OFFSHORE BANKING, TAX-PLANNING, & THE VIRTUAL INTERNET OFFICE : OIL & GAS GNP FORENSIC ACCOUNTING EXPERT WITNESSES & COMPUTER LITIGATION SUPPORT
<BF>Avi Rushinek, Ph.D. <RO>
<BF>Sara F. Rushinek, Ph.D.<RO> * **
This is a study of the challenges and opportunities in Offshore Banking, Tax-planning, & The Virtual Internet Office (OBTVI) for Forensic Accounting Expert Witnesses & Computer Litigation Support. GNP (Government and Non-profit) accounting issues, are at the center of these challenges, since Oil and Gas are heavily regulated. Due to the recent advances of the Internet, the Virtual Internet Office (VIO) is no longer just a theory, it is the reality, which accounting expert witness, providing computer litigation support, need to know, and apply. This study illustrates how to do just that, and why is it so urgent.
<BF>Introduction<RO>
<BF>The Problem With Offshore Banking, Tax-planning, & The Virtual Internet Office (OBTVI)<RO>
The Problem With Offshore Banking, Tax-planning, & The Virtual Internet Office (OBTVI) is that scam artists learn how to use it and deploy it very fast as Elisabeth Donovan describes in a recent article entitled: “Investors Lose Big In Offshore Scheme”, in the Miami Harold.
That article describes how “minorities, immigrants” are “targeted in ‘ponzi’ plan” under the subtitle of “Islands Of Secrecy. The article describes how “Antigua launched a criminal investigation; more than 60 Texas residents have filed a civil suite against Ford, the Form and related companies; About 800 hundred Floridians say they lost more than $10 million; and … how U.S. banks’ relationships with off-shore banks can serve as a gateway for dirty money.[1]
<BF>”Huge Profits and Potential Way To Avoid Taxes Were The Lure”<RO>
Elisabeth Donovan proceeds to describe how ”huge profits and a potential way to avoid taxes were the lure.” She continues to describe how “the investment program was handled by a company called World Wide Resource Management, in Nassau, the Bahamas, but after October 1995, Ford and his associates moved their base of operations to the two-island nation of Antigua and Barbuda – which at the time offered absolute secrecy for its banks and off-shore businesses. The Form Ltd. Was established as an Antiguan Company and began to promote even more investment opportunities… While statements came, some of the investors found that the profits never did” In other words the crooks and the scam artists figure out how to use the Virtual Internet Office (VIO) to generate phony financial statements, much faster than the forensic accountants can figure out how to trace the lost funds and uncover the frauds.
“American International Bank, or AIB, the Antiguan off-shore bank at the center of The Forum’s financial activities… has been in receivership for three years, its assets still unaccounted for.” Who is supposed to be able to account for these assets if not forensic accounting experts who provide computer litigation support? But again, the crooks and the scam artists are much faster in producing more frauds, than the professional service providers and the various governments can track.”
“The Form appears to be a Ponzi-type investment scheme” according to a report published in February by the Senate Governmental Affairs Committee’s permanent sub-committee on investigations.”
“A Ponzi-scheme pays off early investors with funds from those who invest later. George R. Neely, the Houston lawyer representing the Texas investors, also believes his clients were victimized by a Ponzi scheme. Collectively, Neely’s clients…invested more than 1 million. The suit, which Neely would like certified as a class-action, alleges fraud, conspiracy, non-disclosure and breach of contract. The defended it alleges led investors to believe ‘their funds were absolutely protected’ and that representations made about the vehicles were ‘false’.”
<BF>”What Can The Forensic Accounting Expert Witness Do To Help”<RO>
What can the forensic accounting expert witness do to help? The forensic accounting expert can help in almost every category of problems, including but not limited to the following:
Help certify the case as a class-action, proving the allegations of fraud, conspiracy, non-disclosure and breach of contract. The forensic accounting can help prove that the defendant led investors to believe ‘their funds were absolutely protected’ and that representations made about the vehicles were ‘false’.”
<BF>”Forensic Accounting Expert Witness & Proving Fraud Allegations”<RO>
Rushinek, A. and Rushinek, S. demonstrate how a forensic accounting expert witness can built a "Damage Cost Calculation Model for Exxon Corporation and the Oil and Gas Industry” and demonstrate fraud even when if fact the fraud does not exist. In this case, the forensic accountant simulated a fraud from financial statements that are fraud free. This article shows a “A Simulated Fraud Decomposition of Expert System Software Controls." Such a method can be applied to Offshore Financial Havens, since much time the actual fraudulent financial statements are not readily available. Therefore, the forensic accounting expert witness may have to resort to simulation. Once, the simulation explains the fraud to the court (judge and jury), the absence of the fraudulent financial statements themselves is less important [2].
These issues are particularly relevant to the Oil and Gas industries as Rushinek and Rushinek illustrate with several articles such as: Rushinek, A. and Rushinek, S. "Damage Cost Calculation Model for Exxon Corporation and the Oil and Gas Industry: A Simulated Fraud Decomposition of Expert System Software Controls", OIL AND GAS TAX QUARTERLY, Vol. 44, No. 3, March 1996, 337-350, and Rushinek, A. and Rushinek, S. "Tax Fraud Forecasting For the Petroleum Refining Industry: Financial Ratios & Reversed Accounting Theory Applied to Shell Oil", OIL AND GAS TAX QUARTERLY, March, 1997.
Several other cases that illustrate the same issues include the famous Enron Corporation fraud case and its implications of the CPA firms involvement.
In another case, Rushinek, A. and Rushinek, S. show how a forensic accounting expert witness can forecast “Tax Fraud” “For the Petroleum Refining Industry” using “Financial Ratios & Reversed Accounting Theory.” In this case, the forensic accounting expert witness uses the abnormality of the financial ratios to raise some red flags[3]. Just like some of the offshore financial havens promise astronomically high financial ratios, such as Return On Investment (ROI) that is 10-100% higher than normal.
In another case Rushinek, A. and Rushinek, S. show how a forensic accounting expert witness can deploy software that uses "Artificial Intelligence” to detect “Financial Fraud."[4] In another case, Rushinek, A. and Rushinek, S. illustrate how a forensic accounting expert witness can assist in "Controlling Computer Crime, Fraud and Abuse." This is relevant to the case of offshore financial havens, since it may assist in tracing the movement of funds, through a variety of electronic fund transfer, and the abuse of computers to disguise the theft of funds[5].
<BF>”Forensic Accounting Expert Witness & Proving Lack Of Disclosure”<RO>
As Rushinek, A. and Rushinek, S. demonstrate forensic accounting experts focus frequently on a variety of disclosure issues. Such disclosure issues "Evaluation of Business Line Reporting: Forecast Errors, and Segment Revenue/Earning Disclosure." This applies to offshore financial haven reporting that fails to disclose true revenues and earnings[6]. Instead, these havens confuse cash inflows from new investments, with true revenues and earnings, misleading investors to sink more money into their loosing investment adventures.
<BF> “Show Me The Money” & Is The Bank Responsible For The Losses ?<RO>
“An attorney for The Form blames AIB for the investor’s problems, but the banks receiver says AIB is not at fault.” “One of Ford’s attorneys, Bruce Fein of Mclean, Va., says the problem lies with American International Bank in Antigua, not with his client or The Forum.” For this “blame game” everybody wants to see the money. The attorneys, the plaintiffs and the defendants, so they are asking: “Show Me The Money” & Is The Bank Responsible For The Losses?
For this reason the accounting expert witness should know about banking as Rushinek, A. and Rushinek, S. banks move to new “Interactive Computerization of Manual Banks Demand‑Deposits Management Information System (MIS) for Electronic Data Processing (EDP) Auditing.” In an “Empirical Analysis," they demonstrate trends that led banks to automate their systems in the past 20 years.[7] Accountants that are familiar with such systems can help trace the money, and place the blame on the correct party.
Some times the only way to recover information is through "The Control of Computerized Information Related to Branch Manpower Management Follow up Systems for Banks,” as Rushinek, A. and Rushinek, S. show in an article.[8] Formal information channels are not available and the forensic auditor may have to resort to gain control of specific subsystems and derive information out of them.
Frequently, the sources of losses are loans that the bank extends to the founders of the offshore corporations, that are given without merit and with out proper collaterals. The trouble is that without some understanding of Bank Loan Systems, such determination is beyond the ability of the auditor. Moreover, the forensic expert witness and the forensic auditor should be able to demonstrate how a bank could be blamed and be held responsible for such activity. Rushinek, A. and Rushinek, S. developed "A Model for Measuring and Forecasting the Level of Information Content as a Function of Accounting Information System Reports: An Empirical Multiple Regression Analysis for a Computerized Banking Loan System." Such models can help pinpoint who is responsible for the insufficient information concerning the lost and unpaid loans.[9]
<BF> Misusing Transfer Pricing Scheme To Steal Funds Across Countries?<RO>
Tracing the money is often difficult since it the scam artists tend to move it from country to country, applying overstated transfer pricing to disguise the theft and the ponzi-schemes. This is a case of Misusing Transfer Pricing Scheme To Steal Funds Across Countries. In the case reported by the Miami Harold “the money went to Panama and ‘to a number of African countries for the so called investments.” As the move the money from country to country and company to company they may register phony service and product sales that are invisible to us. Rushinek, A. and Rushinek, S. demonstrate what are "Multinational Transfer‑Pricing Factors:” including, but not limited to “Tax, Custom Duties, Antitrust/Dumping Legislation, Inflation, Interest, Competition, Profit/Dividend, and Financial Reporting.."[10]
Legislation is another important factor in the offshore business, but without enforcing it, it may be very misleading. “you can have any law you want,” said David Merchant, Miami based publisher of Offshore Alert. “If you do not enforce it, or do not have the will to enforce it, you have nothing.” Thus, the accountant should evaluate the law and the degree at which the government enforces it!
Senate investigators say Ford and his associates tried to hide the trail – moving money in one case to Chase Manhattan Bank in New York to Banko Do Brasil in New York and then to Panama.” Rushinek, A. and Rushinek, S. describe "Accounting Software” that deals with “ Evaluation: Hardware, Audit Trails, Backup, Error Recovery and Security." The Managerial Auditing Journal discusses audit trails that apply to computer auditing, can also be used to track the money movements. [11]
Our extensive international network of offshore business and financial affiliations enables us to operate in virtually every major financial center in the world. Our business is to advise and assist you in the process and procedures involved in the formation of an international structure with its related communications and financial infrastructure. Our financial and business services facilitate your business and investment growth, protect your assets and minimize taxes. In short, we're here to serve your needs. Our extensive international network of offshore business and financial affiliations enables us to operate in virtually every major financial center in the world. Our business is to advise and assist you in the process and procedures involved in the formation of an international structure with its related communications and financial infrastructure. Our financial and business services facilitate your business and investment growth, protect your assets and minimize taxes. In short, we're here to serve your needs.
When we browsed to http://www.incorporateoffshore.org/index1.htm , we found a typical home page. This is the home page of Abaris Offshore Business Formation for Trusts, IBC's, Bank Accounts, Brokerage Accounts, Merchant Accounts and More...From :Suite 40, 711 S. Carson St., Carson City, Nevada 89701’Voice: 775-882-0768 Facsimile: 775-882-6818, & Email: agents@incorporateoffshore.org.
This home page of an offshore service company that offers the following services( and more):[12]
Company, IBC, LLC and Trust Formations,
Tax & Estate Planning,
Asset Protection,
Banking, Brokerage Accounts and Credit Cards,
Trust Maintenance,
Records and Returns,
Governmental Reporting,
Asset Acquisition and Disposal,
Accounting Control,
Directorships,
Business Management,
Capital Management,
Invoicing and Cash Flow,
Office Specialized Services,
Private Commercial Lending & Financing,
Bahamas Investment & Trading Facilities,
Annuity Design & Management.
Privacy - In fact, it is the law in many jurisdictions such as Nevis and The Bahamas.
Diligence - in helping clients plan, create and maintain their business structure.
Timely Service - on start-ups, administration, and management.
One service that none of these companies are offering as of yet, is the virtual office service, and that is primarily due to the fact that the technology is fairly new. The virtual office approach will lead to the installation of a web server at the offshore location. This way the business can be run from anywhere in the world. All it means, for example, is that a Miami CPA firm can drop a web server in the Bahamas, offering any of the above services from anywhere in the world to any client in the world, without stepping food in the offshore territory, with some local technical support. The local technician will ensure that the web server in up and running (working).
It is so difficult to trace the money in the traditional audit ways because of the rapid international and intercontinental movement of the money. “The money went to Panama and to a number of African countries for the so called ‘investments.’ Ford and his associates
Mark Barton, who shot dead 12 people before turning the gun barrel on himself on July 29, 1999 had been playing fast and free in one of America's most recent and high risk careers. The Atlanta online day-trader opened fire after being hit by crushing share losses. Like many others, he had quit his nine-to-five job months before to seek a fortune in front of his PC. [13]
There are problems with trading huge volume of stocks.[14] When the market does fall, online brokerages should theoretically be equipped to handle four times as many trades as they currently process without down time. But so far the down times won't go away. The sites for Schwab and E*Trade each went down five times earlier this year. E*Trade already faces several class-action lawsuits. After customers complained that inaccessible sites caused them to lose money, regulators in New York began investigating the industry.
Because online brokerages have substantially upgraded their Internet and phone capacity, regulators may be more inclined to see investor behavior and misleading advertising by some online brokerages as the key issues. As on-line trading grows to include an estimated 4.4 million investors and $420 billion in assets, more traders are screaming for speed and suing when they don't get it. As much is evident in four punitive class-action losses related to the on-line brokerage's computer failures in Feb 1999. [15]
New York's attorney general launched a campaign on Nov. 22, 1999 to educate investors about the pitfalls of trading on the Internet and asked online brokerages to disclose more about the computer glitches that irritate amateur investors. Eliot Spitzer said that Internet brokerage firms' advertisements are giving the impression that "investors have access to both instant trades and instant wealth, neither of which is true." A report released recommends that online brokerages be encouraged in some cases to ensure that their customers make investments that are appropriate for them.[16] The study found the most common cause of problems is the fact that a number of online brokerage firms rely on mainframe computer systems that were designed for brokers' use, not the 24-hour-a-day, high-volume transactions of Internet trading. In addition, the firms may find it difficult to hire and train the highly skilled technical staff which is critical to the expansion of their system’s capacity.
The SEC received 504 complaints from investors during the first nine months of
1999 on the difficulty of getting access to their accounts, 393 complaints of
failures or delays in processing trading orders and 247 of errors in processing
orders. Market orders can be filled at unexpected prices. Limit orders can go
unfilled. Trade confirmations to investors are delayed. Cancellation orders
get to the exchange floor or market maker after trades are completed. And, the
problems are likely to be magnified on topsy-turvy days when investors can
least afford delays.
As risky as that is, though, these dealers have a unique knowledge of the
supply and demand for a stock that they can use to trade profitably. NYSE
specialists maintain the "book" of orders and can gauge the buying or
selling pressure that is building. NASDAQ market makers don't maintain the same
kind of book, but they're privy to similar market intelligence. They also
profit by playing the "spread" - the difference between the best
"bid-and-ask" price from all the market makers in that stock.[17]
<BF>Lawsuits against Online Brokers<RO>
The systems failures and clogged lines that plagued many on-line brokerages during late October 1997 are coming back to haunt E-Trade. Larry Cooper, an E-Trade customer since September 4, 1997, has initiated a class action lawsuit against the fast-growing firm. Cooper charges that E-Trade aggressively pursued new customers even though it knew it did not have the capacity to service its existing clients.[18]
In his suit, Cooper claims that E*Trade aggressively pursued new customers even though it knew it did not have the capacity to service its existing clients. Cooper also charges that E*Trade's advertising has been deceptive and that he and other customers lost money because they were unable to trade or access their accounts through the Internet or over the telephone on October 27 and 28.
Sources claim this is not the first time irate customers of on-line brokerages have considered suing their brokerages. The stumbling block, usually, is the arbitration agreement customer’s sign before they open an account. Seth Lesser, an attorney with Bernstein Litowitz Berger & Grossman, which represents Cooper, admits that "this may be an issue ultimately" but adds that "the way we read the contract, a class action does not go to arbitration."
Another suit, filed by Coleen Divito in Santa Clara, Calif., Superior Court Monday, seeks unspecified damages from what the investor says was an inability to execute online trades at certain times of the second week of Feb 1999.[19] A series of system crashes at E*Trade's Web site locked out some customers from their accounts and embarrassed the fast-growing brokerage firm. The suit, which seeks class-action status, alleges that the system failures constitute unfair business practices because E*Trade advertises 24-hour account availability.
E-Trade is not the only online broker faced with problems, as there was another lawsuit was filed by Aaron Abada against Schwab, alleging that the brokerage misrepresented the capabilities of its online trading system, both in brochures and on its web site. Specifically, Abada alleged that Schwab delayed execution of one of his trades by three hours, resulting in his purchase of certain securities at a significantly higher price than was in effect at the time Abada placed the order. Abada also alleges he was unable to log on to his Schwab account during this time.[20]
The problem is that technology and the Internet have reshaped consumer
expectations of what is - or should be - possible. Too many customers fail to
understand the hierarchy of how trades are lined up and prioritized - and how
much can happen in a volatile market after they hit "Send."
<BF>Scenario -- Trader Sues Broker For lost Profits and Additional losses Due To Trade Interference<RO>
Under our illustrated scenario, a broker denied a trader, the opportunity to complete his trading plan and earn a potential of $20,000. In the middle of the trade, one late afternoon, the trader complained to his broker. The broker got offended and told the trader to leave and go to another trading room with another broker. The trader replied that he started the trade and asked the broker to let him finish his last trade. The broker became restless and threatened to pull the plug on the PC, if the trader did not move out immediately. When the trader refused to move, saying that he has to complete his transaction, the broker pulled the power plug suspending the trade before the trader could cover the short position. The trader planned to cover his short by earning $2.00 on 10,000 shares, a total of $20,000. Instead, the trader lost the opportunity to earn $20,000 due to his inability to cover his short position, during that trading day. Since the market closed in the mean time, and the stock market value trend reversed on the next day. The trader sued for $20,000 damages due the broker disrupting his trade of $20,000 of lost profits.
The broker claimed that the trader should have left earlier when the broker told him to leave in the first place. The broker claimed that the trader was not authorized to stay there and continue to trade, since the broker had told him to leave.
<BF>The Role of The Forensic Accountant In Calculating The Damages Using The “But If” Analysis<RO>
The forensic accountant has to determine whether the lost profits would have amounted to $20,000. Using a “But If Analysis” combined with a regression and ANOVA, the forensic accountant demonstrated that indeed the trader would have earned about $20,000, if he would have covered his short position before the market closed, which the trader planed to do. The trader kept a written plan of transactions and exit points, which were available to all parties. However, due to the uncertainty of the adjusted R-square of .65 prior to the trade, the forensic accountant could not conclude the entire $20,000 in damages.
The forensic accountant could show that “But If “ the action of the broker would have not occurred the trader would have most probably made $20,000 on covering his short position, with a better than 65% probability (based on the R-Square value of about 65%). However, combining this 65% and the $20,000, results in lower total damages than the trader alleges.
<BF>Multiple Linear Regressions For Forensic Accounting “But If” Analysis<RO>
Multiple linear regressions for forensic accounting “but if” analysis helps test the hypothesis that the trend is significant and predictable. In our case the regression analysis helps the Forensic Accountant establish that the trend is statistically significant. Therefore, the trader could reasonably forecast the trend accurately and profit from his speculation.
<BF>Null Hypothesis Of Regression Analysis & The ANOVA<RO>
Employing the Null Hypothesis Of Regression Analysis & The ANOVA techniques, we state that the coefficients of the regression are all equal to zero. In such a case, the trend would have been unpredictable and the trader could not reasonably expect to correctly predict it. Therefore, the trader can not claim to have lost profits due to the misconduct of the Online Brokering services.
In contrast, the Null Hypothesis states that these coefficients are significantly different than zero and from each other. Accordingly, the trend is predictable and the trader could have predicted it correctly and profit from it.
Our data analysis rejected the null hypothesis. That all the coefficients are zero, and are the same. Our analysis shows the opposite. Our analysis shows that the coefficients are not zero, and therefore the trend is predicable. So we reject the null hypothesis, in favor of the alternative hypothesis.
<BF>”But-If” Analysis Day-Trader Events: If The Broker Would Have Not Acted <RO>
Table 1:
But-If Total Damages Calculations Based On Mathematical Expectations Of Profits
|
Date |
Time |
High |
Low |
Close |
Volume |
Close-9 |
Calc |
Foregone Proftis |
|
|
|
30-Nov-99 |
9:57 AM |
$77.25 |
$77.00 |
$77.00 |
700.00 |
79.25 |
Started Tracking Stock |
|
||
|
30-Nov-99 |
6:30 PM |
$73.25 |
$73.00 |
$73.25 |
200.00 |
$73 |
a |
Last |
|
|
|
30-Nov-99 |
3:11 PM |
$74.81 |
$74.63 |
$74.75 |
986,000.00 |
$75 |
b |
First |
|
|
|
Trade budgeted for $2 Gain Per Share On Covering A Short |
$2 |
c=a-b |
Short Profit Per Share |
|
||||||
|
Trade budgeted for blocks of 10,000 shares |
|
|
10,000 |
d |
Shares Traded |
|
||||
|
Total gain of the number of shares Times Gain Per Share |
$20,000 |
e=d*c |
Total Short Profits Foregone |
|||||||
|
R**2Adjusted is the probability of Success |
|
|
65.14% |
f |
Adjusted R Square (R **2A) |
|||||
|
Mathematical Expectation Of Profit = Probability * Total Gain |
$13,029 |
g=f*a |
Final Damages |
|
||||||
Table 1 describes the Date, Time, High, Low, Close, Volume, Close-9 (Lagged back 9 observations), Calc (Calculation formulas) of Foregone Profits of AOL (America On Line). On 30th of November 1999, at 9:57 AM, the day trader started monitoring AOL. For the first minute the High was $77.25. The day trader started monitoring and tracking this stock. After tracking the stock for a while, the trader detected a downtrend and started regressing the above variables on the 9 Lagged back Close Price (Minute by Minute). The trader was waiting for the R**2 Adjusted to exceed 65%, before betting on the trend and shorting the stock. The R**2 Adjusted exceeded the threshold and the traded stopped Tracking Stock, on 30-Nov-99, same day, at 3:11 PM. At this minute the High was $74.81, and the Close was $74.63. When the stock reached $75, b, First quotes of this trade, shorting of AOL.
The trader was planning on covering the short as soon as the price reached $73 that evening. The problem was that about 6:00 as the price approached $73, the brokers computer stopped working. The traded complained that he asked the broker to fix the computer many times before and the broker promised to fix it, yet the broker failed to repair that computer. The broker told the trader that the broker is “fed up” with the trader’s complaints and told the trader to leave. The computer started working again, when the trader told the broker that he will leave after covering the short. As the stock reached the expected $73 and the trader was about to cover the short, the broker unplugged the power of the computer and told the trader to leave the room immediately. The trader had to leave the room and was unable to cover the short. By the time the trader was able to cover the short, the stock market returned back to $75 wiping out the trader’s gains. The trader sued the broker for the foregone gains.
The question is how can the forensic accountant calculate the damages to the trader? This approach uses the “But If” regression analysis to calculate the damages. This But-If analysis uses the last day of the trade at the value at 6:30 PM when the stock reached $73.00. This is the value of $73, a, the Last value for covering the short on 30-Nov-99. Trade budgeted for $2 Gain Per Share On Covering A Short, $2, which was calculated as c=a-b, Short Profit Per Share. Trade budgeted for blocks of 10,000 shares, thus, 10,000, d, Shares Traded has to be calculated the Total gain of the number of shares Times Gain Per Share. Therefore, $20,000, e=d*c, is the Total Short Profits Foregone, assuming the trade was carried out. Since the trade was not carried out we have to use the probabilities of an accurate forecast of the regression. Therefore, we have to use the R**2Adjusted, which is the probability of Success, 65.14%. In step f, the Adjusted R Square (R **2A), calculates the Mathematical Expectation Of Profit = Probability * Total Gain, which is $13,029, g=f*a, the Final Damages, according to this But-If regression analysis.
ANOVA shows the Degrees Of Freedom (df) for the Regression. It reflects the -predictor variables that we have used in our forecasting model.[21] Likewise, it shows the Degrees Of Freedom for the Residuals, which equals the total number of observations less the predicted and predictor variables. The Total of the Degrees Of Freedom is the sum of the Regression and the Residual Degrees Of Freedom.
The ANOVA also displays the Coefficients, Standard Error, t-Stat, P-value, the Confidence Levels Of Lower 95% and Upper 95% about the forecasted Close value of the stock market. The predictors are highly significant statistically, since their respective p-values are below our minimum level of the 5% Confidence Interval for the overall model.
The Time with a negative coefficient indicates to the Day-Trader that the time drives the price down (negative affect). Afternoon prices are going to be lower than the morning prices. Therefore, the Day-Trader should short the stock. In contrast, if Time coefficient were positive, than the Day-Trader should long the stock instead of shorting it.
The Volume has a negative statistically significant coefficient. This has a very significant technical analysis importance. It means that the volume supports the decline in stock market price. In other words, this is a decline of price with an increase in volume, which means that it is not going to reverse any time soon, unlike a collusion of some traders that creates a fake price decline, without volume support.
Finally, last but not least important is the Close-9 variable. This means that the closing price lagged back 9 observations have a positive effect on the current price. In other words, the current price is likely to go in the same direction as the price lagged back 9 periods. So, if the price declined 9 periods ago, (about 9*5 minutes = 45 minutes), it will most likely continue (not reverse) within the next hour.
The Plot 1 group of Plots focuses on the Residual Distribution. Plot 1, the Observation Residual Plot shows that the residuals have a slight curvilinear function, in a wavy pattern around the origin. Plot 2, the Time Residual Plot shows an even distribution from 9:30 am to 1:30 p.m. Plot 3, the Volume Residual Plot shows that the larger the volume, about 10,000 shares, the highest is the residual value, within .25 cents.
The Plots 2 group of Plots focuses on the Line Fit. Plot 1 shows that the Close Prices are going down in a steady fashion while the predicted and the actual lines overlay each other very closely. The same trend shows up in the Time Line Fit Plot, Plot 2. The same pattern applies the Volume and Close Plots. Plot 5, the Normal Probability Plot shows that the distribution of prices resembles the one half (left side) of a bell shape normal distribution, which is hardly skewed, thus, meeting the normality assumption of regression analysis.
<BF>SUMMARY, CONCLUSIONS, & IMPLICATIONS<RO>
In summary, this paper showed how to apply regression analysis to the calculations of damages on a day trader, due the misconduct of a broker. It illustrates the role of a forensic accountant in such cases. All the information that will risk violating the privacy of the parties involved has been removed. This way the privacy of the broker and the trader will be protected. Yet, we can learn how to use the But-If analysis.
The conclusion of this paper is that the forensic accountant can serve as an expert witness and provide computer litigation support services, but the accountant has to use applied statistics to perform these duties. The implications of this study are that forensic accountants will have to become more proficient in statistics, math, and computer applications to fulfill such rolls.
* The authors are professors at the University of Miami
** The authors will provide additional appendices, tables, charts, and program code listings, upon written request.
[1] Elisabeth Donovan, “Investors Lose Big In Offshore Scheme”, The Miami Harold , Monday, September 3, 2001, p. 13a.
[2] Rushinek, A. and Rushinek, S. "Damage Cost Calculation Model for Exxon Corporation and the Oil and Gas Industry: A Simulated Fraud Decomposition of Expert System Software Controls", OIL AND GAS TAX QUARTERLY, Vol. 44, No. 3, March 1996, 337-350
[3] Rushinek, A. and Rushinek, S. "Tax Fraud Forecasting For the Petroleum Refining Industry: Financial Ratios & Reversed Accounting Theory Applied to Shell Oil", OIL AND GAS TAX QUARTERLY, March, 1997
[4] Rushinek, A. and Rushinek, S. "Tax Fraud Forecasting For the Petroleum Refining Industry: Financial Ratios & Reversed Accounting Theory Applied to Shell Oil", OIL AND GAS TAX QUARTERLY, March, 1997
[5] Rushinek, A. and Rushinek, S. "Controlling Computer Crime, Fraud and Abuse," EDPACS, THE EDP (ELECTRONIC DATA PROCESSING) AUDIT, CONTROL AND SECURITY NEWSLETTER, December 1983
[6] Rushinek, A. and Rushinek, S. "Evaluation of Business Line Reporting: Forecast Errors, and Segment Revenue/Earning Disclosure", SOUTHEAST AMERICAN ACCOUNTING ASSOCIATION PROCEEDINGS 1991, 118, Birmingham, Alabama, April 1991
[7] Rushinek, A. and Rushinek, S. "The Interactive Computerization of Manual Banks Demand‑Deposits Management Information System (MIS) for Electronic Data Processing (EDP) Auditing: An Empirical Analysis," 1983 WESTERN AMERICAN INSTITUTE FOR DECISION SCIENCES (AIDS) PROCEEDINGS, Reno, Nevada.
[8] Rushinek, A. and Rushinek, S. "The Control of Computerized Information Related to Branch Manpower Management Follow up Systems for Banks, COMPUTER PERSONNEL, February, 1989
[9] Rushinek, A. and Rushinek, S. "A Model for Measuring and Forecasting the Level of Information Content as a Function of Accounting Information System Reports: An Empirical Multiple Regression Analysis for a Computerized Banking Loan System Follow‑up," SOUTHEAST AMERICAN ACCOUNTING ASSOCIATION (AAA) 1983 PROCEEDINGS, Virginia Beach, Virginia, 320‑327, April 1983.
[10] Rushinek, A. and Rushinek, S. "Multinational Transfer‑Pricing Factors: Tax, Custom Duties, Antitrust/Dumping Legislation, Inflation, Interest, Competition, Profit/Dividend, and Financial Reporting", INTERNATIONAL JOURNAL OF ACCOUNTING EDUCATION AND RESEARCH, Vol. 23, No. 2, 1989.
[11] Rushinek, A. and Rushinek, S. "Accounting Software Evaluation: Hardware, Audit Trails, Backup, Error Recovery and Security", MANAGERIAL AUDITING JOURNAL, Vol. 10, No. 9, 1995, 29-37.
[12] http://www.incorporateoffshore.org/index1.htm
[13] Abbott, Jez, “Show me the money”, New Media Age, October 14, 1999.
[14] Siskos, Catherine “The downside of online trading”, Kiplinger's Personal Finance Magazine; Washington; Jun 1999
[15] Smith, E.B., “On-line trading hits speed bump”, USA Today; Arlington; Jun 9, 1999.
[16] Gordon, Marcy, “Online Trading Practices face more scrutiny”, The San Diego Union Tribune; November 23, 1999.
[17] Schwanhausser, Mark, “Old Rules still apply to online Trading”, The Houston Chronicle, October 3, 1999.
[18] Weisul, Kimberly, “E*Trade hit with class action over clogged lines in October”, The Investment Dealers' Digest, IDD; New York; Dec 8, 1997.
[19] Sessa, Danielle; “Investor's Lawsuit Involves Crashes Of E*Trade System”, Wall Street Journal; New York; Feb 12, 1999.
[20] Computer & Online Industry Litigation Reporter, October 19, 1999.
[21] Available upon request from the authors.