Advances in Accounting Education: Teaching and Curriculum Innovations 9781784416454, 9781784416461

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ADVANCES IN ACCOUNTING EDUCATION: TEACHING AND CURRICULUM INNOVATIONS

ADVANCES IN ACCOUNTING EDUCATION: TEACHING AND CURRICULUM INNOVATIONS Series Editors: Timothy J. Rupert and Beth Kern Recent Volumes: Volume 1:

Edited by Bill N. Schwartz and David E. Stout

Volumes 2
7:

Edited by Bill N. Schwartz and J. Edward Ketz

Volumes 8
10:

Edited by Bill N. Schwartz and Anthony H. Catanach Jr.

Volumes 11
12:

Edited by Anthony N. Catanach Jr. and Dorothy Feldmann

Volumes 13
15:

Edited by Dorothy Feldmann and Timothy J. Rupert

Volume 16:

Edited by Timothy J. Rupert

ADVANCES IN ACCOUNTING EDUCATION: TEACHING AND CURRICULUM INNOVATIONS VOLUME 17

ADVANCES IN ACCOUNTING EDUCATION: TEACHING AND CURRICULUM INNOVATIONS EDITED BY

TIMOTHY J. RUPERT Northeastern University, USA

BETH KERN Indiana University South Bend, USA

United Kingdom
North America
Japan India
Malaysia
China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2015 Copyright r 2015 Emerald Group Publishing Limited Reprints and permissions service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78441-646-1 ISSN: 1085-4622 (Series)

ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004. Certificate Number 1985 ISO 14001

CONTENTS LIST OF CONTRIBUTORS

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CALL FOR PAPERS

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WRITING GUIDELINES

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EDITORIAL REVIEW BOARD

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STATEMENT OF PURPOSE

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SECOND CHANCE HOMELESS SHELTER: A FRAUD EXERCISE FOR INTRODUCTORY AND SURVEY COURSES IN ACCOUNTING Curtis M. Nicholls and Stacy A. Mastrolia

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THE USE OF ALTERNATIVE QUIZ FORMATS TO ENHANCE STUDENTS’ EXPERIENCES IN THE INTRODUCTORY ACCOUNTING COURSE Julia M. Camp, Christine E. Earley and Judith M. Morse

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PEDAGOGY CHANGE IN UNDERGRADUATE MANAGERIAL ACCOUNTING PRINCIPLES COURSES: A DETAILED REVIEW OF SIMULATION USE TO SUPPORT BUSINESS INTEGRATION LEARNING, STUDENT ENGAGEMENT, TEAMWORK, AND ASSESSMENT James F. Zeigler

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ONLINE ACCOUNTING DEGREES: HIRING PERCEPTIONS OF ACCOUNTING PROFESSIONALS James M. Kohlmeyer III, Larry P. Seese and Terry Sincich v

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CONTENTS

SPECIAL SECTION ON TEACHING THE STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS: HISTORY, PRACTICE, AND THE CLASSROOM Ann Boyd Davis

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RE-CONCEPTUALIZING INSTRUCTION ON THE STATEMENT OF CASH FLOWS: THE IMPACT OF DIFFERENT TEACHING METHODS ON INTERMEDIATE ACCOUNTING STUDENTS’ LEARNING Casey J. McNellis

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TEACHING THE STATEMENT OF CASH FLOWS AND FREE CASH FLOW ESTIMATION WHEN NONARTICULATION IS PRESENT Peter J. Frischmann, Lela D. “Kitty” Pumphrey and Mukunthan Santhanakrishnan

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LIST OF CONTRIBUTORS Julia M. Camp

Department of Accountancy, Providence College, Providence, RI, USA

Ann Boyd Davis

College of Business, Tennessee Tech University, Cookeville, TN, USA

Christine E. Earley

Department of Accountancy, Providence College, Providence, RI, USA

Peter J. Frischmann

College of Business, Oregon State University, Corvallis, OR, USA

James M. Kohlmeyer III

School of Accountancy and Finance, Clemson University, Clemson, SC, USA

Stacy A. Mastrolia

School of Management, Bucknell University, Lewisburg, PA, USA

Casey J. McNellis

Department of Accounting/Finance, School of Business Administration, University of Montana, Missoula, MT, USA

Judith M. Morse

Department of Accountancy, Providence College, Providence, RI, USA

Curtis M. Nicholls

School of Management, Bucknell University, Lewisburg, PA, USA

Lela D. “Kitty” Pumphrey

School of Accounting, Oklahoma State University, Stillwater, OK, USA

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Mukunthan Santhanakrishnan

Cox School of Business, Southern Methodist University, Dallas, TX, USA

Larry P. Seese

School of Accountancy, Old Dominion University, Norfolk, VA, USA

Terry Sincich

College of Business, University of South Florida, Tampa, FL, USA

James F. Zeigler

Department of Accounting and MIS, College of Business, Bowling Green State University, Bowling Green, OH, USA

CALL FOR PAPERS Submissions are invited for forthcoming volumes. Advances in Accounting Education: Teaching and Curriculum Innovations (AAETCI) publishes a wide variety of articles dealing with accounting education at the college and university level. AAETCI encourages readable, relevant, and reliable articles in all areas of accounting education including auditing, financial and managerial accounting, forensic accounting, governmental accounting, taxation, etc. Papers can be: • Thought pieces that share anecdotal experiences with various pedagogical tools. • Position papers on particular issues. • Comprehensive literature reviews grounded in theory. • Conceptual models. • Historical discussions with implications for current and future pedagogical efforts. • Methodology discussions. • Research studies with implications for improving accounting education. AAETCI provides a forum for sharing generalizable teaching approaches from curricula development to content delivery techniques. Pedagogical research that contributes to more effective teaching in colleges and universities is highlighted. All articles must explain how teaching methods or curricula/programs can be improved. Non-empirical papers should be academically rigorous, and specifically discuss the institutional context of a course or program, as well as any relevant tradeoffs or policy issues. Empirical reports should exhibit sound research design and execution, and must develop a thorough motivation and literature review, possibly including references from outside the accounting field.

SUBMISSION PROCESS Send two files by email: one with a manuscript copy but without a cover page, and the other solely a cover page with author information. Cover ix

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pages should list all authors’ names and addresses (with telephone numbers, fax numbers, and e-mail addresses). The authors’ names and addresses should not appear on the abstract. To assure anonymous review, authors should not identify themselves directly or indirectly. Also, attach a copy of any research instruments. Two reviewers assess each manuscript submitted and reviews are completed in a timely manner, usually 60
90 days. Send manuscripts to [email protected]

WRITING GUIDELINES 1. Write your manuscript using active voice. Therefore, you can use the pronouns “we” and “I.” Also, please avoid using a series of prepositional phrases. We strongly encourage you to use a grammar and spell checker on manuscripts before you submit to our journal. Parsimony is a highly desirable trait for manuscripts we publish. Be concise in making your points and arguments. The text of typical manuscripts (exclusive of references, tables, and appendices) are no longer than 30 pages. 2. Each paper should include a cover sheet with names, addresses, telephone numbers, fax numbers, and e-mail address for all authors. The title page also should include an abbreviated title that you should use as a running head (see item 7 below). The running head should be no more than 70 characters, which includes all letters, punctuation, and spaces between words. 3. The second page should consist of an Abstract of approximately 150
200 words. 4. You should begin the first page of the manuscript with the manuscript’s title. DO NOT use the term “Introduction” or any other term at the beginning of the manuscript. Simply begin your discussion. 5. Use uniform margins of 1 1/2 inches at the top, bottom, right and left of every page. Do not justify lines, leave the right margins uneven. Do not hyphenate words at the end of a line; let a line run short or long rather than break a word. Type no more than 25 lines of text per page. 6. Double space all lines of text, which includes title, headings, and quotations. 7. After you have arranged the manuscript pages in correct order, number them consecutively, beginning with the title page. Number all pages. Place the number in the upper right-hand corner using Arabic numerals. Identify each manuscript page by typing an abbreviated title (header) above the page number. 8. All citations within your text should be formatted with the author(s) name and the year of publication. An appropriate citation is Catanach (2004) or Catanach and Feldmann (2005), or Catanach et al. (2006) when there are three or more authors. You do not need to cite six or xi

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seven references at once, particularly when the most recent references refer to earlier works. Please try to limit yourself to two or three citations at a time, preferably the most recent ones. 9. You should place page numbers for quotations along with the date of the material being cited. For example: According to Beaver (1987, 4), “Our knowledge of education research … and its potential limitations for accounting …” 10. Headings: Use headings and subheadings liberally to break up your text and ease the reader’s ability to follow your arguments and train of thought. • First-level headings should be UPPER CASE ITALICS, bold face, and flush to the left margin. ○ Second level headings should be in Bold Face Italics, flush to the left margin with only the first letter of each primary word capitalized. ▪ Third-level headings should be flush to the left margin, in Italics (but not bold face), with only the first letter of each primary word capitalized. 11. Notes or Endnotes should be used only if absolutely necessary. Try to incorporate endnote/footnote material into the body of the manuscript. Notes must be identified in the text by consecutive numbers, then enclosed in square brackets and listed at the end of the article. Place them on a separate section before your references. Begin notes on a separate page, with the word “Notes” centered at the top of the page. All notes should be double-spaced; indent the first line of each note five spaces. 12. Your reference pages should appear immediately after your “Notes” section (if any) and should include only works cited in the manuscript. The first page of this section should begin with the word “References” centered on the page. References to working papers are normally not appropriate. All references must be available to the reader; however, reference to unpublished dissertations is acceptable. Sample Book References Runkel, P. J. and J.E. McGrath. (1972), Research on Human Behavior: A Systematic Guide to Method; Holt, Rinehart and Winston, New York, NY. Smith, P. L. (1982), “Measures of variance accounted for: theory and practice,” in Keren, G (Ed.), Statistical and Methodological

Writing Guidelines

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Issues in Psychology and Social Science Research, Erlbaum, Hillsdale, NJ, pp. 101
129. Stout, D. E. and D. E. Wygal. (1994), “An empirical evidence of test item sequencing effects in the managerial accounting classroom: Further evidence and extensions,” in Schwartz, Bill N.(Ed.), Advances in Accounting, Vol. 12, JAI Press, Greenwich, CT, pp. 105
122. Sample Journal References Abdolmohammadi, M. J., K. Menon, T. W. Oliver, and S. Umpathy. (1985). The role of the doctoral dissertation in accounting research careers. Issues in Accounting Education, 22, 59
76. Thompson, B. (1993). The use of statistical significance tests in research: Bootstrap and other methods. Journal of Experimental Education, 61, 361
377. Simon, H.A. (1980). The behavioral and social sciences. Sciences, July, 72
78. Electronic Sources If available online, the full URL should be supplied at the end of the reference. 13. You should label TABLES and FIGURES as such and number them consecutively (using Arabic numerals) in the order in which you mention them first in the text. Indicate the approximate placement of each table/figure by a clear break in the text, inserting: TABLE (or FIGURE) 1 ABOUT HERE Figures should be placed after your References section and tables should follow figures. Begin each table and figure on a separate page. 14. You should list any acknowledgments on a separate page in a separate electronic file to preserve author anonymity. Type the word “Acknowledgment,” centered, at the top of the page and type the acknowledgment itself as a double-spaced, single paragraph. Once the editorial review process is complete, your acknowledgments will be inserted immediately after the last page of text (before the Notes and References Sections).

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EDITORIAL REVIEW BOARD Brenda Anderson Brandeis University, USA

Mary Anne Gaffney Temple University, USA

Cynthia Blanthorne University of Rhode Island, USA

Brian Patrick Green University of Michigan-Dearborn, USA

Cathleen Burns Creative Action Learning Solutions LLC, USA

Julie H. Hertenstein Northeastern University, USA

Thomas G. Calderon The University of Akron, USA

Brian Hogan University of Pittsburgh, USA

Paul M. Clikeman University of Richmond, USA

Susan B. Hughes University of Vermont, USA

Ann Boyd Davis Tennessee Technological University, USA

David Hulse University of Kentucky, USA Julia Karcher University of Louisville, USA

Mary S. Doucet California State UniversityBakersfield, USA

Joan Lee Fairfield University, USA

Carol M. Fischer St. Bonaventure University, USA

Linda M. Lovata Southern Illinois University Edwardsville, USA

Michael J. Fischer St. Bonaventure University, USA

Susan A. Lynn University of Baltimore, USA

Dann Fisher Kansas State University, USA

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Jared Moore Oregon State University, USA

Michael K. Shaub Texas A&M University, USA

Curtis M. Nicholls Bucknell University, USA

Paul A. Shoemaker University of Nebraska-Lincoln, USA

Philip R. Olds Virginia Commonwealth University, USA Lynn M. Pringle Arizona State University, USA Michael S. Schadewald University of Wisconsin-Milwaukee, USA

Jay C. Thibodeau Bentley University, USA Pierre L. Titard Southeastern Louisiana University, USA Martha L. Wartick University of Northern Iowa, USA

STATEMENT OF PURPOSE Advances in Accounting Education: Teaching and Curriculum Innovations is a refereed academic journal whose purpose is to meet the needs of individuals interested in the educational process. We publish thoughtful, welldeveloped articles that are readable, relevant, and reliable. Articles may be non-empirical or empirical. Our emphasis is pedagogy, and articles MUST explain how instructors can improve teaching methods or accounting units can improve curricula/programs. Non-empirical manuscripts should be academically rigorous. They can be theoretical syntheses, conceptual models, position papers, discussions of methodology, comprehensive literature reviews grounded in theory, or historical discussions with implications for current and future efforts. Reasonable assumptions and logical development are essential. All manuscripts should discuss implications for research and/or teaching. Sound research design and execution are critical for empirical reports. All articles should have well-articulated and strong theoretical foundations, and establishing a link to the non-accounting literature is desirable.

REVIEW PROCEDURES Advances in Accounting Education: Teaching and Curriculum Innovations will provide authors with timely reports that clearly indicate the review status of the manuscript. Authors will receive the results of initial reviews normally within eight to twelve weeks of manuscript submission, if not earlier. We expect authors to work with a co-editor who will act as a liaison between the authors and the reviewers to resolve areas of concern.

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SECOND CHANCE HOMELESS SHELTER: A FRAUD EXERCISE FOR INTRODUCTORY AND SURVEY COURSES IN ACCOUNTING Curtis M. Nicholls and Stacy A. Mastrolia ABSTRACT Purpose
This exercise should make apparent to introductory accounting students the importance of internal controls both as a deterrent and as an early detector of fraud. We use the fraud triangle (PCAOB, 2010) framework to help students understand and evaluate this fraud. We believe completing this exercise will give students a better understanding of fraud in general, the fraud triangle, and internal controls and their use in preventing and detecting fraud. Methodology/approach
This exercise presents an actual embezzlement committed by a long-tenured employee of a local not-for-profit organization. Each component of the exercise contains a series of questions to facilitate classroom discussion.

Advances in Accounting Education: Teaching and Curriculum Innovations, Volume 17, 1
24 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1085-4622/doi:10.1108/S1085-462220150000017001

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Findings
Student surveys confirm that students learn about detecting and preventing fraud. Students also indicate that they find the not-forprofit setting interesting and would use the principles in the exercise if they become affiliated with a not-for-profit organization. Originality/value
To our knowledge, this is the first fraud exercise directed at educating students in introductory and survey courses in accounting where students likely have only a minimal understanding of accounting and internal controls. Keywords: Introductory accounting exercise; forensic accounting exercise; not-for-profit fraud; embezzlement; fraud triangle; internal controls

The Association of Certified Fraud Examiners (ACFE), in their ACFE 2014 Report to the Nation on Occupational Fraud and Abuse, found that 10.8% of the frauds they studied occurred at not-for-profit organizations and an additional 15.1% occurred at government agencies (ACFE, 2014). According to Gary Snyder, managing partner of Nonprofit Management Group, well-publicized, large dollar frauds at several not-for-profit organizations have led the general public to distrust these organizations (Snyder, 2005, p. 22). In a recent study, Ventura and Daniel (2010) survey a sample of church members1 regarding the trustworthiness of the organization’s leadership. Ventura and Daniel find that church members have a high degree of confidence in the honesty and ethical behavior of their church leaders, and that church leaders have a high level of trust in their employees. These high levels of trust often result in low levels of supervision and monitoring of employees, and, therefore, a higher opportunity for embezzlement. The fraud on which we base our exercise occurred at a (not religiously affiliated) not-for-profit organization where a similar high level of trust, combined with minimal internal controls, created an opportunity for embezzlement. Among the many recommendations by the ACFE in their 2014 report is a call for additional employee education in “preventing and detecting occupational fraud” (ACFE, 2014, p. 5). However, many not-for-profit organizations do not have employees with anti-fraud training and many small not-for-profit organizations do not have employees with advanced training in accounting or finance. Lack of resources and training can

Second Chance Homeless Shelter: A Fraud Exercise

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create greater exposure to fraud at not-for-profit organizations by providing additional opportunities (as detailed by Public Company Accounting Oversight Board (PCAOB) Auditing Standard #12 and explained below) for employees to commit fraudulent acts. In addition to the ACFE’s call for more fraud-related education, contemporary research in accounting education calls for more experiential forms of learning to increase student engagement in introductory accounting courses (Duchac & Amoruso, 2012). We believe this exercise will be particularly useful in an introductory accounting course for two distinct reasons: first, the fraud is straightforward and easy to understand regardless of a student’s accounting experience; second, the fraud occurs in a not-for-profit setting that should capture the interest of the current Millennial generation of students. We further discuss these reasons below. Introductory or survey accounting (hereafter referred to as introductory accounting) courses typically provide only minimal discussion of the accounting internal controls required for fraud prevention or detection.2 This real-world exercise provides an active-learning tool that will increase student engagement and help students remember internal controls and fraud prevention longer and more thoroughly than a textbook example. Also, because most existing exercises and case studies in accounting fraud are intended for use in advanced-level accounting courses (e.g., audit or forensic courses) where most students are accounting majors, this exercise fills the largely overlooked need for fraud and forensics exercises that instructors can use in introductory accounting courses. This exercise is an active-learning tool that instructors can use to teach forensics and internal accounting controls to students who are not likely to enroll in more advanced accounting courses. Most non-accounting business students will not take any fraud-related courses
but, as indicated in recent research by Duchac and Amoruso (2012), business students are typically required to complete one or two introductory accounting courses.3 Targeting this exercise to the introductory accounting course gives students who are not accounting majors exposure to the topic. We believe the not-for-profit setting will be particularly interesting to Millennial students as generational research indicates that many traditional undergraduate students (members of the Millennial generation) are interested in pursuing careers that will allow them to achieve a level of selfactualization tied to improving the world and serving those in need. Surveys of Millennial students and employees indicate that they desire to

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be connected to their employer and its mission (Smith, 2008) and that volunteer programs can be effective in attracting Millennial talent to an employer (Needleman, 2008). For these reasons, and based on our own experience in advising and mentoring Millennial students, we imagine a number of our Millennial graduates will work for, work with, or act as advisers to not-for-profit organizations. These same students may find that their business education leads them to a role requiring accounting or financial expertise even though they may have only taken an introductory accounting course and no courses in auditing or fraud prevention and detection. This exercise provides faculty teaching introductory accounting courses a short and easy-to-implement fraud prevention and detection exercise that we base on an actual embezzlement. The exercise includes actual statements made by the perpetrator. We have altered names and locations to protect the privacy of the involved parties. Although we designed this exercise to introduce fraud topics to students with limited accounting coursework, recent research by Lee, Arunachalam, and Schmidt (2013) suggests that accounting students may also benefit from exposure to this exercise early in their accounting studies. Lee et al. (2013) find that training in fraud detection, specifically fraud-related experiential learning, significantly improved a student’s ability to identify and justify fraud in a case setting. We organize the balance of this manuscript as follows: we provide a brief overview of the fraud; outline the learning objectives of the exercise; provide implementation guidance; explain the assessment of the effectiveness of the exercise; and offer our concluding remarks.

BRIEF OVERVIEW OF THE FRAUD Second Chance Homeless Shelter is a local overnight shelter for adult men and women operating as a not-for-profit 501(c)(3) organization. In April 2011, the Director of the shelter, Allison Wright, discovered that the Administrative Assistant, Dean Brown, had forged her name on checks and used a purchase card to embezzle almost $12,000 from the shelter. Once the forensic investigation was complete, law enforcement determined that Brown forged Wright’s name on 26 checks he made out to himself and on three other checks made out to K-Mart and Staples to pay bills for personal purchases made with the shelter’s purchase card. In total, Brown embezzled $11,571 between June 2010 and April 2011.

Second Chance Homeless Shelter: A Fraud Exercise

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LEARNING OBJECTIVES OF THE EXERCISE We believe this exercise contributes to a student’s development in three key areas: (1) Students will gain a better understanding of fraud prevention and detection. (2) Students will gain a better understanding of the fraud triangle (PCAOB #12): incentive, opportunity, and rationalization. (3) Students will develop a more thorough understanding of internal controls and how they can be used to prevent and detect fraudulent behavior. In Auditing Standard No. 12 (2010), the PCAOB identifies three fraud risk factors (also known as the fraud triangle4) that auditors should consider during their risk assessment procedures because these three conditions are often present when fraud occurs. First is an incentive or a pressure to commit fraud. Second, an opportunity to perpetrate fraud. Third, an attitude or rationalization for committing fraud. For years, auditing courses have used the fraud triangle framework to introduce accounting students (and future auditors) to the concepts of fraud prevention and detection. The fraud triangle is easy to understand and simple to use; it does not require significant technical accounting knowledge to implement. Once a student understands the fraud triangle, it is intuitive and therefore memorable. For these reasons, we believe the fraud triangle is a good framework to use for this exercise and a good tool for introductory accounting students to learn and use. Researchers have also evaluated the validity of the fraud triangle framework empirically. Hogan, Rezaee, Riley, and Velury (2008) summarize academic research findings relevant to the PCAOB’s financial statement fraud project. During their analysis, Hogan et al. (2008) find that there exists a significant body of literature identifying the characteristics of fraud firms and that this literature supports the three specific components of the fraud triangle. Hogan et al. (2008, p. 246) also conclude that the three specific components of the fraud triangle are “grounded in empirical evidence.” Therefore, we believe that the fraud triangle framework is useful for this assignment given the targeted participants and is also valid according to empirical evidence.

IMPLEMENTATION GUIDANCE As previously stated, we designed this exercise to expose students in the introductory accounting course to several aspects of fraud prevention and

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detection using an actual fraud perpetrated at a not-for-profit organization. Instructors can use this exercise at any point in the course as fraud is typically outside of the standard introductory accounting curriculum, and the exercise does not require significant knowledge of accounting mechanics.5 The exercise relies on the instructor to discuss the relevant questions with the students and to provide the necessary information related to the fraud triangle. We conducted the exercise in the second month of the introductory accounting course. At this point, students were familiar with the basics of financial statement preparation and analysis, but had not encountered internal controls or fraud (although some classes may have been exposed to limited in-class comments related to fraud, it is not a part of the core curriculum). We conducted the exercise during a recitation period, which allowed sufficient time for both instruction and discussion. We did not ask students to prepare for the recitation and did not provide any fraud-related training in the course before this exercise. In order to be consistent across test samples, we limited the time allowed for the assignment to one hour. We found the one hour time constraint worked well, although some classes would have discussed the assignment longer if provided additional time. The assignment included three phases (see Boxes 1
3). Together the three phases lead the students through the background, discovery, and resolution of the fraud at Second Chance Homeless Shelter. We also created a series of related discussion questions for each phase (see Tables 1
3). We organized students into groups of three to four to facilitate discussion and outlined the intended progression through each of the phases. Next, we distributed the first phase of the exercise (Box 1 “Phase I: Background”) to the students. We allowed the students a few minutes to read through the document and then asked them to discuss within their groups the questions related to that phase of the exercise (Table 1). After approximately five to ten minutes, we began an instructor-led discussion of each question. We first called on individual groups to respond and then allowed any class member to provide input related to the question. We followed the pattern established in the first phase for the remaining two phases of the exercise (Boxes 2 and 3) and the related discussion questions (Tables 2 and 3). Also, we introduced the fraud triangle framework to the students after they read Phase II of the exercise, but before they started discussing the Phase II questions. Although the pattern remained the same, we allocated time differently among the phases as follows:

Second Chance Homeless Shelter: A Fraud Exercise

Box 1. Second Chance Homeless Shelter Assignment (Phase I: Background). On Friday, April 15, 2011, Allison Wright,8 the Director of Second Chance Homeless Shelter, opened the purchasing card bill9 and noticed that the bill had a higher balance than she expected. After reviewing the detailed statement, she noticed some unexpected purchases from K-Mart. She also saw that the purchases were charged to the card assigned to Dean Brown, the administrative assistant at Second Chance. Allison and Dean had separate purchasing cards for the Second Chance account and each month two separate bills were received from the bank in one envelope, so it was easy to know what charges were made to each card. Allison and Dean used the cards to purchase office supplies, coffee, tea, sugar, towels, sheets, blankets, and other small items the shelter needed. However, Allison did not remember sending Dean to K-Mart during the last several months. Usually Allison reviewed the bills each month when she signed the checks for payment but occasionally she would sign the checks without reviewing the statement. With a cold feeling in her stomach, Allison went to the accounts payable file and pulled out the other purchase card statements. Sitting down behind the desk in her office, Allison started looking carefully at the purchase card statements from the last few months. She was relieved to see nothing else out of order in the statements. Allison sat back and took a deep breath. Second Chance was a small homeless shelter with about 15 full- and part-time employees that took care of approximately 50 individuals each night. The shelter operated as a 501(c)(3)10 organization and Allison had been the Director for the past eight years. She loved her job and she loved “her family”: the employees and “residents” of the shelter. After a few minutes, Allison realized that she still had a problem with Dean for charges she found on the statement she opened earlier this morning, but he would be out of the center until the following Tuesday, so she had some time to think about what to say to him. Allison relied on Dean to take care of the administration of the center. He had worked at Second Chance for 11 years. He sat at the front desk each day, greeting the “residents” as they came and went. He opened the mail, collected contributions, and prepared the bank

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deposit slips so Allison could make the bank deposits after work on Fridays. He kept the checkbook, although every check required Allison’s signature. He recorded all of the financial transactions to the small-business general ledger system the shelter used, and prepared the monthly reports for Allison and the Shelter’s Board of Directors. If he was not trustworthy … Allison did not even want to think about it. But she had to think about it. Allison got her key, unlocked the bottom drawer of Dean’s desk, and removed the checkbook. Allison set the binder containing the checks for the shelter on Dean’s desk and flipped it open.

Box 2. Second Chance Homeless Shelter Assignment (Phase II: Discovery). Allison slowly turned the pages of the checkbook, carefully looking at the check stubs with Dean’s handwriting on them. The shelter only used about 15 checks each month for regular expenses, so she was surprised to see more than 10 check stubs marked “void” just in the last few months. She made a list of the check numbers for the checks marked “void” and went to the file cabinet where the bank statements were filed. Allison took the folder containing the bank statements to Dean’s desk and pulled out the previous month’s statement. Allison looked at the list of cleared checks on the bank statement, searching for the check number for the “void” checks. She froze when she saw one of the check numbers listed as “cleared” on the bank statement with the amount $300 beside it; she had a dreadful feeling that this day was only going to get worse. Over the course of the morning, Allison reviewed the check stubs for the past two years, listing every check number marked “void.” She took the list to the bank. She asked the bank manager if she could get copies of the front and back of the cleared checks on her list. The bank manager used the computer to find scanned copies of the front and back of every check on Allison’s list. None of the checks were void; every check had “Dean Brown” as the payee and Allison could tell her signature was forged. Allison took copies of the forged checks and left the bank with a heavy heart.

Second Chance Homeless Shelter: A Fraud Exercise

After sitting in her office and thinking about the situation for an hour, Allison realized she was “over her head”; she was not trained to deal with embezzlement! After all, who knew how much more Dean had stolen and how? She called the local police department and made an appointment for a detective to meet with her on Monday. On Monday, April 18, 2011, Detective Jeff Etty arrived at Second Chance to talk with Allison. Allison explained to Detective Etty what occurred on the previous Friday, and she showed him the forged checks, check register, and check stubs, bank statements, and the purchase card statement that started the whole thing. Detective Etty asked Allison to sign her name to five pieces of paper so he could compare her signature to the check copies. After comparing signatures, it was obvious to the detective that the checks were forged. Detective Etty agreed to investigate further. At Detective Etty’s request, Allison searched Dean’s desk for bank reconciliations, she did not find any, although preparing bank reconciliations was one of Dean’s responsibilities. Detective Etty asked Allison to access copies of the purchase card statements for the card assigned to Dean but, because she did not know the passwords to look up the statements online, she had to call the bank that issued the card and ask for statements to be faxed to the shelter. Once Detective Etty completed his examination of the documents, it was obvious that Dean had been using his purchasing card to make illegal purchases starting in June 2010. Further, Dean had forged Allison’s signatures on checks he wrote to himself since September 2010. After completing his investigation, Detective Etty could prove that Dean illegally purchased $736.43 of goods from K-Mart, $75.98 of goods from Staples, forged three checks to pay those bills, and forged another 26 checks addressed to himself totaling $10,758.15. In total, Dean had stolen almost $12,000 in less than a year
almost 4% of the gross receipts of the shelter during that time period! When Dean returned to work on Tuesday, April 19th, Allison terminated him immediately. She was deliberately vague with Dean about the full cause of his termination; she only said that she was concerned about his handling of the shelter’s finances. On Wednesday, April 20, 2011, at 1:00 pm, Detective Etty conducted a taped, Mirandized11 interview with Dean Brown at the police station. During this interview, Dean stated that “he was an

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artist and would like to pursue his hobby after he gets through this incident,” and that “he is into photography.”12 Detective Etty told Dean that the interview was about the forged checks and asked him why he forged the checks. “Dean stated that he was scared. Dean stated that he did more than his share of work and covered for other people over there (Second Chance) all the time and there were certain things that popped up that I just didn’t have the income for and I knew what I was doing was wrong.” Dean also stated that “car repairs cropped up (tires at a local tire shop) and everyday expenses.” Dean further stated that “he was feeling let down at work and knew what he was doing was wrong … that after he was fired, he was embarrassed and has not shown his face in town … that he did not even tell his fiance´ … that he loved his job and loved working with the residents.” Dean admitted that he “made out about 10 to 15ish checks to himself and signed Allison Wright’s name … Dean was not certain on the total amount of checks that he made out to himself … (and) that he started writing these checks about a year ago.” He further admitted that “he started the illegal purchases from K-Mart and Staples and that it was stupid … that he would pay the illegal purchases from K-Mart and Staples by writing Second Chance checks and forging Allison Wright’s signatures to pay the invoices.” Dean admitted that “the food purchases and CDs, DVDs and other items purchased from K-Mart were purchased illegally … (he) thought there were about one dozen illegal purchases from K-Mart and one dozen illegal purchases from Staples … (he) would purchase ink cartridges from Staples … (and) the purchases may have started about a year ago.” During the interview, Dean stated that “he was so sorry and regretful for what he did … (he) stated that he was going to beg for mercy from God and who ever.”

Second Chance Homeless Shelter: A Fraud Exercise

Box 3. Second Chance Homeless Shelter Assignment (Phase III: Resolution). On Tuesday, April 26, 2011, Detective Etty met with the K-Mart Asset Protection Coordinator and received copies of register receipts for all of Dean Brown’s illegal purchases as well as video evidence of Dean’s two most recent purchases (on March 10, 2011 and March 15, 2011). On Friday, April 29, 2011, Detective Etty received and served a search warrant for Dean Brown’s bank records. On May 6, 2011, Detective Etty requested and received an arrest warrant for Dean Brown. On August 16, 2011, Dean Brown was charged in the Court of Common Pleas, and on March 13, 2012, Dean Brown was sentenced by the Court of Common Pleas. Dean’s sentence included:13 1. Pay court costs, costs of prosecution, and other fees required by law; 2. Serve seven years of supervised probation and pay $30 per month in supervision fees; 3. Serve three years (consecutive to #2 above) of supervised probation and pay $30 per month in supervision fees; 4. While on probation, Dean may not: a. Violate state or federal law; b. Consume alcoholic beverages, or even go into establishments that serve or sell alcohol; c. Consume drugs or other controlled substances (except with a valid prescription); 5. Enroll in and successfully complete any and all treatment recommended as a result of a drug and alcohol assessment previously performed; 6. Make restitution of $7,458.46 to Second Chance Homeless Shelter and $4,112.13 to the defrauded bank; 7. Perform 100 hours of community service within the first year of his probation; and 8. Write a letter of apology to Second Chance Homeless Shelter.

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Table 1.

Second Chance Homeless Shelter
Discussion Questions (Phase I: Background).

Questions What clue led Allison to suspect possible fraud? Once Allison discovered the odd charges at K-Mart and Staples, where could she begin to look in order to discover the extent of Dean’s fraudulent behavior? What additional documents might be helpful?

When reviewing the checkbook, how could Allison identify stolen funds? Are there additional documents or information that might be helpful?

How could Allison determine if Dean has stolen cash donations which should have been deposited at the local bank?

How can Allison evaluate Dean’s use of his purchase card? Are there additional documents or information that would be helpful?

Solutions The purchase card statement was the first sign of a problem. Note to instructor: we use this question as a brainstorming tool to get the students to begin thinking about where/how to look for fraud. Furthermore, we use this question to begin exposing them to the different documents available in the accounting records. Possible student solutions include: purchase card statements, check register (checkbook), bank statements, and deposit slips. Allison could examine the check register, cancelled checks and voided checks. She could compare the check register and cancelled checks looking for any discrepancies, suspicious or unusual vendors, and forged signatures. Allison could also review any voided checks to make sure they are actually voided and were not used. Allison could review the donor tax receipts mailed to donors each year (As this is a 501(c)(3) organization, each year the Shelter would send tax statements to donors detailing their contributions for the past year.). The shelter should be sensitive to any donor complaints of discrepancies between their records and the tax receipt they received. Dean could have been taking donations and then altering the donor receipts to hide his theft. As a proactive measure, the donor tax receipts could include a note: “Please verify that all donations to Second Chance Homeless Shelter are accurate and report any discrepancies directly to Allison Wright at 800-XXX-XXXX.” Each month, Allison could review Dean’s purchase card statements and match each purchase on the statement to the original store receipts. In this exercise, Dean had disposed of all purchase card statements related to his card (remember, he was

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Second Chance Homeless Shelter: A Fraud Exercise

Table 1.

(Continued )

Questions

Solutions responsible for opening all mail and filing the statements?). If she was concerned about Dean’s behavior, Allison could contact the purchase card vendor directly for copies of past purchase card statements to review. On an ongoing basis, Allison could review the purchase card activity online.

Table 2.

Second Chance Homeless Shelter
Discussion Questions (Phase II: Discovery).

Questions Using the fraud triangle framework, identify the components of fraud found in this exercise: (a) Incentive/Pressure

(b) Opportunity

Solutions

The perpetrator often faces outside financial pressure which they feel they cannot disclose. For example, in this exercise, Dean faced the unexpected “car repair.” In this exercise, our review of court documents, as well as undocumented conversations with those familiar with the case, revealed that Dean had an alcohol problem. After the fraud was discovered, Dean participated in professional treatment services. We discuss this additional factor with students, as well as additional examples (drug use, gambling, sick relative). It is also important to indicate that the financial “problem” can be as simple as greed. The second component of the fraud triangle results from environmental factors that enable the fraudster to alleviate their financial problem(s) via embezzlement. The most common environmental factor which provides the opportunity to steal is a lack of strong internal controls. In addition to a lack of strong internal controls, high levels of trust can also contribute to the opportunity for theft to occur. When teaching this exercise, we typically reserve a discussion of internal controls until the next question; here, we direct students to consider the factors that lead to a lack of internal controls such as: (1) Lack of financial acumen on the organization’s board of directors. (2) Lack of employees with sufficient accounting background including experience in designing and enforcing internal controls. (3) Lack of internal or external audits. (4) Lack of financial resources which often lead to time constraints or

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Table 2. Questions

(c) Rationalization

How did Second Chance Homeless Shelter provide the opportunity for Dean to steal from the organization?

What steps could Second Chance Homeless Shelter take to prevent future cases of embezzlement?

(Continued ) Solutions

shortcuts. (5) Donation revenue (from non-reciprocal transactions) is easier to steal than revenue received in exchange for goods or services (reciprocal transaction) (Ventura & Daniel, 2010). The final component of the fraud triangle is justification by the perpetrator for their actions. Fraudsters often justify their actions with a sense of entitlement to funds (they are overworked), or the rationalization that they are simply “borrowing” the funds (Ventura & Daniel, 2010). They also rationalize that the theft is not causing anyone physical injury. We direct students to the following direct quote (included in the exercise) from Dean indicating his rationalization: “he did more than his share of work and covered for other people over there (Second Chance) all the time.” Lack of internal controls over the financial processes of the organization provided the opportunity for Dean to steal. At this point, we provide a basic definition loosely based on the COSO framework (COSO, 2013) of internal controls as processes and procedures designed to protect an organization from misreporting and to protect its financial assets. Second Chance lacked two specific internal controls that allowed Dean to embezzle. (a) Segregation of duties: Dean had authority to collect donations and deposit donations. Dean was also allowed to use the purchase card and subsequently received, reviewed, and filed purchase card statements. Dean also had custody of the check register and performed the bank reconciliation. (b) Reconciliation/Review: Although checks required Allison’s signature, Dean was able to circumvent this internal control due to inadequate review. The checkbook was not reviewed on a monthly basis, nor was Allison performing (or even reviewing) monthly bank reconciliations. In addition, no one was reviewing the monthly purchase card statements. Implementing the internal controls outlined in the prior question would allow Second Chance to prevent, or at minimum, more quickly detect embezzlement. We encourage students to think creatively about the internal controls discussed in the prior question, allowing them to design their own methods for segregating duties (e.g., two individuals must deposit donations, monthly bank, and purchase card reconciliations must be performed by someone who does not have access to the checkbook or have a purchasing card, etc.). This allows the students to gain an appreciation for simple ways to integrate internal controls into an operational process without the need for expensive solutions. During this discussion, we attempt to point out any obvious flaws in their suggested solutions and challenge them to design a better system of internal controls.

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Second Chance Homeless Shelter: A Fraud Exercise

Table 3.

Second Chance Homeless Shelter
Discussion Questions (Phase III: Resolution).

Questions

Solutions

Do you think the punishment fit the crime?

Beyond the loss of funds, what additional problems could Second Chance Homeless Shelter face as a result of Dean’s fraud?

There is no correct answer to this question; however, we find it an interesting conversation to have with the students. Again, no predetermined solution is possible for this question, but students typically engage in interesting dialogue related to this question. An important consequence could be that donors would lose confidence in Second Chance’s fiscal responsibility which could result in a loss of donations and, therefore, impair Second Chance’s ability to achieve its service-oriented goals.

Phase I: Background: Approximately 10
15 minutes Phase II: Discovery: Approximately 20
25 minutes Phase III: Resolution: Approximately 10
15 minutes The remaining time was spent in administrative tasks such as explaining the exercise and administering our test survey. We did not conduct any follow up assignments or other classroom activities related to the exercise. However, following the helpful suggestion of an anonymous reviewer, we provide a list of “key take-aways” in appendix that can be provided to participants at the discretion of the faculty administrating the exercise. Appendix contains two versions of the take-away material, a full-size version and a smaller tri-fold business card size which can be printed on the front and back of a single sheet and folded. Instructors can use the key take-away material to increase student learning and to provide students with a helpful future reference.

ASSESSMENT OF EFFECTIVENESS We conducted IRB-approved classroom testing with undergraduate students at a private-liberal arts university. The students were registered in two separate accounting courses. The first course is an introductory accounting course that is required of all business students but is also a popular elective, drawing students from a variety of majors and class years.

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In this manuscript, we refer to this course as Accounting I, although it is important to note that this course is not a standard first course in the principles of accounting.6 The second course using this exercise is a foundational accounting course required of all accounting and finance majors. This second course also draws significant interest from non-accounting students.7 For simplicity, we refer to this course as Accounting II. All students in Accounting II have taken the Accounting I course. Our sample includes 79 (60.8%) students in the Accounting I course and 51 (39.2%) students in the Accounting II course, for a total sample size of 130 students. The majority of students (89.2%) were in their first or second year of undergraduate education. We conducted the exercise during individual recitation hours by two instructors. In order to prevent response bias related to influence from the course’s regular instructor, the instructor leading the exercise was not the normal course instructor. All classes completed the exercise within the first seven weeks of a traditional semester. Although exercise participation was mandatory, participation in the survey was voluntary; all enrolled students (130) voluntarily participated in the survey. After completing the exercise, we asked students to complete an anonymous survey regarding the efficacy of the exercise. The survey utilizes a fivepoint Likert scale with 1 = Strongly Agree, 2 = Agree, 3 = Neither Agree nor Disagree, 4 = Disagree, and 5 = Strongly Disagree. After tabulating the survey results we conducted one-sample t tests, to determine if the mean response was different from the midpoint of the scale. Table 4 presents complete results of the survey. Students found the exercise “clear and understandable” (mean = 1.45, std. dev. = 0.59) and “an interesting setting in which to study the topic of financial fraud” (mean = 1.58, std. dev. = 0.68). With regard to the first learning objective “to gain a better understanding of fraud prevention and detection,” students responded affirmatively to learning something about both preventing (mean = 1.68, std. dev. = 0.67) and detecting (mean = 1.70, std. dev. = 0.64) fraud. In support of the second learning objective related to the fraud triangle, students indicated that they “learn[ed] something new about individuals involved in financial fraud and their motivation” (mean = 1.69, std. dev. = 0.76). Finally, in support of the third learning objective, students indicated that they are likely to use the principles from the exercise to identify and detect fraud (mean = 1.58, std. dev. = 0.62) if they become associated with a not-for-profit organization. We conducted additional statistical tests to identify differences in the results between the two separate accounting courses performing the exercise. Primarily relying on regression analysis, results of which can be found in Table 5, we found significant differences between student

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Second Chance Homeless Shelter: A Fraud Exercise

Table 4.

Student Survey Results.

Questions I am interested in working for a not-for-profit organization in the future. I expect to be associated with or involved with a notfor-profit organization in the future. The exercise was clear and understandable. The exercise provided an interesting setting in which to study the topic of financial fraud. This exercise and the related questions were too difficult. I learned something new about detecting financial fraud. I learned something new about preventing financial fraud. I learned something new about individuals involved in financial fraud and their motivation. If I become associated with a not-for-profit, I would likely use the principles demonstrated in this exercise to detect and prevent fraud.

Mean Std. Dev.

t-Value

p-Valuea

3.16

1.06

1.75