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SOLUTIONS CHAPTER 6
Fraud and White-Collar Crime
COVERAGE OF LEARNING OBJECTIVES
CHAPTER
WORKPLACE PROBLEMS
LEARNING OBJECTIVE QUESTIONS APPLICATIONS and CASES
LO1. Define fraud and 4, 5, 6, 7, 8, 76, 77 78, 79, 81, 82
describe white-collar crime. 12, 13,
14, 15, 16,
42–51, 52–56
LO2. Explain the 17, 18, 76 82
development of fraud theory 19, 20,
beginning with the fraud 21, 22,
triangle. 23, 24,
25, 26,
57–66
LO3. Explain various 27, 28, 76 80, 81, 82
theories for why people 29, 30,
commit fraud. 31, 32, 33,
34, 35, 67–75
LO4. Identify the 39 76 82
characteristics of a typical
fraudster.
LO5. Describe the impact of 76 82
white-collar crime on victims.
LO6. Describe the 40 76 82
government’s role in
prosecuting white-collar
crime.
Copyright © 2015 Pearson Education, Inc. 106

Questions
6-1. Forensic accounting has become a highly visible component of the accounting profession
because of the pervasiveness of fraud, the highly visible cases in the early 2000s, and the
public outcry related to these fraudulent events.
6-2. Unique skills that forensic accountants possess that are useful in the area of fraud
investigation include fraud deterrence, fraud detection, and fraud investigation. In
addition, a solid understanding of the judicial process, including the rules of evidence and
burden of proof, are useful skills.
6-3. Five key aspects of financial crimes are:
1. Financial crimes are criminal offenses. The standard of proof is beyond a reasonable
doubt, and the burden of proof is on the prosecution.
2. Financial crimes are crimes of intent. Absent an admission, circumstantial evidence,
including expert witness testimony, is used to establish or infer fraudulent intent.
3. Financial crimes are not victimless. In addition to economic loss, financial crimes
can result in emotional and physical harm to individuals.
4. Financial crimes may involve violent acts. Although white-collar crime is generally
considered a nonviolent activity, the possibility of violence cannot be ignored.
5. The government (prosecution) is not always right. A criminal indictment is not proof
of a crime. It is an assertion that a crime has been committed.
6-4. Robbery is the use of force to persuade someone to surrender property. Fraud is the use
of deception to persuade someone to surrender property.
6-5. Fraud requires that the prosecution meet the “beyond a reasonable doubt” burden of proof
standard because it is a criminal/felony offense.
6-6. Fraud is the unlawful taking of another’s property by deception.
6-7. The four basic elements of fraud established by common law are:
1. A material false statement or omission.

2. Knowledge that the statement or omission is false.
3. The suspect intended to induce the victim to rely on the false statement or omission.
4. The victim relied on the false statement or omission and suffered injury or damage.
6-8. Fraud is crime of intent because it is an intentional act conducted by a person who has
free will. In other words, the fraudster meant to do the act.

6-9. Intent is the state of mind accompanying a fraudulent act. It requires the mental
resolution or determination to conduct a fraud.
6-10. Fraudulent intent is established in the legal system through an admission or through the
gathering and presentation of circumstantial evidence.
6-11. Circumstantial evidence is objective data related to a crime. This evidence must consider
alternative explanations and the degree of impact of such data in order to make
circumstantial evidence compelling in the judicial process. When there are no alternative
explanations and the degree of impact of the observations is high, then probative value is
established. When there are multiple alternative explanations and the degree of impact is
low, the probative value of circumstantial evidence is diminished. Degree of impact
relates to the significance of an observation to the issue being considered by a court.
6-12. White-collar crime is a major subcategory of fraud. There are competing definitions of
white-collar crime. The following are provided by the U.S. Congressional Subcommittee
of Crime and the FBI.
1. The U.S. Congressional Subcommittee on Crime presented the following operational

definition of white-collar crime: “an illegal act or series of illegal acts committed by
nonphysical means and by concealment or guile to obtain money or property, to avoid
the payment or loss of money or property, or to obtain personal or business
advantage.”
2. The FBI defines white-collar crime as: “illegal acts which are characterized by deceit,
concealment, or violation of trust and which are not dependent upon the application
of threat of physical force or violence. Individuals and corporations commit these
acts to obtain money, property, or services; to avoid the payment or loss of money or
services; or to secure personal advantage.”
6-13. Six attributes of white-collar crime presented in the chapter are:
1. Deceit. Offenders misrepresent and conceal the truth.

2. Intent. Fraud does not happen by accident.
3. Breach of trust. Offenders are generally in a position of trust that is manipulated or
breached to facilitate the fraudulent action.
4. Losses. White-collar crime is the unlawful taking of another’s property.
5. Concealment. White-collar crime may continue for years or may never be
discovered.
6. Outward respectability. As the name implies, white-collar crime is commonly
perpetrated by individuals (e.g., professionals) who are seemingly beyond reproach.

6-14. The enforcement of laws enacted to protect the public against white-collar crime is the
responsibility of the FBI, IRS, Secret Service, SEC, EPA, and U.S. Customs. The
Commerce Clause of the U.S. Constitution gives the federal government the authority to
police white-collar crime.
6-15. The FBI’s eight major categories of white-collar crime are (examples are selected from
those presented in a table in the chapter):
1. Securities and commodities fraud. Securities market manipulation

2. Corporate fraud. Financial statement fraud.
3. Health care fraud. Billing schemes.
4. Mortgage fraud. A material misstatement, misrepresentation, or omission relating to
a real estate transaction relied on by a lender.
5. Financial institution fraud. Check kiting.
6. Insurance fraud. Insurance agents diverting policyholder premiums to personal accounts.
7. Mass marketing fraud. Exploitation through telemarketing, mass mailings, and the
Internet.
8. Money laundering. The infusion of illegal money into the stream of commerce.
Examples for each of the fraud categories will differ from student to student. One
example from the table set forth in the text is provided for each fraud category.
6-16. Areas of white-collar crime, other than those identified by the FBI, include tax fraud,
mail fraud, Social Security fraud, food stamp fraud, immigration fraud, and bank fraud.
These frauds are investigated by other federal agencies such as the IRS, U.S. Postal
Service, Secret Service, Social Security Administration, Department of Agriculture, and
U.S. Immigration.
6-17. Donald Cressey postulated fraud theory by interviewing 209 inmates at three prisons in
the Midwest. His research was conducted in 1949. This work identified the convergence
of pressure, opportunity, and rationalization as primary fraud determinants.
6-18. The three elements of the fraud triangle are pressure, opportunity, and rationalization.
Pressure is a need or non-shareable problem that precedes the criminal violation of
financial trust. Opportunity is being in a position and having the skills necessary to take
advantage of a situation in a fraudulent manner. Rationalization is a process by which a
person attempts to make his or her actual or intended behavior more logical or justifiable.
6-19. Cressey believed that the three elements in the fraud triangle contribute to a forensic
accountant’s understanding of why people commit fraud because it illustrates how a
person in a position of trust solves a nonshareable problem (pressure) by taking
advantage of his or her position, training, and experience.

6-20. Students will identify three personal characteristics that might serve as a “red flag” to the
possibility of fraud. Students will develop different combinations of the ten red flags
related to personal characteristics presented in the chapter.
Personal Characteristics Discussion Point

1. Living beyond one’s means Pressure. Need to generate additional
income to maintain lifestyle.
2. An overwhelming desire for Rationalization. Need to succeed or
personal gain maintain a level of success.
3. High personal debt Pressure. Need to fund repayment.
4. A close association with customers Opportunity. Ability to take advantage
of a close relationship
5. Feeling of being underpaid Rationalization. Need to achieve
equity related to a perceived wrong.
6. A wheeler-dealer attitude Pressure. Need to maintain an image.
7. Strong desire to beat the system Pressure. Need to prove being smarter
than the system.
8. Excessive gambling habits Pressure. Need to replace funds or pay
person to whom the losses accrued.
9. Undue family or peer pressure Pressure. Need to relieve the situation.
10. Feeling of under-appreciation Rationalization. Need to achieve
equity from a perceived slight.
Student speculation as to why each might help a forensic accountant detect a fraudulent
situation will vary.
6-21. Students will identify three organizational characteristics that might serve as a red flag to
the possible presence of fraud. These are presented in a table in the chapter, which is
partially reproduced below:
Organizational Characteristics Brief Discussion

Placing too much trust in key employees Provides opportunity.
Lack of proper procedures for Provides opportunity.
authorization of transactions
Inadequate disclosures of personal Provides opportunity.
investments and incomes
No separation of authorization of Provides opportunity.
transactions from the custody of related
assets
Lack of independent checks on Provides opportunity.
performance
Inadequate attention to details Provides opportunity.
No separation of custody of assets from Provides opportunity.
the accounting for those assets
No separation of duties between Provides opportunity.
accounting functions

Lack of clear lines of authority and Provides opportunity.
responsibility
Lack of frequent review by internal auditors Provides opportunity.
6-22. Personal and organizational red flag characteristics relate to the fraud triangle by helping
a forensic accountant identify pressure, opportunity, and rationalization. As presented in
the chapter, personal characteristics relate to pressure and rationalization, whereas
organizational characteristics relate to opportunity. For example, high personal debt
might suggest pressure, not separating duties among accounting functions might present
an opportunity, and a feeling of not being appreciated might provide a basis for
rationalizing a fraudulent action.
6-23. The most common type of financial statement fraud is the overstatement of revenues. The
two primary motivators for this type of fraud are (1) market pressure to raise share values
and (2) the need to finance the firm’s growth.
6-24. In the fraud diamond, capability contributes to the possibility of fraud as a fraudster must
have not only the opportunity to commit a fraudulent act, but must also have the
necessary skill set to accomplish it.
6-25. The knuckle-head defense asserts that a person may have had the opportunity to commit a
fraud but did not have the ability to actually commit a fraudulent act. It is related to the
capability aspect of the fraud diamond.
6-26. The fraud scale differs from the fraud triangle by replacing rationalization with integrity.
When integrity is lacking, the likelihood of fraud increases.
6-27. Economic theory helps explain fraud through its premise that individuals are motived by
self-interest and thus are more likely to commit fraud when it is in a person’s self-interest
to do so.
6-28. The calculus of fraud equation is R (reward) > PL (probability of getting caught times the
perceived gravity of the loss). This suggests that a person will make a calculated choice
of whether to commit fraud by comparing the gain to be achieved by performing a
fraudulent act to the risk of that act (probability of getting caught multiplied by the
penalty to be paid if caught).
6-29. An economic model cannot fully and accurately explain why a person commits fraud.
Human behavior is too complex and uncertain to be reduced to elements in an economic
model.
6-30. Rational choice theory posits that offenders (fraudsters) are rational calculators who choose
courses of action that produce optimal rewards with limited effort. Two primary
components of a rational choice decision are opportunities and a cost-benefit trade-off.
Factors that increase benefits include low effort level needed, limited skill needed, available
targets, high expected yield, and low risk of getting caught, whereas costs include high effort
level needed, high skill needed, and a high risk of getting caught.

6-31. Neutralization is a rationalization technique used to justify or explain an involvement in a
fraud.
6-32. Three common neutralization techniques are denial, condemnation, and higher loyalty.
Denial is an attempt to assert that something true is actually false. Condemnation is an
attempt to shift blame to those who condemn an action (e.g., co-worker, employer, law
enforcement). Higher loyalty attempts to legitimize an action by reference to a stronger
bond that exists with a group than with society in general.
6-33. Three common denial techniques used by fraudsters are:
1. Denial of responsibility. Offenders view their behavior as a result of circumstances

beyond their control.
2. Denial of injury. Offenders feel as though their behavior did not hurt anyone, even
though it is against the law.
3. Denial of the victim. Offenders conclude that the victim was deserving of his or her
injuries.
6-34. The general theory of crime explains crime as a natural consequence of uncontrolled
human desire to seek pleasure and avoid pain. It has two components: opportunity and
self-control. Opportunity is being in a situation where a fraudulent act is possible.
Self-control is the ability to control one’s emotions and desires.
6-35. High self-control is the ability to control one’s actions, and low self-control is the
inability to control one’s actions. In the broadest sense, it is the ability to do the right
thing, no matter what opportunity or cost a situation presents. In the chapter, high
self-control is presented as the tendency to avoid acts whose long-term costs exceed their
momentary advantages. Low self-control coupled with opportunity provides a higher
likelihood that fraud will occur.
6-36. Organizational misconduct is performed by individuals on behalf of an organization for

which they are affiliated. Personal misconduct is the propensity of a person to commit a
fraudulent act given the ability and opportunity to do so.
6-37. An organization’s leadership can minimize the likelihood of organizational misconduct

by setting the right tone. A culture that discourages misconduct will likely experience
few inappropriate acts, whereas a culture of rule-bending and grey-area practice is more
susceptible to organizational misconduct.
6-38. Researchers estimate that 85% of the population would commit fraud if given the right
set of conditions, and only 10% of the population would not commit fraud regardless of
pressure and opportunity stimuli. The remaining 5% will commit fraud regardless of the
conditions and circumstances.

Students will have varying responses to these statistics. However, an understanding of
the research findings will suggest to organizational leaders that they set the right tone and
design, implement, and monitor an internal control system that minimizes the opportunity
for organizational members to commit an undesirable action.
6-39. The characteristics of a typical fraudster, as presented in the chapter, include the
following, according to a 2011 KPMG study:
1. Above-average intelligence
2. Relatively well-educated
3. 36–45 years old
4. Male
5. White
6. Inclined to take risk
7. Commits fraud against own employer
8. Works in collusion with another offender
9. Employed by the company for more than ten years
10. Holds a senior management position
11. Works in finance or accounting
12. Lacks feelings of anxiety and empathy
13. External locus of control
6-40. The investigation of white-collar crimes is often a low priority for law enforcement
agencies because they are difficult and expensive to prove. Victims may be reluctant to
report an offense, and they rely significantly on circumstantial evidence. Finally, law
enforcement agencies may be ill-equipped and inadequately trained to properly
investigate and prosecute this type of crime.
6-41. A forensic accountant must understand the perceptions, opportunities, and risk-
assessment processes of a fraudster to successfully combat fraud because all
organizations are exposed to fraud risk, and no matter how well designed an internal
control system, fraud cannot be completely eliminated. Thus, understanding what
motivates a fraudster will help in the deterrence, detection, and investigation of possible
fraudulent acts.

Multiple-Choice Questions
Select the best response to the following questions related to fraud and white-collar crime:
6-42. A
6-43. B
6-44. B
6-45. A
6-46. D
6-47. C
6-48. E
6-49. A
6-50. B
6-51. B
Select the best response to the following questions related to white-collar crime:
6-52. B
6-53. B
6-54. A
6-55. D
6-56. C
Select the best response to the following questions related to fraud theory:
6-57. B
6-58. A
6-59. C
6-60. D
6-61. A
6-62. D
6-63. C
6-64. A
6-65. B
6-66. C
Select the best response to the following questions related to fraud motivation:
6-67. D
6-68. C
6-69. B
6-70. A
6-71. D
6-72. B
6-73. A
6-74. B
6-75. C

Workplace Applications
6-76. Upon review the State of West Virginia v. Keith O. Peoples case, student responses will
include the following:
1. A civil case is normally between individuals or organizations, whereas a criminal

case involves a wrong against society.
A civil case starts with a complaint that a person or organization has been harmed by
another. A criminal case starts with an accusation of a violation of law (criminal
complaint), which may be followed by a criminal investigation and an indictment.
The standard of proof in a criminal case is “beyond a reasonable doubt.” The standard
of proof in a civil case is generally a “preponderance of the evidence.”
The sanctions in a civil case generally involve money—that is, economic damages.
The sanctions in a criminal case are much more extreme, involving fines, penalties,
incarceration, and even capital punishment.
A defendant in a criminal case is entitled to an attorney. If a defendant cannot afford
one, an attorney (and expert witness fees) is provided by the state, as well as funds for
expert witness fees. Parties to a civil action must engage their own attorneys.
2. Beyond a reasonable doubt is the highest standard of proof. This means that the
evidence must remove all uncertainty in the minds of a trier of fact. A probability
cannot be assigned but the standard is higher than a preponderance of the evidence.
In the court’s instructions to the jury, it was presented as “proof of such a convincing
character that a reasonable person would not hesitate to rely and act upon it.”
3. Intent is defined by Black’s Law Dictionary as “a state of mind accompanying an

act.” As such, a person must have the resolve to perform an act. In other words, a
person must have meant to perform an act.
The circumstantial evidence compiled by the state’s lead investigator to establish
intent in the Peoples case included payroll records from the police department and the
mall from Jan. 1, 2001, to August 31, 2004. A comparison of the times worked was
developed, and 478 overlapping hours were discovered. This number was later
reduced to 100 due to reasonable explanations for some of the overlapping hours
provided by the defense. Second, testimony from TCM’s security director and
TCM’s general manager confirmed that their employees are not supposed to be “on
duty” with the police department while working at the mall, as well as the accuracy of
the time clock used to record time on the job. The common sense theme was “you
can’t be in two places at the same time.”
4. The significance of considering alternative explanations when conducting a fraud
investigation relates to the ability to arrive at a conclusion that incorporates due
professional care. When using a scientific approach, possible explanations are
considered and either accepted or rejected based on their individual merits. The

fewer the possible alternative explanations, the greater the reliability of the evidence
in terms of probative value.
Alternative explanations were important in this case. The prosecution did not
consider other possible explanations for the time overlaps, such as being off duty for
things like extended overtime and meritorious service even though the time records
showed the officer was still working. This was approved department operating
practice. This early release policy, authorized exits from the mall, and payroll errors
were other areas where alternative explanations were appropriate, but were not
considered by the prosecution.
5. The three conditions generally present when fraud occurs are pressure, opportunity,
and rationalization. Pressure: Peoples worked overtime to meet financial needs.
Opportunity: Police officers are not subject to direct observation, which could
provide an opportunity to double dip. Rationalization: Everyone does it; I’m
underpaid and underappreciated.
6. The court’s instructions to the jury are important to ensure that members of the jury
follow the law in order to perform their function as a trier of fact. The court’s
instruction clarifies how a jury should go about their duty, what evidence they may
consider, and how they should interpret expert testimony as well as the lack of
testimony by the defendant.
7. Peoples’s failure to testify should have had no impact on the jury’s deliberations. The
court’s instruction clearly points out that the defendant is not required to testify and
the burden of proof is the responsibility of the state.
8. The court’s instructions aside, opening and closing arguments are very important
components of a trial. Opening statements provide the first opportunity for each side
to connect with the jury and share their respective stories. Closing arguments provide
the final words, the last chance to identify a failure in the opposing side’s case, a
failure to produce evidence as promised, or a failure to respond to the evidence
presented.
9. Adversarial bias is the introduction of bias into a deliberative process when both
parties can choose experts that have opinions that fit the needs of their case.
Confirmation bias is the tendency of people to favor information that supports their
opinion. A case can be made that the use of Cpt. John Tabaretti as a primary witness
for the prosecution is indicative of adversarial bias, as the state did not employ an
independent forensic accountant. Confirmation bias is exhibited by Cpt. Tabaretti in
the manner in which he used his spreadsheet to match hours, and when his analysis
confirmed his belief about double dipping, he did not pursue alternative explanations.

10. After more than eight hours of deliberation, the jury found Cpl. Peoples not guilty of
fraudulent schemes. On June 1, 2009, Cpl. Keith Peoples was restored to active duty
with CPD. Subsequent interviews of jury members indicated that they viewed the
state’s evidence as too uncertain to support a guilty verdict. Thus, the prosecution
was unable to prove intent.
6-77. The FBI’s posting entitled 2009 Financial Crimes Report is found at
http://www.fbi.gov/stats-services/publications/financial-crimes-report-2009, or via a link
at www.pearsonhighered.com/rufus.
The Forensic Accountant Program section of the 2009 Report contains the following
(Note the General Overview is a direct quote from the report):
I. General Overview
In March 2009, the FBI created the Forensic Accountant Program (FAP) and instituted
the Forensic Accountant Unit (FAU) within the CID, FCS. The Forensic Accountant
position was developed in an effort to attract and retain top-tier accounting professionals
who possess the ability to conduct complex, thorough forensic financial investigations.
The FAP is the culmination of years of effort to advance and professionalize the FBI’s
financial investigative capabilities. The FBI’s FoAs [forensic accountants] will be
expected to testify as expert witnesses in judicial proceedings and essentially retain
ownership of the financial investigative portion of complex investigations with little
guidance from the respective Case Agent(s).
The mission of the FAU is to support all FBI investigative matters requiring a forensic
financial investigation and to ensure the FBI’s financial investigative priorities are
continually addressed. The FAU seeks to provide the highest caliber of financial
investigative work-product and support as well as contributing to the FBI’s Intelligence
Cycle. The FAU is developing and implementing a rigorous training curriculum and
partnering with an array of public and private organizations in an effort to cultivate a
workforce that provides superior results both in the field offices and at FBIHQ.
II. Initiatives
This section covers a variety of areas that are summarized below:
1. A forensic core training program was developed. It is a comprehensive introductory

training program aimed at increasing the FBI forensic accountant’s proficiency in
financial investigations.
2. A Bankscan program was developed “which translates physical bank and credit card
statements into an electronic medium.” This is intended to save the FBI forensic
accountant’s time by reducing the manual hours needed for this task.

3. A process has been developed to convert the FBI financial analysts into the forensic
accounting program. This is intended to ensure the “highest caliber of financial
investigative work-product and support.”
III. Significant Cases
1. Madoff Investigation: The FBI’s forensic accounting unit was actively engaged in
statistical work in this case.
2. Stanford Financial Group: A $7 billion Ponzi scheme was investigated, and the
forensic accounting unit’s work helped secure indictments and guilty pleas.
3. Bad Medicine: A $7 million health care fraud was perpetrated by doctors in Puerto
Rico submitting fraudulent health care claims to a major insurance company. This
resulted in multiple arrests and 168 indictments relating to 107 individuals.
4. Scott Rothstein: A $1.2 billion Ponzi scheme was conducted by a Fort Lauderdale
attorney through which money was fraudulently obtained using investment schemes
such as claiming to lend money to nonexistent borrowers and making investments to
clients who were supposedly backed by confidential civil lawsuit settlements but
were not.
Chapter Problems
6-78. The FBI’s Common Fraud Schemes can be found at http://www.fbi.gov/scams-
safety/fraud.
The fraud schemes listed are:

1. Telemarketing fraud
2. Nigerian letter or “419” letter
3. Identity theft
4. Advance fee schemes
5. Health care fraud or health insurance fraud
6. Redemption / strawman / bond fraud
7. Letter of credit fraud
8. Prime bank note fraud
9. Ponzi schemes
10. Pyramid schemes
11. Market manipulation or “pump and dump” schemes

The FBI’s web site provides information on each fraud and tips for avoiding each of the
schemes listed. Each student’s PowerPoint presentation should explain how the fraud is
conducted and the FBI’s tips for avoiding the fraud.
6-79. The FBI’s posting entitled 2009 Financial Crimes Report includes a section entitled
Corporate Fraud General Overview and one entitled Significant Cases. It is found at
http://www.fbi.gov/stats-services/publications/financial-crimes-report-2009.
In this report students will find the following key information:
Corporate Fraud, General Overview. This section discusses the FBI’s key investigative
initiatives for the past year. The following are listed:
(1) Falsification of financial information, including:

(a) False accounting entries;
(b) Bogus trades designed to inflate profit or hide losses; and,
(c) False transactions designed to evade regulatory oversight.
(2) Self-dealing by corporate insiders, including:

(a) Insider trading;
(b) Kickbacks;
(c) Backdating of executive stock options;
(d) Misuse of corporate property for personal gain; and,
(e) Individual tax violations related to self-dealing.
The Significant Cases section includes information on the following cases: (1) Petters
Company, Inc., (2) Credit Suisse, and (3) 1031 Tax Group.
1. Petters Company, Inc. was a $3.4 billion fraud perpetrated by obtaining loans from
hedge funds and investment groups in order to finance transactions with major
department stores. These loans were obtained using fraudulent purchase and sales
transaction documents.
2. Credit Suisse was a scheme in which Credit Suisse induced a large corporate investor
to invest in securities using student loans as collateral. The securities actually
contained subprime loans as collateral. It was settled for $400 million.
3. 1031 Tax Group was a tax code scheme using Section 1031 of the code to induce
investment by “promising clients their money would be used solely to effect 1031
exchanges as outlined in the exchange agreements.” The owners of the company,
Okun and Coleman, siphoned off “approximately $132 million in client funds to
support Okun's lavish lifestyle, pay operating expenses for his various companies,
invest in commercial real estate, and purchase additional qualified intermediary
companies to obtain access to additional client funds.”

6-80. The 2012 ACFE Report to the Nations on Occupational Fraud and Abuse can be
obtained at http://www.acfe.com/rttn.aspx, or via a link at
www.pearsonhighered.com/rufus.
The sections included in the report are: Perpetrators of Fraud, Victims of Fraud, and
Fraud Detection. While each student’s memo will be different, the key findings of this
report presented on the web site include:
1. Perpetrators of Fraud:
A. Those in higher levels of authority perpetrate larger fraud schemes. For example,
median fraud losses were: owners $573,000, managers $180,000, and employees
$60,000.
B. 77% of all frauds were conducted by individuals in the areas of “accounting,
operations, sales, executive/upper management, customer service and purchasing.”
C. Most were first time offenders.
D. Over 80% displayed one of the fraud “red flags,” such as living beyond means,
financial distress, close ties with vendors or customers, and the need to control
situations.
2. Victims of fraud were primarily small businesses as their internal controls are usually
weaker and their trust levels higher than their larger counterparts. The industries in
which fraud victims are located are financial services, government and public
administration, and manufacturing. The employment of anti-fraud controls
significantly reduced the incidence of fraud, and about half of the fraud losses were
never recovered by the victims.
3. Fraud detection occurs at an average of eighteen months after a fraud commences. It

is generally discovered through tips 43%, management review 15%, internal audit
14%, accident 7%, account reconciliations 4%, document examination 4%, external
audit 3%, and other means such as notification by police or surveillance monitoring.
6-81. The 2007 Oversight Systems Report on Corporate Fraud report can be obtained by
searching the web site http://www.ethicsworld.org.
This is a comprehensive report that may have a variety of classroom uses. Student
responses to the following questions should contain:
a. What has happened to the prevalence of fraud since 2005?
Fraud is more widespread; 76% of respondents indicate fraud has increased, up from
67% in 2005.

b. What are the primary reasons that executive fraud occurs?
According to survey respondents, executive fraud results from pressure to meet goals
(81%) and personal gain (72%). In addition, a belief they won’t get caught (41%)
and feeling actions are not fraudulent (40%) were the next most cited reasons.
A belief that regulations are easily bypassed (21%) and fear of losing their job if
goals are not met (20%) were additional reasons as well as lack of resources so
corners were cut (8%) and lack of understanding of laws and regulations (5%).
c. Identify the measures that are considered the most effective in preventing or deterring
fraud.
Forty-three percent of respondents feel that organizational leadership setting the right
tone is a key to fraud deterrence. None of the respondents felt that laws and
regulations deter fraud. In addition, technology enabled monitoring (15%), visible
prosecution and convictions (15%), stringent internal controls (13%), whistle blower
protections (12%), and quarterly/annual audits (2%) were additional measures that
could reduce fraud if implemented successfully.
Case
6-82. 1. This is a white-collar crime. It was committed by persons who were respected in the
banking organization and who held high executive positions.
2. Randall and Tyre fit the profile of a typical fraudster.

Randall Tyre
1. Above-average intelligence Yes Yes
2. Relatively well-educated College Bank Schools
3. 36–45 years old 45 43
4. Male Yes Yes
5. White Yes Yes
6. Inclined to take risk Yes Yes
7. Commits fraud against own employer Yes Yes
8. Works in collusion with another offender Yes Yes
9. Employed by the company for more than 10 years Yes Yes
10. Holds a senior management position Yes Yes
11. Works in finance or accounting Loan Officer Bank Pres.
12. Lacks feelings of anxiety and empathy No No
13. External locus of control Yes Yes

3. The three elements of the fraud triangle are present in the case. Pressure:
There was pressure to build loan volume in order to enhance corporate profit and to
obtain what the board considered to be a high-profile customer. Opportunity: Both
held positions of power in the organization, had authority to act up to certain lending
limit constraints, and were the primary contacts with the correspondent bank.
Rationalization: They were helping a customer. Given enough time, the economy
would correct and the customer would be able to repay the loan.
4. As an investigator, planning the case is an important first step that would likely
include the following:
a. An understanding of a standard of beyond a reasonable doubt for a criminal case

that will be tried in a federal jurisdiction
b. A review of all relevant laws and regulations
c. Discussions with regulatory authorities with knowledge of the case
d. Inspection and analysis of all relevant documents, including loan documentation,
loan committee minutes, and board of director minutes
e. Interviews of all knowledgeable parties, moving from general to the targets,
including the lenders, board members, borrowers, correspondent bank employees,
and other persons within the bank with knowledge of this event.
5. Intent impacted the actions of Randall and Tyre in several ways: First, they intended
to make the loan in an appropriate way. Once circumstances got out of control, they
intended to continue to work with the customer until the economy recovered. Most
importantly, they mutually agreed not to inform the board since they believed a
pending merger might be cancelled if the loan was discovered.
6. The calculus of fraud can be used to assess the actions of Randall and Tyre. The
formula is R>PL. Both Randall and Tyre felt the merger could be preserved and the
loan collected if there was enough time for the economy to recover. This would
allow them to keep their jobs. This outcome, in their minds, must have been greater
than the probability of getting caught and the likelihood of going to jail.
7. Randall and Tyre used neutralization techniques described in this chapter in the
following ways. They blamed the institution’s CEO and the board of directors for
applying pressure to generate loans (condemnation). They also exhibited denial of
responsibility as they felt the force of circumstance worked to their detriment—
specifically, the pressure to make the loan, the lack of time to perform an appropriate
due diligence analysis, and the severe economic downturn that hit the commercial
real estate area hard.

8. Arguments that might be used to combat the prosecutor’s allegation of fraudulent
intent are:
a. Randall and Tyre were not given enough time to adequately analyze the credit.
b. All lending procedures were followed up to the point that the loan was disbursed
and the correspondent bank had not yet approved their participation.
c. It was normal practice in the bank to work with customers and make payment
waivers during times of economic distress.
d. Randall might claim he informed Tyre of the recourse agreement, and Tyre failed
to inform the board.
e. There was no initial intent. There was an error in judgment once circumstances
put them in a no-win situation.
9. The primary reason Randall and Tyre were convicted of a crime was based on
violation of banking law and motive. The district attorney argued that both men were
aware of the banking regulations that were violated, suspected that institutional
knowledge of this loan would adversely impact a pending merger, and hid the facts
and circumstances in order to keep their jobs. Both served 2.3 years in a federal
prison.

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COVERAGE OF LEARNING OBJECTIVES

Copyright © 2015 Pearson Education, Inc. 106

6-3. Five key aspects of financial crimes are:

6-6. Fraud is the unlawful taking of another’s property by deception.

1. A material false statement or omission.

Copyright © 2015 Pearson Education, Inc. 107

1. The U.S. Congressional Subcommittee on Crime presented the following operational

6-13. Six attributes of white-collar crime presented in the chapter are:

1. Deceit. Offenders misrepresent and conceal the truth.

Copyright © 2015 Pearson Education, Inc. 108

1. Securities and commodities fraud. Securities market manipulation

Copyright © 2015 Pearson Education, Inc. 109

Personal Characteristics Discussion Point

Organizational Characteristics Brief Discussion

Copyright © 2015 Pearson Education, Inc. 110

Copyright © 2015 Pearson Education, Inc. 111

6-33. Three common denial techniques used by fraudsters are:

1. Denial of responsibility. Offenders view their behavior as a result of circumstances

6-36. Organizational misconduct is performed by individuals on behalf of an organization for

6-37. An organization’s leadership can minimize the likelihood of organizational misconduct

Copyright © 2015 Pearson Education, Inc. 112

Copyright © 2015 Pearson Education, Inc. 113

Copyright © 2015 Pearson Education, Inc. 114

1. A civil case is normally between individuals or organizations, whereas a criminal

3. Intent is defined by Black’s Law Dictionary as “a state of mind accompanying an

Copyright © 2015 Pearson Education, Inc. 115

Copyright © 2015 Pearson Education, Inc. 116

This section covers a variety of areas that are summarized below:

1. A forensic core training program was developed. It is a comprehensive introductory

Copyright © 2015 Pearson Education, Inc. 117

III. Significant Cases

The fraud schemes listed are:

Copyright © 2015 Pearson Education, Inc. 118

In this report students will find the following key information:

(1) Falsification of financial information, including:

(2) Self-dealing by corporate insiders, including:

Copyright © 2015 Pearson Education, Inc. 119

3. Fraud detection occurs at an average of eighteen months after a fraud commences. It

a. What has happened to the prevalence of fraud since 2005?

Copyright © 2015 Pearson Education, Inc. 120

2. Randall and Tyre fit the profile of a typical fraudster.

Copyright © 2015 Pearson Education, Inc. 121

a. An understanding of a standard of beyond a reasonable doubt for a criminal case

Copyright © 2015 Pearson Education, Inc. 122

Copyright © 2015 Pearson Education, Inc. 123

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