proper governance could keep these inadequacies from being repeated.

Keywords: Governance; Nature’s Glass; governance weaknesses; not-for-profit fraud; internal controls

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Mattel, Inc.: A Study of the Fall of Barbie’s Co-Founder | Full Article (PDF)
Alyssa Ong
Andrea M. Scheetz

Abstract: We present the history of Mattel, Inc. and the financial statement fraud (both past and present) that rocked the creators of Barbie. We review the events that led to Mattel’s settlement with the Securities and Exchange Commission and the Grand Jury indictment of Mattel Co-Founder Ruth Handler and other company executives. Through inclusion of other relevant company disputes, we are able to obtain a not-so-rosy picture of the Mattel corporate culture, which continues to cause problems for the company to this day. Students apply the facts of the case to the fraud diamond, use the most recent ACFE report to compare the Mattel fraud to other “typical” frauds, consider the impact of corporate culture and tone at the top on fraud to determine whether the punishments meted out were appropriate. This article provides links to articles, podcasts, and videos to help enrich class discussion. In the post-Barbie movie haze, this case study engages students in critically examining a real-life case of fraud that has mostly been left for the history books.

Keywords: Mattel, Inc.; Financial statement fraud; fraud diamond; corporate culture; Barbie

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Book Reviews

Rules for Whistleblowers: A Handbook for Doing What’s Right Stephen Kohn, 2023, $32.95, paperback Lyons Press 246 Goose Lane, Suite 200 Guilford, Conn. 06437       The founding partner of Kohn, Kohn & Colapinto seventh book teaches readers how whistleblowers have saved lives, stopped frauds, protected their jobs, and earned million-dollar rewards for doing the right thing. Modernized laws have revolutionized the rights of employees both in the United States and internationally, allowing whistleblowers to be paid over $10 billion in rewards for doing the right thing. But no employee should blow the whistle without knowing their rights because too much is at stake. Attorney Kohn provides 37 rules that highlight the “traps” facing whistleblowers today and addresses how to file anonymous cases and qualify for multi-million-dollar rewards. These 37 rules are summarized in a cartoon-like resource on the KKC website. For example, Rule 4 is “it takes a rogue to catch a rogue,” and Rule 5 “highlights five common mistakes whistleblowers make and how to avoid them.” Kohn carefully explains complex rules and laws governing whistleblowing including the Dodd-Frank, IRS, and False Claims Acts, as well as detailed strategies for fighting retaliation. He also covers controversial issues such as taping, removing documents, and ignoring nondisclosure agreements.

Going Infinite: The Rise and Fall of a New Tycoon Michael Lewis, 2023, 254 pp. W. W. Norton & Company 500 Fifth Avenue New York, NY 10110    Sam Bankman-Fried was the richest person in the world under 30 according to Forbes. His financial goal was for infinite dollars as the FTX enigmatic founder/CEO but eventually became known as the Bernie Madoff of crypto. He co-founded a quantitative trading firm, Alameda Research, eventually owning 90 percent. However, he soon was put on Forbes’ 2023 Hall of Shame. Bankman-Fried used FTX, a cryptocurrency exchange, and Alameda to misappropriate $1.7 billion of customers’ deposits from FTX and defrauded lenders to Alameda of $1.3 billion. His scheme was to channel billions of dolloars of customer deposits from FTX to Alameda and then used the funds to make investments for his own benefit. Author Lewis was a fly on the wall in the Bankman-Fried rise and fall to a 25-year prison sentence. He captures the psychology of the rumpled guy in cargo shorts and limp white socks. He traces “the mind-bending trajectory of a character who never like the rules and was allowed to live by his own rules—until it all came undone.

The Key Man: The True Story of How the Global Elite Was Duped by a Capitalist Fairy Tale Simon Clark, Will Louch, 2021, 352 pp. Harper Collins 195 Broadway New York, NY 10007    Arif Naqvi was the founder and CEO of Abraaj Group, a Dubai-based private equity firm which was charged by the SEC with misappropriating funds from his firm. His scheme was raising money for the Abraaj Growth Market Fund that collected $100 million over three years from U.S.-based charitable organizations. The charismatic Pakistani businessman conned Bill Gates, Western governments, and investors into giving $1 billion to end poverty and improve healthcare in poor countries. Pope Francis blessed his move to harness capitalism for the good of the poor, and he was supported by the Obama administration and investors. The authors weave a story of how the global elite were duped by a capitalist fairy tale as he amassed trillions of dollars in offshore bank accounts. In April 2021, Naqvi was arrested on charges of fraud and faces up to 291 years in prison. In March 2024, Naqui lost his challenge to the U.S. extradition from London to the U.S.

The Thefts of the Mona Lisa Noah Charney, 2024, 155 pp. Rowman & Littlefield 4501 Forbes Boulevard, Suite 200 Lanham, Maryland 20706    On August 21, 2011, the Louvre had more than 400 rooms but only two hundred guards. An Italian museum worker, Vincenzo Peruggia, hid in a closet after the Louvre was closed. He stole one of the most famous paintings in the world by hiding it under his smock and getting a plumber to open a door without a doorknob for him on Monday morning. Peruggia was not apprehended until December 2013 while trying to sell the painting, but he served only a couple of months of time for the theft. Today the most visited museum in the world has 460,000 works of art and 1,200 security employees. Steve Berry indicates that this book reads like a thriller and explains why this artwork has attracted the attention of so many thieves and fanatics. Thefts has an “s” because Peruggia thought the painting had been stolen from Italy by Napoleon. Leonardo DaVinci started the painting in Italy, but he moved the painting to France, finishing it after 10 years. Author Charney presents the criminal biography of the famous Mona Lisa, with a goal of separating fact from fiction (like a forensic accountant should do) in a story of what is not only the most famous art heist in history, but also one of the single most famous thefts of all times. However, history’s greatest art heist occurred at a Boston museum on Saint Patrick’s Day in 1990. The FBI indicated in 2021 that this art theft was valued at $500 million (still unsolved). Art crime is only ranked behind drugs and arms trades in terms of value in international terrorism. Some interesting details are that it is painted on a panel and not on canvas, she wears a veil, and there is a bridge in the background. Her right hand is crossed over her left. The miracle of its survival is why Mona Lisa is smiling. Now you know.

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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/newsevents/ffac/index.php