ACCT 4120: Chapter 1-4 Homework Flashcards
True/False
Nellie works for a large manufacturing company. She heads the information systems department and works closely with the accounting department. Nellie knows a lot about the company’s database systems and accounting practices. Her responsibilities include working with the company’s vendors to create data communication lines. The company works with many vendors, including a large number of new vendors that have been added due to the company’s rapid growth. Recently, Nellie has become concerned about the effectiveness of the internal controls in ensuring the integrity of the purchasing function. She expressed her concerns to senior management and has been asked to recommend proactive steps the company can take to prevent fraud from collusion between employees and vendors.
A periodic letter to vendors explaining an organization’s policy of not allowing employees to accept gifts or gratuities is an effective tool for both preventing and uncovering collusive frauds.
True
A periodic letter to vendors that explains an organization’s policy of not allowing employees to accept gifts or gratuities helps vendors understand whether buyers and sellers are acting in accordance with the organization’s rules. Such letters clarify expectations, which is very important in preventing fraud. Many frauds have been uncovered when, after such a letter was sent, vendors expressed concern about their buying or selling relationships.
True/False
The following actual fraud occurred in a communications company. What Ruth Mishkin did in her spare time didn’t concern the Boca Raton, Florida, public relations firm where she worked very much. “We thought she was just playing cards with the girls,” says Ray Biagiotti, president of Communications Group, the firm that had employed her for nine years. She had become such a trusted employee that her bosses had put her in charge of paying bills, balancing bank accounts, and handling other cash management chores. They didn’t realize their mistake until Ruth took a sick leave, and they discovered she had been pocketing company funds for years. The money had helped stoke a gambling habit that took the 60-year-old widow on junkets to casinos in the Bahamas, Monte Carlo, and Las Vegas. In all, the company claims she stole about $320,000. Ruth pleaded guilty to one count of grand theft and four counts of check forgery. She was placed on 10 years’ probation and ordered to attend meetings of a chapter of Gamblers Anonymous, the national self-help group.
Ruth’s gambling addiction created a perceived opportunity for her to commit fraud.
False
Ruth’s opportunity to commit fraud stemmed from the fact that she was a trusted employee who was in charge of paying bills, balancing bank accounts, and handling cash management. This lack of segregation of duties provided an easy opportunity to commit fraud. Ruth’s gambling addiction created motivation to commit fraud so that she would have additional funds with which to gamble. When people are addicted to a vice such as gambling, they feel tremendous pressure. With so much pressure, it takes only a little rationalization and a small opportunity for someone to perpetrate a fraud.
True/False
“But I intended to pay it all back, I really did,” Joseph Swankie said as he talked to his manager. How did I ever get into this situation, he thought. Two years ago, Joe received the promotion for which he had been working so hard. In addition, Joe’s new manager told him that Joe had a very promising future at the company. Joe and his wife Janae quickly purchased a new home. Not long after, Joe and Janae had their fourth child, and life was great. After having their fourth child, Janae quit work to spend more time with her kids.
Suddenly, things started to turn upside down. The economy took a downturn and had a negative impact on Joe’s company. His pay, which was based on commission, was reduced nearly 50 percent. Joe still worked hard but thought he should be paid more. Unable to find another job, Joe resentfully decided he would stay with the company even with the lower pay.
Not long after he started receiving lower commissions, Joe noticed that the internal controls over the petty cash fund weren’t very strong. The records were not reviewed very often, and small shortages were usually written off. One week, Joe took $50. When questioned by his wife, Joe said he had found a few odd jobs after work. Joe continued this habit of taking small amounts for a couple of weeks. After realizing that no one had noticed the shortage, he started to take up to $100 a week.
One day, another employee noticed Joe taking some cash from the fund and putting it in his wallet. When questioned, he simply stated that it was a reimbursement the company owed him for supplies. An investigation began, and Joe’s fraud was discovered.
Two of the three elements of fraud are present in this scenario.
False
All three elements of fraud—pressure, opportunity, and rationalization—are present. Joe had several financial pressures: He and his wife just had a fourth child; they had just purchased a new home; and his income decreased due to a severe drop in commissions earned. His opportunity arose from the fact that the company had poor internal controls over petty cash. Shortages were usually written off. Joe’s rationalizations could have been that his thefts were only temporary; the company owed him more money; or he worked hard and deserved the money.
Karen, a friend of yours, recently started her own business, The Bike and Boulder Company (B&B). B&B specializes in the sales of mountain bikes and rock-climbing equipment. Karen is putting the finishing touches on her company policies and procedures. She knows you are taking a fraud class and asks you to review what she has completed thus far. You quickly notice that Karen has neglected to address fraud and fraud prevention in her policies and procedures. What policies and procedures would you suggest Karen implement to prevent and detect fraud at B&B?
Which of the following fraud prevention policies or procedures would you recommend to Karen with respect to hiring employees?
a. Require all applicants to certify that they have never committed employee fraud. b. Verify all information on each applicant's resume and/or application. c. Train those involved in the hiring process to conduct thorough background checks. d. Implement procedures to prevent hiring any applicant with an arrest record. e. You should recommend all of these.
b. Verify all information on each applicant’s resume and/or application.
Before hiring an applicant for any position, the employer should verify all information on the applicant’s résumé and/or application. The verification should be complete and conducted by an employee who is thorough and persistent in this important procedure. In addition, the employer should require all applicants to certify that the information on their application and/or résumé is accurate. Also, the employer should train those involved in the hiring process to conduct thorough and skillful interviews.
True/False
According to the text, when one Fortune 500 company changed its stance on fraud from “The CEO is to be informed when someone is prosecuted for fraud” to “The CEO is to be informed when someone who commits fraud is not prosecuted,” the number of frauds in the company decreased significantly.
Fraud research has consistently shown that legal action has been taken against perpetrators who commit fraud against organizations in more than 90 percent of fraud cases.
False
Descriptive fraud research has shown that legal action is taken in less than half of all cases involving frauds committed against organizations. Prior to the policy change regarding fraud committed within the Fortune 500 company, employee fraud was not seen as a serious issue, and prosecutions were unlikely. The general message was that nothing serious will happen to you if you commit fraud (fraud was acceptable), and so it proliferated. But by creating a policy that would essentially prosecute everyone involved in fraud (minimizing these bad-news reports to the CEO), it was clear that fraud would not be tolerated. As a result, fraud within the organization decreased.
Which of the following is not true of civil litigation?
a. It usually begins when one party files a complaint.
b. It must be heard by 12 jurors.
c. Only “the preponderance of the evidence” is needed for the plaintiff to be successful.
d. The purpose is to compensate for harm done to another.
b. It must be heard by 12 jurors.
The purpose of a civil lawsuit is to gain compensation for harm an individual or organization believes has been done to him or her (it). Unlike criminal cases, juries in civil cases need not consist of 12 jurors but may have as few as 6 jurors. The verdict of the jury need not be unanimous. Civil cases are often heard by judges instead of juries. To be successful, plaintiffs in civil cases must only prove their case by the “preponderance of the evidence.” In other words, there need only be slightly more evidence supporting the plaintiff than supporting the defendant.
You are a new summer intern working for a major professional services firm. During your lunch break each day, you and a fellow intern Bob eat at a local sandwich shop. One day, Bob’s girlfriend joins you for lunch. When the bill arrives, Bob pays with a company credit card and writes the meal off as a business expense. Bob and his girlfriend continue to be “treated” to lunch for a number of days. You know Bob is well aware of a recent memo that came down from management stating casual lunches are not valid business expenses. When you ask Bob about the charges, he replies, “Hey, we’re interns. Those memos don’t apply to us. We can expense anything we want. “
Which of the following statements regarding Bob’s use of the company credit card is not true?
a. Bob is committing occupational fraud. b. Bob's use of the credit card is a form of asset misappropriation. c. The amount charged for the nonbusiness lunches does not meet the minimum threshold for fraud. d. You should encourage Bob to change his behavior and correct the fraudulent charges.
c. The amount charged for the nonbusiness lunches does not meet the minimum threshold for fraud.
Fraud occurs when individuals intentionally cheat or deceive others to their advantage. In this case, Bob is committing a fraud. Regardless of the magnitude of the charges, he is intentionally charging nonbusiness lunches to his employer. This is also known as employee fraud or occupational fraud. Bob’s actions fall into the category of misappropriation of assets, i.e., theft or misuse of the employer’s resources. As an employee, you have an ethical responsibility to your employer to report Bob’s fraudulent behavior. Fortunately, in this case nothing has been done that cannot be corrected easily. Because Bob is justifying his behavior by saying the recent memo pertaining to meal expenses does not apply to him because he is an intern, you should try to help Bob see the error of his logic and encourage him to correct the improper credit card charges. If Bob is unwilling to change his behavior, the appropriate superior probably should be notified.
True/False
You are a student at ABC University. You recently read in the school’s daily newspaper about a terrific investment opportunity that promises to pay you a 44 percent annual return on your investment. Although you don’t understand the complicated nature of the investment, several of your friends are investing money. You have an extra $5,000 that you earned last summer that you would like to invest, but you are a bit skeptical about the unusually high rate of return.
An annual return of 44 percent is higher than average, but not unusual for investments that are highly complicated, suggesting that this probably is a good investment opportunity.
False
This is a real investment scam that was perpetrated on an American university campus a few years ago. Before it was stopped, hundreds of students had invested hundreds of thousands of dollars. Many warning signs would suggest this “investment opportunity” is a scam, including:
The promised rate of 44 percent is too high and unreasonable. If it seems too good to be true, it probably is. This promised rate of return does not make business sense.
The nature of the investment is complicated and can’t be easily understood. Making the investment seem complicated is one way perpetrators try to conceal their frauds.
You are excited about the investment because several of your friends have invested. Just because they didn’t exercise due care doesn’t mean you should also do something stupid.
True/False
Fraud detection is an important element of minimizing losses from fraud, and it is important that frauds be detected as early as possible.
Early detection is important because, in most cases, losses are greater at the beginning of a fraud and decrease significantly over time.
False
Because most frauds increase dramatically over time, it is extremely important that when frauds occur, they be detected early. In most cases, the fraud losses that an organization experiences in the final few months of a fraud are higher than the total losses in the first few years of the fraud.
In October 2014, the following case was heard in New Jersey. A former optometrist was sentenced to seven years in state prison for conspiracy, theft by deception, falsifying records, and falsification of records relating to medical care, as part of a massive health insurance fraud. In addition to his prison sentence, the optometrist was ordered to pay a criminal insurance fraud fine of $100,000 and restitution of $97,975. The state is also in the process of seeking an additional $810,000 in civil insurance fraud penalties. The optometrist was found guilty of false insurance billing for providing eyeglasses and routine eye exams at no cost or at reduced cost and making up the difference by billing insurance carriers for services not rendered to patients. The optometrist also had his office staff create approximately 997 false patient records and charts and falsely bill insurance carriers for prescribed optometric services that were not rendered to his patients. He would also bill insurance companies for optometric treatments and tests for ocular conditions that patients did not actually suffer. The optometrist was also charged with falsifying patient records and charts.
Which of the following factors provided the optometrist with an opportunity to commit fraud?
a. Lack of an effective internal control framework. b. Inability to judge the quality of performance of the optometrist. c. Absence of on audit trail. d. All of the above factors provided an opportunity to commit fraud.
b. Inability to judge the quality of performance of the optometrist.
The major fraud opportunity in this case was the inability to judge the quality of performance of the optometrist. Although the insurance companies clearly could have said that the services rendered by the optometrist were not consistent with what they were paying for, they never had reason to believe they needed to assess the optometrist’s services. Another factor was the lack of access to information. The insurance companies had no way of knowing that many of the services being billed for were not actually being performed or that many of the patients did not even exist.
True/False
You are having lunch with another student. During the course of your conversation, you tell your friend about your new fraud examination class. After you explain the devastating impact of fraud on businesses today, she questions how people can commit so much fraud given the advances in technology over the past several years.
Advances in technology have resulted in a significant reduction in the size and frequency of frauds in recent years.
False
Although advances in technology have helped to prevent and detect some fraud, these advances also have opened up new ways for perpetrators to commit fraud that before were unthinkable. Computers, the Internet, and complex accounting systems have made it so easy that perpetrators need only make a telephone call, manipulate a computer program, or press a key on the keyboard to commit fraud. Because physical possession of stolen property is no longer required and because it is just as easy to program a computer to embezzle $1 million as it is $1,000, the size and number of frauds have increased tremendously.
True/False
Alexia Jones is a worker at a local 24-hour pharmacy. Alexia works the night shift and is the only worker. Because management is cost-conscious and business is slow at night, Alexia has been given the responsibility to do the accounting from the previous day. Alexia has two children, and her husband does not work. Alexia has strong pressure to provide well for her family. Assume that you were recently hired by the pharmacy as a business consultant to evaluate the internal controls and the risk of fraud.
Reference to the fraud scale would indicate that Alexia poses a high risk of fraud pharmacy to the pharmacy.
True
Alexia has great pressure to provide well for her family. Alexia also has the opportunity to commit fraud, as she has the responsibility for accounting and is the only worker. She could easily steal cash and manipulate the accounting records. Although we don’t know if Alexia’s rationalization is high or low, we do know that the opportunity and pressure are high. By understanding the fraud scale, we can determine that if pressure and opportunity are high, it doesn’t take too much rationalization for someone to commit fraud. Therefore, the risk for fraud is high in this case.
You are the owner of a local department store in a small town. Many of your employees have worked for your company for years, and you know them and their families very well. Because your business is relatively small, and because you know your employees so well, you haven’t worried about establishing many internal controls. You do set a good example for how you wish your employees to work, you are actively involved in the business, and you provide adequate training to new employees. One day, you become suspicious about an employee at a checkout desk. You fear that he may be stealing from the company by altering the day’s totals at his register. He has worked for you for 15 years, and he has always been honest and reliable. After several weeks of investigation, you discover that your fears are correct—he is stealing from the company. You confront him with the evidence, and he admits to stealing $25,000 over several years. He explains that, at first, he stole mainly to pay for small gifts for his wife and young children, not for himself. But then last year, his wife lost her job, they had another child, and he wasn’t sure how to pay all of the bills, so he took more money, which he intended to repay.
What elements of fraud are present in this case?
a. Opportunity and rationalization. b. Pressure, opportunity, and rationalization. c. Pressure, motivation, and opportunity. d. Opportunity and pressure.
b. Pressure, opportunity, and rationalization.
All three elements of fraud are present in this case—pressure, opportunity, and rationalization. The employee was motivated to commit fraud by financial pressures. Although the owner of the store maintains close relationships with employees, controls are minimal, and should an employee choose to be dishonest (as this example illustrates), he or she would have ample opportunity to steal. The third ingredient for fraud to occur is rationalization, which is indicated in this case by the employee’s expressed intent to repay the stolen funds and by his contention that the money was for his family, not for himself.
True/False
Predication refers to circumstances that would lead a reasonable professional to believe that fraud has occurred.
You should not conduct a fraud investigation without predication.
True
Fraud investigation is a complex and sensitive matter. If investigations are improperly conducted, the reputations of innocent individuals can be irreparably damaged, guilty parties can go undetected and be free to repeat the act, and the offended entity may not have information to use in preventing and detecting similar incidents or in recovering damages. Therefore, it is important that fraud investigations not be conducted without predication.
Robert was the chief teller in a large New York bank. Over a period of three years, he embezzled $1.5 million. He took the money by manipulating dormant accounts. Robert was responsible both for handling dormant accounts and for dealing with complaints from customers. When a customer would complain about his account, Robert was always the one to explain the discrepancy. He usually used the excuse that “it’s a computer error.”
Which of the following control activities would most likely have prevented this fraud?
a. Physical safeguards over customer accounts. b. Documents and records. c. Proper authorizations. d. Segregation of duties.
d. Segregation of duties.
There was a serious lack of segregation of duties and independent checks as well as too much supervisory authority in one person in this bank. The bank placed far too much trust and supervisory authority in Robert. If the bank had designated separate supervisors to handle dormant accounts and customer complaints, or even if it had required Robert to take mandatory vacations or rotated him from time to time (so that other employees would periodically deal with customer complaints), the fraud could not have continued for so long or become so substantial.
