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Solution Manual For Principles of Fraud Examination 4th Edition Wells 1118922344 9781118922347
Solution Manual For Principles of Fraud Examination 4th Edition Wells 1118922344 9781118922347
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ANSWERS TO EXERCISES
Chapter 1
Review Questions
1-3 (Learning objective 1-3) Occupational fraud and abuse includes any personal enrichment that
results from misuse or misapplication of the employing organization’s resources or assets. There
are four key elements to this activity. What are they?
Answer: The four key elements to occupational fraud abuse are that it (1) is clandestine, (2)
violates the employee’s fiduciary duties to the organization, (3) is committed for the purpose of
direct or indirect financial benefit to the employee, and (4) costs the employing organization
assets, revenues, or reserves.
1-4 (Learning objective 1-4) Under the common law, fraud generally consists of four elements,
all of which must be present. List them.
Answer: The four legal elements of fraud are (1) a material false statement, (2) knowledge that the
statement was false when it was uttered, (3) reliance on the false statement by the victim, and (4)
damages as a result.
1-5 (Learning objectives 1-4 and 1-5) What is the difference between occupational fraud and
occupational abuse? Give examples.
Answer: Occupational fraud tends to be more costly and less common than abuse. Occupational
fraud consists of such actions as asset misappropriations, corruption, and fraudulent financial
statements. Occupational abuse consists of petty offenses such as taking extended lunch periods
or breaks, showing up late for work or leaving early, and doing slow or sloppy work.
1-6 (Learning objective 1-7) Edwin H. Sutherland, a criminologist, coined the phrase
“whitecollar crime.” What did he mean by this term? How has the meaning of this phrase
changed over time?
Answer: Sutherland coined the term “white-collar crime” to describe criminal acts of corporations
and individuals acting in their corporate capacity (e.g., crime in the executive suite). Over time,
the term has come to encompass almost any financial or economic crime, from the mailroom to
the boardroom.
1-7 (Learning objective 1-7) Sutherland developed what is known as the “theory of differential
association.” What is the principal tenet of his theory?
Answer: The theory of differential association’s principal tenet is that crime is learned. Sutherland
believed that this learning typically occurred in intimate personal groups.
1-8 (Learning objective 1-8) Cressey interviewed nearly 200 embezzlers in order to develop his
theory on the causation of fraud. As a result of his research, what was Cressey’s final
hypothesis?
Answer: “Trusted persons become trust violators when they conceive of themselves as having a
financial problem which is non-shareable, are aware this problem can be secretly resolved by
violation of the position of financial trust, and are able to apply to their own conduct in that
situation verbalizations which enable them to adjust their conceptions of themselves as trusted
persons with their conceptions of themselves as users of the entrusted property.”
1-9 (Learning objective 1-9) Cressey believed that non-shareable problems provided the
motivation for employees to commit occupational fraud. What did he mean by “non-shareable”?
Answer: Cressey meant that the problems, at least in the eyes of the potential offenders, must be
kept secret from others, so as to avoid embarrassment or, more importantly, a loss of status.
1-10 (Learning objective 1-9) Cressey divided the non-shareable problems of the subjects in his
research into six different subtypes. What are they?
Answer: The subtypes are (1) violation of ascribed obligations, (2) problems resulting from
personal failure, (3) business reversals, (4) physical isolation, (5) status gaining, and (6)
employer–employee relations.
1-11 (Learning objective 1-11) Albrecht concluded that there were three factors that led to
occupational fraud. What are they?
Answer: Albrecht’s list is very similar to the fraud triangle. The three factors he identified are (1)
situational pressures, (2) opportunities, and (3) personal integrity.
1-12 (Learning objective 1-12) What factor did Hollinger and Clark identify as the primary cause
of employee deviance?
Answer: The research of Hollinger and Clark strongly suggests that job dissatisfaction among
employees—across all age groups but especially younger workers—is the most likely cause of
counterproductive or illegal behavior in the workplace.
1-13 (Learning objective 1-13) The 2011 Global Fraud Survey covered a number of factors that
are related to occupational fraud. List these factors.
Answer:The 2011 Global Fraud Survey gathered data on occupational fraud and abuse relating to
(1) the cost of fraud and abuse, (2) position, gender, tenure, and criminal history of the
perpetrator, (3) size of the victim organization, (4) actions taken against occupational fraudsters
by their victims, (5) methods by which occupational frauds were detected, (6) commonness of
schemes, and (7) costs associated with various schemes.
Discussion Issues
1-1 (Learning objective 1-1) How does “fraud examination” differ from “forensic accounting”?
Answer: Fraud examination is a process used to resolve allegations of fraud from inception to
disposition. Forensic accounting is any accounting work done in anticipation of litigation.
1-2 (Learning objective 1-2) There are several steps involved in the fraud theory approach. What
are they?
Answer: The fraud theory approach involves analyzing the available evidence, developing a
theory of what fraud could have occurred based on a worst-case scenario, testing the theory,
revising it or amending it as necessary, then proving the theory through additional investigative
work.
1-3 (Learning objectives 1-3 through 1-6) How does occupational fraud and abuse differ from
other kinds of fraud? Give examples of other fraud types.
Answer: Typically, any crime that uses deceit as its principal modus operandi is considered
fraud. Occupational fraud involves those frauds that are committed against organizations by
individuals who work for those organizations. Other fraud types include but are not limited to:
insurance frauds committed by customers and policyholders, Internet frauds and scams
perpetrated by individuals, frauds against governmental organizations committed by companies
and individuals, frauds against banks committed by outsiders, and credit card frauds perpetrated
against businesses.
1-4 (Learning objectives 1-7 and 1-8) How does the study of criminology relate to the detection
or deterrence of fraud? How does it differ from the study of accounting or auditing?
Answer: Criminals commit frauds. Accounting relates to the classification of assets, liabilities,
income, expenses, and equity. Auditing involves the verification of books and records. While
accounting and auditing give us information on how fraud is committed, the study of criminology
helps us understand why fraud is committed. The simple fact is that books don’t commit fraud,
people do. Understanding both how and why fraud is committed helps us better detect and deter
it.
1-6 (Learning objective 1-8) Cressey’s “fraud triangle” states that three factors—non-shareable
financial need, perceived opportunity, and rationalization—are present in cases of occupational
fraud. Which of these three factors, if any, is the most important in causing executives,
managers, and employees to commit occupational fraud?
Answer: All three are equally important. A fire cannot exist without fuel, oxygen, and heat; a
fraud cannot exist without motive, opportunity, and rationalization. If a person has unlimited
motive but no opportunity, he or she cannot commit fraud. If a person has opportunity but
doesn’t need the money, the fraud is unlikely to occur. Should an individual have both motive
and opportunity but cannot salve his or her conscience through rationalization, the crime will
most likely not be committed.
1-7 (Learning objectives 1-8 and 1-9) Cressey described a number of non-shareable financial
problems that he uncovered during his research. Which of these, if any, apply to modern-day
executives who are responsible for large financial statement frauds? In the 50-plus years since
Cressey did his study, are the factors he described still valid? Why or why not?
Answer: Three non-shareable financial problems seem to be at the root of today’s financial
frauds: violation of ascribed obligations, problems resulting from personal failure, and business
reversals. Many modern-day businesses begin “cooking the books” when executives realize that
they will not be able to meet their financial obligations. Similarly, some executives are too
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our principal literati. They will prove interesting to the public. It would
be as well to insert the letters in your Messenger, with facsimiles of the
signatures. Of my own letters eliciting these replies I have unfortunately
preserved no copies." Here Mr. M. handed us the MSS.
"Well, sir," said we—"so be it; Mr. Joseph V. Miller, then, since you will
have it so, we are highly sensible of your noble, of your disinterested
generosity. We are ——"
"It is"—he replied, with a toss of the head, which we thought slightly
supercilious—"It is—Joseph X. Miller. But why do you ask? Good day!
In a style epistolary and non-epistolary I must bid you adieu—that is to
say I must depart (and not remain) your obedient servant, Joseph Y.
Miller."
"Mr. Miller," said we, at length, "shall we not send you a number of the
Magazine containing your correspondence?"
LETTER I.
Philadelphia, ——.
Dear Sir,—I regret that you had the trouble of addressing me twice
respecting the Review of your publication. The truth is it was only
yesterday I enjoyed the opportunity of reading it, and bearing public
testimony to its merits. I think the work might have a wider
circulation if, in the next edition, it were printed without the preface.
Of your talents and other merits I have long entertained a high
opinion.
There is nothing very peculiar in the physique of this letter. The hand-
writing is bold, large, sprawling, and irregular. It is rather rotund than
angular, and is by no means illegible. One would suppose it written in a
violent hurry. The t's are crossed with a sweeping scratch of the pen,
giving the whole letter an odd appearance if held upside-down, or in any
position other than the proper one. The whole air of the letter is
dictatorial. The paper is of good but not superior quality. The seal is of
brown wax mingled with gold, and bears a Latin motto, of which only
the words trans and mortuus are legible.
LETTER II.
Hartford, ——.
Much pains seem to have been taken in the MS. of this epistle. Black
lines have been used, apparently. Every t is crossed and every i dotted
with precision. The punctuation is faultless. Yet the tout-ensemble of the
letter has nothing of formality or undue effeminacy. The characters are
free, well-sized, and handsomely formed, preserving throughout a
perfectly uniform and beautiful appearance, although generally
unconnected with each other. Were one to form an estimate of the
character of Mrs. Sigourney's compositions from the character of her
hand writing, the estimate would not be very far from the truth. Freedom,
dignity, precision, and grace of thought, without abrupt or startling
transitions, might be attributed to her with propriety. The paper is good,
the seal small—of green and gold wax—and without impression.
LETTER III.
New York, ——.
Dear Sir,—I have delayed replying to your letter of the — ult. until
I could find time to make the necessary inquiries about the
circumstances to which you allude. I am sorry to inform you that
these inquiries have been altogether fruitless, and that I am
consequently unable, at present, to give you the desired information.
If, hereafter, any thing shall come to light which may aid you in
your researches, it will give me great pleasure to communicate with
you upon the subject.
There is much in the hand-writing here like that of Mrs. Sigourney, and
yet, as a whole, it is very different. In both MSS. perfect uniformity and
regularity exist, and in both, the character of the writing is formed—that
is to say, decided. Both are beautiful, and, at a casual glance, both have a
somewhat similar effect. But Mrs. Sigourney's MS. is one of the most
legible, and Mr. Paulding's one of the most illegible in the world. His
small a's, t's and c's are all alike, and the style of the characters generally
is French. No correct notion of Mr. Paulding's literary peculiarities could
be obtained from an inspection of his MS. It has probably been modified
by strong adventitious circumstances. The paper is of a very fine glossy
texture, and of a blue tint, with gilt edges.
LETTER IV.
Boston, ——.
The hand writing here is of an odd appearance. The capitals and long
letters extend far above or below the line, and the rest have a running and
diminutive formation, rendering it difficult to distinguish one from
another. The words are unusually far apart, and but little matter is
contained in much space. At first sight the MS. appears to be hurried—
but a few moments' examination will prove that this is not the case. The
capital I's might be mistaken for T's. The whole has a clean and uniform
appearance. The paper is common, and the seal (of red wax) is oval in
shape—probably a shield—the device illegible.
LETTER V.
St. Mark's Place, New York, ——.
LETTER VI.
New York, ——.
My Dear Sir,—I owe you a very humble apology for not answering
sooner your flattering epistle of the — ult. The truth is, being from
home when your letter reached my residence, my reply fell into the
ever open grave of deferred duties.
Dear Sir,—I have received your favor of the ——. The report to
which it alludes was entirely without foundation. I have never had,
and have not now, any intention of editing a Magazine. The
Bookseller's statement on this subject originated in a
misunderstanding.
Mr. Halleck's is a free, mercantile hand, and evinces a love for the
graceful rather than for the picturesque. There is some force, too, in its
expression. The tout ensemble is pleasing. Mr. H.'s letter is probably
written currente calamo—but without hurry. The paper is very good, and
bluish—the seal of red wax.
LETTER VIII.
Alexandria, Red River, ——, Louisiana.
Dear Sir,—Your polite letter of the — is before me, and the view
which you present of the estimation in which you hold my poor
labors is every way gratifying. It would afford me great pleasure to
send you a few trifles for the Hum-drum, which I have no doubt
will prove a very useful periodical if its design is well carried out—
but the truth is my time is entirely occupied.
Yours,
The writing in this letter has a fidgetty appearance, and would seem to
indicate a mind without settled aims—restless and full of activity. Few of
the characters are written twice in the same manner, and their direction
varies continually. Sometimes the words lie perpendicularly on the page
—then slope to the right—then, with a jerk, fly off in an opposite way.
The thickness, also, of the MS. is changeable—sometimes the letters are
very light and fine—sometimes excessively heavy. Upon a casual glance
at Mr. F.'s epistle, one might mistake it for an imitation of a written letter
by a child. The paper is bad—and wafered.
LETTER IX.
Philadelphia, ——.
LETTER X.
Boston, ——.
Dear Sir,—I have your favor of the ——. For the present I must
decline replying to the queries you have propounded. Be pleased to
accept my thanks for the flattering manner in which you speak of
my Lecture.
LETTER XI.
New York, ——.
LETTER XII.
Boston, ——.
JOSEPH M. MILLER.
LETTER XIII.
Baltimore, ——.
Dear Sir,—I have received your note of the — ult. and its contents
puzzle me no little. I fear it will be impossible to give a definitive
reply to an epistle so enigmatically worded. Please write again.
Yours truly,
LETTER XV.
Oak Hill, ——.
Dear Sir,—I have received your polite letter of the ——, and will
have no objection to aid you in your enterprise by such information
as I can afford. There are many others, however, who would be
much better able to assist you in this matter than myself. When I get
a little leisure you shall hear from me again.
The hand writing of the Chief Justice is not unlike that of Neal—but
much better and more legible. The habit of running two words into one
(a habit which we noticed in Neal) is also observable in the Chief Justice.
The characters are utterly devoid of ornament or unnecessary flourish,
and there is a good deal of abruptness about them. They are heavy and
black, with very little hair stroke. The lines are exceedingly crooked,
running diagonally across the paper. A wide margin is on the left side of
the page, with none at all on the right. The whole air of the MS. in its
utter simplicity, is strikingly indicative of the man. The paper is a half
sheet of coarse foolscap, wafered.
LETTER XVI.
Baltimore, ——.
Dear Sir,—I have received your letter of the — ult. in which you do
me the honor of requesting an autograph. In reply, I have to say, that
if this scrawl will answer your purpose it is entirely at your service.
Yours respectfully,
Mr. Wirt's hand writing has a strong resemblance to that of his friend
John P. Kennedy—it is by no means, however, as good, and has too
much tapering about it to be thoroughly picturesque. The writing is
black, strong, clear, and very neat. It is, upon the whole, little in
accordance with the character of Mr. W.'s compositions. The lines are
crooked. The paper bluish and English—wafered.
LETTER XVII.
Washington, ——.
Believe me with the highest respect, your much obliged friend and
servant,
Judge Story's is a very excellent hand, and has the air of being written
with great rapidity and ease. It is rotund, and might be characterized as a
rolling hand. The direction of the letters occasionally varies from right to
left, and from left to right. The same peculiarity was observable in Mr.
Flint's. Judge Story's MS. is decidedly picturesque. The lines are at equal
distances, but lie diagonally on the page. The paper good, of a bluish tint,
and folded to form a marginal line. The seal of red wax, and stamped
with a common compting-house stamp.
LETTER XVIII.
New York, ——.
My Dear Sir,—I thank you for the hints you have been so kind as to
give me in relation to my next edition of the "Voyage," but as that
edition has already gone to press, it will be impossible to avail
myself of your attention until the sixth impression.
Very respectfully, your obedient servant,
LETTER XIX.
Portland, ——.
Mr. Brooks writes a very good hand, strong, bold, and abrupt—highly
indicative of the author's peculiar features of mind. These are nervous
common sense, without tinsel or artificiality, and a straight forward
directness of conception. The lines are even—and the words at proper
intervals. The paper good—and wafered.
LETTER XX.
Washington, ——.
LETTER XXI.
Philadelphia, ——.
Dear Sir,—I have just received your letter of the ——, in which
you complain of my neglect in not replying to your favors of the
—— of the —— and of the —— ult. I do assure you, sir, that the
letters have never come to hand. If you will be so good as to repeat
their contents, it will give me great pleasure to answer them, each
and all. The Post Office is in a very bad condition.
Yours respectfully,
JOSEPH W. MILLER, ESQ.
LETTER XXII.
Boston, ——.
Respectfully yours,
Dr. Channing's MS. is very excellent. The letters are bold, well-sized,
and beautifully formed. They are, perhaps, too closely crowded upon one
another. One might, with some little acumen, detect the high finish of Dr.
C.'s style of composition in the character of his chirography. Boldness
and accuracy are united with elegance in both. The paper very good, and
wafered.
LETTER XXIII.
Philadelphia, ——.
Dear Sir,—I must be pardoned for declining to loan the books you
mention. The fact is, I have lost many volumes in this way—and as
you are personally unknown to me you will excuse my complying
with your request.
Yours, &c.
LETTER XXIV.
Washington, ——.
Yours, &c.
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