Albrecht: Fraud Examination, 4e

Chapter2
WHYPEOPLECOMMITFRAUD
DiscussionQuestions
1. Researchshowsthatanyonecancommitfraud.Fraudperpetratorsusuallycannotbe
distinguishedfromotherpeopleonthebasisofdemographicorpsychological
characteristics.Mostfraudperpetratorshaveprofilesthatlooklikethoseofhonest
people.Inotherwords,thetypesofpeoplewhocommitfraudareordinarypeople,
justlikeyouandme.
2. Peoplecanbemotivatedtocommitfraudbecauseoffinancialpressures,vices,or
becauseofworkrelatedpressures.Aswell,perpetratorsoffraudcanbemotivatedby
aperceivedopportunitytocommitfraudandtheabilitytorationalizethatwhatthey
aredoingisnotwrong.Theirmotivationsareusuallycombinedintothefraudtriangle
ofperceivedpressure,perceivedopportunity,andrationalization.
3. Thefraudtriangleincludesthreeelementsthatalmostalwaysmustbepresentinorder
forsomeonetocommitfraud:aperceivedpressure,aperceivedopportunity,and
somewaytorationalizethefraudasacceptable.Thefraudtriangleisimportant
becauseithelpsustodeterminethemotives,reasons,andopportunitiesthatsomeone
hadincommittingfraud.Byusingthefraudtriangle,wecanbetterfocusonareasin
anorganizationthatwillhelpusdetectandpreventfraud.
4. Thefraudscaleillustratestherelationshipbetweenthethreeelementsofthefraud
triangle.Itshowsthatperceivedpressure,perceivedopportunity,andrationalization
areinteractive.Inotherwords,thegreatertheperceivedopportunityorthemore
intensetheperceivedpressure,thelessrationalizationittakestomotivatesomeoneto
commitfraud.Likewise,themoredishonestaperpetratoris,thelessopportunity
and/orpressureittakestomotivatefraud.
5. Manytypesofpressuresmotivatesomeonetocommitfraud.Theyincludefinancial
pressures,vices,workrelatedpressures,andothertypesofpressures.Financial
pressuresincludegreed,livingbeyondonesmeans,highbillsorpersonaldebt,poor
credit,personalfinanciallosses,andunexpectedfinancialneeds.Vicesinclude
addictions,suchasgambling,drugs,alcohol,andextramaritalrelationships.Work
relatedpressuresincludefeelingoverworkedorunderpaid.
6. Thecontrolsthatpreventand/ordetectfraudulentbehaviorhavetodowithproviding
deterrencetothosewhoarethinkingaboutcommittingfraud.Havinganeffective
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controlstructureisprobablythesinglemostimportantstepthatorganizationscan
taketopreventandeventodetectfraud.Therearefivecomponentsinacompanys
controlstructure:thecontrolenvironment,riskassessment,informationand
communication,controlproceduresoractivities,andmonitoring.
7. Manyfactorsprovideopportunitiesforfraudincludingtheinabilitytojudgethe
qualityofperformance;failuretodisciplinefraudperpetrators;lackofaccessto
information;ignorance,apathy,andincapacity;andlackofanaudittrail.
8. Nearlyeveryfraudinvolvestheelementofrationalization.Mostperpetratorsarefirst
timeoffenderswhowouldnotcommitothertypesofcrimes.Rationalizinghelps
minimizetheperceiveddishonestyoftheiracts.Commonrationalizationsinclude:

Theorganizationowesme.
IamonlyborrowingthemoneyIwillpayitback.
Nobodywillgethurt.
Ideservemore.
Itsforagoodpurpose.
Wellfixthebooksassoonaswegetoverthisfinancialdifficulty.
Somethinghastobesacrificed.

Wheninterviewed,mostfraudperpetratorssaythingslike,Iintendedtopaythe
moneyback.Ireallydid.Theyaresincere.Intheirminds,theyrationalizethatthey
willrepaythemoney,andsincetheyjudgethemselvesbytheirintentionsandnotby
theiractions,theydonotseethemselvesascriminals.
9. JimBakkerrationalizedhisactionsbyconvincinghimselfthatthePTLnetworkhada
goodpurposeandthathewashelpingothers.Bakkerbelievedthatanymoneyhe
receivedwoulddirectlyorindirectlybenefithisfollowers.Hehadnumerous
pressures,includinggreed,selfishness,andalustforpower,andBakkerwasina
positionoftrust.Aswithmostpeopleinpositionsoftrust,hehadnumerous
opportunitiestocommitfraud.
10. Dr.SamWaksalcommittedfraudbytransferringsharesintohisdaughterstrading
accountandthenhavinghertradeinhiscompanysstock(insidertrading).Because
hehadinsiderinformation,heunderstoodthatitwouldbeunethicalforhimtomake
trades.However,herationalizedthatifhehadhisdaughtermakethetrades,rather
thanhimself,thenhisactionswouldbelegalandethical.
Lateron,whenexplaininghisactions,Waksalsaidthefollowing:Icouldsitthere
andthinkthatIwasthemosthonestCEOthateverlived.And,atthesametime,I
couldgliblydosomethingandrationalizeitbecauseIcutacorner,becauseIdidnt

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thinkIwasgoingtogetcaught.Andwhocared?Lookatme.ImdoingX,sowhat
differencedoesitmakethatIdoacoupleofthingsthatarentexactlykosher?
Waksalsrationalizationallowedhimtohavealonghistoryofethicallapses,reckless
behavior,andembellishingthetruth.Hehadbeendismissedfromanumberof
academicandresearchpositionsforquestionableconduct,forexample.Oneformer
colleaguesaidcuttingcornersforSamwaslikesubstanceabuse.Hediditinevery
aspectofhislife,throughouthisentirelife.1
11. Powerisdefinedastheabilitytoinfluencesomeoneelse.Whenafraudtakesplace,
theconspiratorhasthedesiretocarryouthisorherownwillinfluenceanother
persontoactanddoastheperpetratorwishesregardlessofresistance.
12. Fraudperpetratorsusepowertoinfluenceandpersuadeindividualstoparticipatein
fraud.Fraudperpetratorscangetpotentialcoconspiratorstojointhefraudby
promisingarewardorbenefit(rewardpower),byfollowingtheordersofaperson
whoisinapositionofauthority(legitimatepower),bymakingthepotentialrecruit
feelfearfornotjoiningthefraudscheme(coercivepower),orthroughdeceiving
someonebecausethepotentialrecruithasalackofknowledge(expertpower).
Finally,perpetratorscangetpotentialperpetratorstojointheschemethroughthe
influenceofarelationship(referentpower).

True/False
1. True
2. True
3. False.Managementsexampleisaveryimportantpartofthecontrolenvironment.
4. False.Goodcontrolsusuallydecreaseopportunitiesforindividualstocommitfraud
withinanorganization.
5. False.Effectivefraudfightersputtheireffortsintotryingtoeliminateallthreeparts
ofthefraudtriangle,especiallyreducingopportunities.
6. True
7. True

CBSNews.com, Sam Waksal: I Was Arrogant, 6 October 2003, <www.cbsnews.com/stores/2003/10/02/60

minutes/main576328.shtml>, accessed on May 22, 2004.
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Albrecht: Fraud Examination, 4e

8. False.Fraudperpetratorswhoareprosecuted,incarcerated,orseverallypunished
usuallydonotcommitfraudagain.Infact,theyhaveaverylowrateofrecidivism,
whileperpetratorswhoarentprosecutedhaveahighrateofrecidivism.
9. True
10. False.Appropriatehiringwilldecreaseanorganizationsriskoffraudbecausepeople
withhighintegrityarelesslikelytorationalizeandcommitfraud.
11. False.Anindividualwhoownshisorherownbusinessandisthesoleemployee
probablydoesnotneedmanycontrolprocedures.Whilesuchpeoplemayhaveample
opportunitytodefraudtheircompanies,theyhavenoincentivetodoso.
12. True
13. False.Documentsrarelyserveaspreventivecontrols,buttheyprovideexcellent
detectivecontrols.
14. True
15. False.Powerisalmostalwaysusedtoinfluenceanotherpersontoparticipateinan
alreadyexistingfraudscheme.
MultipleChoice
1. b
2. d
3. c
4. a
5. d
6. d
7. c
8. e
9. b
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Albrecht: Fraud Examination, 4e

10. a
11. b
12. c
13. c
14. b
15. b
16. e
17. e
18. c
19. c
20. b
ShortCases
Case1
1. Authorization.Themanagersofthestoresshouldfollowtheauthorizationpolicyand
reviewallrequestsforlargeamountsofcreditandtheapprovalofnewcredit
customers.
2. Segregationofdutiesandindependentcheckonperformance.Asecond
individual,preferablysomeonenotintheaccountingdepartment,shouldperformthe
bankreconciliation.
3. Segregationofdutiesand/orindependentchecks.Withrespecttoseparationof
duties,variousfunctionsshouldbeassignedtodifferentpeople.Iftwoseparate
individualsperformedtherecordkeepingandphysicalhandlingofinventory,the
opportunityfortheftwouldbegreatlyreduced.Withrespecttoindependentchecks,
testcountsofhisrecordkeepingcouldbeperformed.

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4. Adequatedocumentandrecords.Awelldesigneddocumentshouldbeformatted
sothatitcanbehandledquicklyandefficiently.
Case2
Whilemanypeoplewouldquestionwhethertheaccountingisappropriate,thereisaready
marketfortherefinedproducts,andboththesellingpricesandthecostofrefiningtheoilcan
bereasonablyquantifiedordetermined.Thisisagoodcasetodebateandprovidesstudents
withexperienceregardingtheimprecisenessofaccountingrules.Inthisinstance,expertsfor
theplaintiffsarguedthatthetreatmentwasinappropriate,whileexpertsforthedefense
arguedthatthetreatmentwasappropriate.Therearemanyexamplesconcerningrevenue
recognition,inventory,andotherissueswheretheproperaccountingtreatmentisnot
absolutelydetermined.Theseexamplesshowthataccountingisnotanexactscience.
However,aggressiveaccountingoftenismotivatedbypressuretocookthebooksandisa
precursortoandwarningoffraud.Itcertainlywasinthiscase.
Case3
1. Thecompanylacksgoodcontrolactivitiesorprocedures.Mainly,itlackssegregation
ofduties,agoodsystemofauthorizations,independentchecks,physicalsafeguards,
anddocumentsorrecords.Helenwasallowedtosignthepaymentvoucherfor
servicesrendered,andshewasalsoallowedtosignforallvoucherpaymentslessthan
$10,000.
2. Helenwasatrustedemployee.Thecompanyalsolackedgoodcontrolactivities.To
perpetratethefraud,allshehadtodowascontinuetoprocessthecheckstothe
terminatedvendorandsignthevouchers.
3. Thefraudwouldhavebeendetectedifthecompanyhadpossessedagoodinternal
auditdepartment,combinedwithsecurityorlosspreventionprograms.Agood
accountingsystemwouldhavehelpedinthediscoveryofthefraudandwouldhave
madeitdifficultforHelentoconceal.
Case4
1. RuthMishkinwasatrustedemployeeandshewasinchargeofpayingbills,
balancingaccounts,andhandlingcashmanagement.
2. AgamblingaddictioncausedRuthtohaveanimmensepressuretocommitfraudso
thatshewouldhaveadditionalfundswithwhichtogamble.

3. BecauseRuthwasatrustedemployee,herbossesputherinchargeofpayingbills,
balancingbankaccounts,andhandlingothercashmanagementchores.Thislackof
segregationofdutiesprovidedaneasyopportunitytocommitfraud.
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4. Whenpeopleareaddictedtoavicesuchasgambling,theyfeeltremendouspressure.
Withsomuchpressure,ittakesonlyalittlerationalizationandasmallopportunity
forsomeonetoperpetrateafraud.
Case5
1. Thecompanyshouldimplementindependentchecksandsegregationofduties
controls.TheaccountantshouldnotbepostingtotheGeneralLedger,payingthe
bills,andsigningthechecks.TheCEOorsomeoneelseshouldsignthechecks.Also,
theaccountantsworkshouldbereviewedforerrorsandfraudbyanindependent
source.Theaccountantshouldbeprosecutedcivillyandcriminallyformailfraud,
embezzlement,andmoneylaundering.Inaddition,itwouldbeasimpletasktohave
theauditorsrunacomputeranalysisontheaddressesofvendorstolookfor
companieswiththesameaddresses.
2. Thecompanyshouldimplementsegregationofdutiescontrols.Thewarehouse
managershouldnotbeabletobothreceivereturneditemsandissuethecredit
memos.Theaccountsreceivabledepartmentshouldcreatecreditmemos,whichare
thentakentothewarehousewhereadditionalgoodscanbeissued.Inaddition,
anotherworkermustprocessreturneddefectivemerchandise.Boththemanagerand
theworkershouldsignoff.Thewarehousemanagershouldbeprosecuted,andhis
sonshouldspendmoretimeinthegym.
3. Asystemofauthorizationsshouldbeimplemented.Theboardshouldnotallowthe
CEOtofirehisemployeesandrehirethemascontractors.Theaccountantwho
preparespayrollrecordsshouldnoticethisproblem.Inaddition,iftheCEOprepares
payrollrecords,thereisalsonosegregationofduties.TheCEOshouldbeprosecuted
fortaxfraudandmoneylaundering.
4. Authorizationandsegregationofdutiescontrolsshouldbeimplemented.The
accountspayableclerkshouldnothavecustodyofthesuppliesshepurchases.
Suppliesshouldbeloggedintoawarehouseandthendistributedasneeded.The
accountantshouldalsoindependentlyrecordtheclerksactivities.Sheshouldnotbe
abletosignchecks.
Case6
1. Thepharmacyhasahighriskoffraud.Alexiahasgreatpressuretoprovidewellfor
herfamily.Alexiaalsohastheopportunitytocommitfraud,asshehasthe
responsibilityforaccountingandistheonlyworker.Shecouldeasilystealcashand
manipulatetheaccountingrecords.

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2. WhilewedontknowifAlexiasrationalizationishighorlow,wedoknowthatthe
opportunityandpressurearehigh.Byunderstandingthefraudscale,wecan
determinethatifpressureandopportunityarehigh,itdoesnttakeverymuch
rationalizationforsomeonetocommitfraud.Therefore,theriskforfraudishighin
thiscase.
3. Itwouldbeveryimportanttoexplaintotheownerthehighriskoffraudatthe
pharmacy.Importantcontrolactivitiesaremissing.Backgroundchecks,segregation
ofduties,andothercontrolswouldlowertheriskoffraud.
Case7
1. Joelhasmanyopportunitiestocommitfraud.Heisatrustedfriendofthefamily.At
therestaurant,thereisnosegregationofduties,systemofauthorizations,independent
checks,orphysicalsafeguardstopreventJoelfromcommittingfraud.
2. Anincreaseinrevenuesaccompaniedbyadecreaseinprofitsmaysignalapossible
fraud.Thechangedprofitmarginratio(netincome/revenues)isapossiblesymptom
offraud.
3.

Inthiscase,asinmostcases,afewsimplecontrolscouldsubstantiallyreducethe
opportunitiesforfraud.Forexample,BobandTomcouldinstallanautomated
registerintowhichallsaleswouldberecorded.Theycouldhavemysteryshopperseat
attherestaurantandpayincashinordertoseeifthereceiptswererecorded.They
couldmakethedepositsandreconcilethebankaccountthemselves.

4. Possibleanswersmightbe:

SegregationofdutiesdonotallowJoeltodoeverythingheisdoing.
Systemofauthorizations.
Independentchecks.
Physicalsafeguardssuchasautomatedregisters.

Case8
Themajorfraudopportunityinthiscasewastheinabilitytojudgethequalityofperformance
oftheoptometrist.Althoughtheinsurancecompaniesclearlycouldhavesaidthatthe
servicesrenderedbytheoptometristwerenotconsistentwithwhattheywerepayingfor,they
neverhadreasontobelievetheyneededtoassesstheoptometristsservices.
Anotherfactorwasthelackofaccesstoinformation.Theinsurancecompanieshadnoway
ofknowingthatmanyoftheservicesbeingbilledforwerenotactuallybeingperformed,or
thatmanyofthepatientsdidnotevenexist.

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Case9
Acoupleofpossibilitiesmayexplaintherationalizationelementofthefraudtriangle.First,
sincemanyoftheclientswereexpatriatesworkingoutsidetheUnitedStates,theremayhave
beenrationalizationonthepartofHammondandFCSthatitwasokaytosellthemhigh
yieldinvestmentschemesbecausetheycouldntfollowthestockmarketonadailybasis.The
secondpossibilityisthatHammondknewthattheaccountswereormightbemisleading,
false,ordeceptive.Althoughhemayhavethoughtthis,iftheothertwofactorsarepresent,it
iseasytorationalizethateventhoughtheymaybefalse,theyalsomayberealorgenuine.
Insteadoflookingatthesituationobjectively,heprobablyrationalizedthepossibilityofit
beingalegitimateopportunity.
Case10
1. ReasonswhyLenshouldpursueprosecution:
a. Prosecutionsetsprecedencewithinthecompanythatfraudwillnotbe
tolerated.
b. Prosecutionbringsaboutjustice.
c. Prosecutionmayresultinrecoveryofstolenfundsbecauseofordered
restitutionpayments.
d. Prosecutionwillhelppreventdishonestemployeesfromdefraudingother
organizations.
2. ReasonsLenmightnotwanttopursueprosecutionare:
a. FearthatnegativepublicitywillhurttheimageoftheCPAfirm.
b. Hemightfeelbadlyfortheemployeeorhisfamily.
c. Hedoesntwanttoacceptresponsibilityforthelaxinternalcontrolsthat
existedinhisfirm.
3. Answersmayvary.However,prosecutionisprobablymorebeneficialindeterring
futurefraudulentactivitieswithinthefirm.
Case11
1. Yes,itisafraudtochargethecompanyforpersonallunchesthatyousubmitas
businessexpenses.Fraudisoftendefinedbytherulesofanorganization,and
chargingthecompanyforpersonalexpensesisintentionallynotfollowingtherules.

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2. Inthisexample,allthreeelementsoffraudmaybepresent:pressure,opportunity,and
rationalization.Theopportunitytocommitfraudishigh,andcertainlyrationalization
ispresent.Itisdifficultfromthelimitedfactstoknowwhetherapressureispresent.
3. Howonerespondstothementorisasubjectiveanswer.Ifthenewemployeewas
awarethatsuchchargesrepresentedfraud,sheshoulddeclinetoparticipateandlet
thementorknowthatshedoesnotagreewithcharginglunchesagainstcompany
policy.Additionalstepscouldbetakentonotifysupervisorsandsuggestthatthey
furthereducatecompanypersonnelregardingcompanypolicies.
Case12
1. Opportunityandpressurearebothpresentinthiscase.Althoughtheownerofthe
storemaintainscloserelationshipswithemployees,controlsareminimal,andshould
anemployeechoosetobedishonest(asthisexampleillustrates),heorshewould
haveampleopportunitytosteal.Thethirdingredientforfraudtooccuris
rationalization,andgiventhehighpressureandopportunity,rationalizationonly
needstobelowtomoderateinthiscase.
2. Thisfraudmighthavebeendetectedearlierbyimplementingbasiccashaccounting
andreconciliationtechniquesseparateemployeeIDnumberstologintoregisters,
independentchecksonregistertotals,twoemployeesalwaysbeingpresenttocount
cash,periodicemployeerotationsandvacations,andbasicanalyticreviews.
3. Inthefuture,youshouldbemoreconcernedwithinternalcontrols,greateremphasis
onsegregationofduties,potentiallyimplementingbettercomputersystemsandlogin
authorizations,andpossiblyevensurveillancecameras.
4. Fraudisalwayslesscostlytopreventordetectearly,andanythingyoucandoto
reducefraudwouldbewise.
Case13
1. Lauersencouldhavefeltsomepressuretomakefertilitytreatmentsaffordableforhis
patients.
2. Lauersenperceivedthattheinsurancecompanydidnotcheckcarefullyonthetypes
ofsurgeriesperformed,andthereforeitwaseasyforhimtolieaboutthesurgeries.
3. Lauersenmayhavefeltthathewashelpingwomenwhocouldnotaffordtohave
children.Thiswastheprimaryfactorinhisdecisiontocommitfraud.

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4. Lauersencouldhaverecommendeddifferentinsurancecompaniesthatcovered
fertilitysurgeries.Or,tohelpmaintainhisandhisclientsintegrity,hecouldhave
recommendedadoptionservicesforthosepatientsunabletoaffordfertilitysurgeries.
Case14
1. Thefraudtriangleincludesperceivedpressuresperceivedopportunity,andsomeway
torationalizethefraudasacceptable.
PerceivedPressure:Asasinglemotheroffour,itmaybedifficultforNancyto
provideforherfamily.Additionally,shefeelsthepressuretoprovidesomeofthe
finerthingsforherchildrenandgivethemthebestpossiblecare.These
perceivedfinancialpressurescouldmotivateNancytotakemoneyfromthe
doctor.
Opportunity:Becausethereisnosegregationofduties,Nancyhasthe
opportunitytokeepthecashshecollectsfromthecustomersandwriteoffthe
accountwhenthebooksshowthatallfundshavenotbeencollected.Without
appropriatecontrolsinplace,Nancyhasseveralopportunitiestocommitfraud.
Rationalization:Nancydoesnotfeelthatsheispaidenoughtomeethercurrent
financialneeds.Shemayrationalizethatshedeservesanincreaseinpaytomeet
herneeds.Furthermore,Nancymayfeelthatshedeservesanincreaseinpay
becauseshedoessomuchworkforthedoctorsoffice.Nancymayrationalize
thatsheisjustborrowingthemoneyandwillrepayitlater.Asatrusted
employee,shemayrationalizethatthedoctorwouldwanthertotakealittleextra
moneyforherneeds;afterall,sheneedsthemoneymuchmorethanthedoctor.
2. Thecriticaldutiesofwritingchecks,makingbankdeposits,andreconcilingbank
statementsshouldbesegregatedanddualcustodycontrolshouldbeimplemented.
Nancyshouldnotbecollecting,recording,anddepositingpaymentsallbyherself.An
additionalemployeemayneedtobehired.Commonly,anoutsourcedbillingofficeis
usedasacheckandbalance.Eachoftheseactivitiescanbegivendualcustodyby
bothNancyandanotherperson.Althoughthiscontrolcanoftenbeexpensive,itmay
beworthittothedoctor.Thedoctorshouldanalyzetherisk/benefitsofhiringanother
person.
Case15
1. Joehadseveralfinancialpressures:hiswifejusthadafourthchild;theyhadjust
purchasedanewhome;andhehadexperiencedaseveredropincommissionsearned.
Hisopportunityarosefromthefactthatthecompanyhadpoorinternalcontrolsover
pettycash.Shortageswereusuallywrittenoff.Joesrationalizationscouldhavebeen
thathistheftswereonlytemporary;thecompanyowedhimmoremoney;orhe
workedhardanddeservedthemoney.

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2. Thecompanycouldhavepreventedthefraudfromoccurringbyhavingbetter
controlsoverthepettycash.Forexample,thecompanycouldhavehadonepersonbe
thepettycashcustodianrequiringanyonewithaneedforpettycashtogothrough
thatperson.Thereshouldalsohavebeenperiodicreconciliationsofthepettycash
fund.

CaseStudies
CaseStudy1
1. Theofficemanagerworksaloneandhassignificantopportunitiestoalterthebooksor
accountsofcustomersandpocketmoneyforhimself.Employeesworking
unaccompaniedcanalsotakesidejobsandpocketthereceiptsforthemselves.
Additionally,theycanusethechemicalstoprovidelawncaretofamilyandfriendsat
nocost.
2. Fraudsymptomsthatshouldbelookedfororthatareevidentinthiscaseinclude:less
timewithofficemanager,morechemicalsbeingusedthannecessary,employee
homesreceivingunpaidservices,andincreasedrevenueswithdecliningprofits.
Employeesmayhavetakenonnewcustomerjobsandpocketedthemoneybecause
thecustomersarenotenteredonthecomputersystem.
3. Theofficemanagershouldbemonitoredmoreclosely,andtheaccountsshouldbe
checkedonamoreregularbasis.Theownerwillhavetospendmoretimeensuring
thattheofficeworkisdonecorrectly.Dailychecksonsuppliesmaybenecessaryto
makesureemployeesarenotusingchemicalsforpersonalgains.Employeeswork
habitsshouldbewatched.Puttingthesecontrolsinplacewillcostmoreemployee
timebutmayprovidegreaterbenefitbyreducingcosts.
CaseStudy2
1. Pressures,opportunities,andrationalizationsforJamessfraud:

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Pressures:Jameswasheavilyindebt.Also,thefinancialpositionofBestClub
wasdecliningsignificantly.
Opportunities:Complexitiesininsurancepoliciesandprocedures,Jamess
managementposition,andareputationasanentrepreneurialtalent.
Rationalizations:Despitehisdebt,Jamesthoughtthatitwastemporary.Hehad
confidenceinBestClub/RedHousesfuturepotentialtobringhimfinancial
success.

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Albrecht: Fraud Examination, 4e

2. Someofthefraudsymptomsare:noequipmentandworkordercontractsexistedto
secureloans;moneyordersdisappeared;therewereunusualzerosinthecustomers
bills;Jameswaslivingthegoodlife,withanexpensivehouseandanewsportscar;
andtoomanyinsuranceclaimswerefiled.
3. Controlsoractionsthatmighthavedetectedthefraudare:independentchecksbythe
insurancecompany,investigationsofcomplaintsbycustomersbeingchargedtoo
much,andinvestigationsoftheapparentlyrapidgrowthofhiscompany.
CaseStudy3
1. JohnsonManufacturingdoesnothaveaveryactiveboardofdirectors,andthereis
littlemonitoringofemployees.
2. Employeecompensationisdependentontheperformanceoftheunit.Ifthedivision
doesntdowell,salariesandbonuseswillbecut.
3. Harrissrationalizationwasthatshewasprovidingashortrunsolutiontotheprofit
declineresultingfromthecompetitorspricecutting,andthedeclinewouldbeonly
temporary.
CaseStudy4
1. Mr.Armstronghadthetrustofhisinvestors.Becauseinvestorstrustedhim,theyput
substantialamountsofmoneyintohisfunds.IftheinvestorshadtrustedMr.
Armstrongless,theywouldnothavegivenhimunlimitedcontroloftheirmoney.
2. IfinvestorshadknownofMr.Armstrongsbackground,theywouldhavebeenless
likelytotrusthimandprobablywouldnthaveallowedhimcompletecontroloverso
muchmoney.

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InternetAssignment
1.

a. Morethan50,000professionals.
b. AnextensiveapplicationprocessandpassingtheuniformCFEexamination.
c. ThemissionoftheAssociationofCertifiedFraudExaminersistoreducethe
incidenceoffraudandwhitecollarcrimeandtoassistthemembershipinits
detectionanddeterrence.
d. CertifiedFraudExaminers(CFEs)comefromvariousprofessions,including
auditors,accountants,fraudinvestigators,losspreventionspecialists,
attorneys,educators,andcriminologists.CFEsgatherevidence,take
statements,writereports,andassistininvestigatingfraudinitsvariedforms.
MostmajorcorporationsandgovernmentagenciesemployCFEs,andothers
provideconsultingandinvestigationsservices.
e. Hopefullyyoudohavewhatittakes.
f. ExamplesmightbetheAuditingAccountsReceivableworkbook,Fraud
RelatedInternalControlsworkbook,andtheBeyondtheNumbers:
ProfessionalInterviewingTechniquesselfstudyvideo.Allofthesematerials
andmanyothersofferedonthesitewouldhelpanyonewhowantsafraud
fightingcareer.
g. TheEthicsLineEthicsLineprovidesatollfreenumberusedtoreport
anonymousallegationsofethicalviolations,fraud,waste,andabuse.
EthicsLineismanned24hoursaday,365daysayearbycontractlaw
enforcementpersonnel,CertifiedFraudExaminers,andtrainedprofessionals.
Whenanemployeeofasubscribercompanycalls,heorshewillbeaskedto
describethenatureofthesuspectedproblem.Fromthere,theEthicsLine
servicewillpromptlyrelaytheinformationtoyourcompany.Yourcompany
thendecidesaboutwhatactionisnecessary.

Debate
1. Thepurposeofthedebateistohelpstudentswrestlewithethicalissuesbeforethey
areactuallyfacedwiththoseissueslaterintheircareer.Whilethereisnocorrect
answertothedebate,westronglyencouragestudentstolookatthevariousoptions,
andconsequencestothoseoptions,thatareavailable.

AnswerstoStopandThinkQuestions
1. Thinkaboutatimeinyourlifewhenyoucompromisedyourownethical
standards.Howdidtheelementsofpressure,rationalization,andopportunity
affectyourdecisionmaking?Werethethreeelementsinteractiveinother

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Albrecht: Fraud Examination, 4e

words,didittakelessopportunitytomakethedecisionwhenyouwereunder
tremendouspressure?
a. Answerstothisstopandthinkwillvarybyperson.However,mostindividuals
intheclasswillhavecompromisedatsometimeintheirlife.Youshouldnt
letthemoffthehooktooeasily.
2. Howhaveindividualsyouknowusedpowertoinfluenceyouractions?Haveyou
donesomethingsimplybecauseaperson(s)hadlegitimateauthority(suchasa
bossorteacher)overyou?Haveyoueverdoneanythingbecauseaperson
offeredyouarewardorbenefitforyouractions?Haveyoueverbeeninfluenced
toparticipateinsomethingsimplybecauseyouwereaskedbyaclosefriendor
colleague?Perhaps,inagroupprojectatschoolyouhaveagreedtodoan
assignmentacertainwaybecauseyoufeltaclassmateknewmoreaboutthe
subjectmatterthanyoudid.Haveyoueverdoneanythingbecauseyoufeared
possiblepunishmentfornotdoingit?Chancesarethatallofushavebeen
influencedtodosomethingbaseduponpowerthatwasexertedbyothers.These
fivetypesofpowerinfluenceallofouractionseveryday.
a. Again,theanswerswillvarybystudent.Again,youshouldntletthemoffthe
hookbyansweringthattheyhaventbeeninfluencedbythepowerofothers
allofushave.

Chapter 2

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