Understanding Crime

Question 1

According to the authors of Crimes of the Middle Classes, advertising influences economic crimes by promising that no one has to settle for second best.

A. True
B. False

Answer 1

A. True

See pages 4.211 in the Fraud Examiner’s Manual

The authors of Crimes of the Middles Classes observe an overarching culture based on affluence and ever-higher levels of success. Media sources, and advertising in general, promise that no one has to settle for second best, prompting those who find themselves running behind to make an attempt to conceal the difference, crossing ethical and sometimes legal lines.

Question 2

Misbehavior is less likely to be detected and punished in a complex organizational structure than in a simple organizational structure.

A. True
B. False

Answer 2

A. True

See pages 4.217 in the Fraud Examiner’s Manual

Complex companies provide a structure that can encourage misbehavior. They provide many settings where misconduct is possible. They isolate those settings in departments and in locations around a city, a country, or the world. This isolation, in turn, means that information about what one part of a company is doing might be unknown in another part. All this reduces the risk that misbehavior will be detected and punished. The larger a company grows, the more specialized its subunits tend to become, and this specialization thereby breeds a higher risk of fraud. An internally diversified company might have few employees who fully understand the detailed workings.

Additionally, specialization tends to hide illegal activities, especially where a firm’s tasks are kept separate and unrelated. Employees cannot gather knowledge about all the particulars of how a firm works. This protects a company from the effects of personnel turnover and leaks of information because no employee knows all the details of the company. The same secrecy, however, raises the chances for misconduct.

Question 3

The managements from several IT consulting firms conspire to take turns submitting the lowest bids for all contracts in their area; this is considered an organizational crime.

A. True
B. False

Answer 3

A. True

See pages 4.214 in the Fraud Examiner’s Manual

Organizational crime is that which is committed by businesses, particularly corporations, and the government. In contrast, occupational crime involves illegal actions committed by individuals during their occupation. An antitrust offense, such as bid rigging or price fixing, would be an organizational crime; accepting or offering bribes is an occupational offense.

Organizational crime occurs in the context of complex relationships and expectations among boards of directors, executives, and managers on one hand and among parent corporations, corporate divisions, and subsidiaries on the other.

Question 4

A behaviorist view of the workplace advocates the use of incentive programs and task-related bonuses to deter employees from ethical and legal violations.

A. True
B. False

Answer 4

A. True

See pages 4.103-4.104 in the Fraud Examiner’s Manual

Emotions, according to behavioral pioneer B. F. Skinner, are a predisposition for people’s actions. Since the emotional associations of any event are important factors in conditioning behavior, the associations can be manipulated in conditioning the behavior. The behaviorist view proposes that, when managers are faced with disgruntled employees, they can modify these emotional circumstances with adequate compensation and recognition of workers’ accomplishments. Incentive programs and task-related bonuses follow this principle, assuming that employees who feel challenged and rewarded by their jobs will produce more work at a higher quality and are less likely to violate the law.

Question 5

According to the social control theory, the more important that social relationships are to a person, the less likely it is that the person will commit crimes.

A. True
B. False

Answer 5

A. True

See pages 4.125 in the Fraud Examiner’s Manual

According to Travis Hirschi, social control theory “assumes the bond of affection for conventional persons is a major deterrent to crime. The stronger this bond, the more likely the person is to take it into account when and if he contemplates a criminal act.” The theory suggests that people confronted with the possibility of violating a law are likely to ask themselves questions such as, “What will my family or friends think if they find out?” Individuals believe that other people whose opinions are important to them will be disappointed or ashamed, and to the extent that they care deeply that these people will feel this way, they will be deterred from committing a criminal act.

Question 6

According to the differential reinforcement theory, behavior is strengthened through positive or negative reinforcement and weakened through punishment.

A. True
B. False

Answer 6

A. True

See pages 4.126 in the Fraud Examiner’s Manual

According to the differential reinforcement theory, people learn social behavior by operant conditioning—behavior controlled by stimuli that occur after the behavior. Behavior is reinforced when rewards are gained (positive reinforcement) or punishment is avoided (negative reinforcement). It is weakened by negative stimuli (punishment) and loss of reward (punishment). Whether deviant or criminal behavior begins or persists depends on the degree to which it has been rewarded or punished, as well as the rewards or punishments attached to its alternatives.

Question 7

To show appreciation for an employee’s hard work, a manager exempts the individual from several undesirable administrative tasks. This is an example of positive reinforcement.

A. True
B. False

Answer 7

B. False

See pages 4.102 in the Fraud Examiner’s Manual

Reinforcement and punishment of behavior are distinguished by the way that positive and negative forces are applied. A positive reinforcement presents a positive stimulus in exchange for the desired response. For example, a parent might say to a child, “You have cleaned your room. Good. Here is the key to the car.” The behavior (cleaning) is reinforced by the awarding of the positive stimulus (the car key). In contrast, a negative reinforcement withdraws a negative stimulus in exchange for the desired response. Continuing the example, the parent might say, “I will stop hassling you if you clean this room.” The negative stimulus (hassling) is withdrawn when the appropriate behavior is performed.

Question 8

As a strategy to control crime, _________ is designed to achieve conformity to the law by providing economic incentives for voluntary adherence to the law and using administrative efforts to control violations before they occur.

A. Prevention
B. Deterrence
C. Compliance
D. None of the above

Answer 8

C. Compliance

See pages 4.229 in the Fraud Examiner’s Manual

As a strategy to control crime, compliance is designed to achieve conformity to the law without having to detect, process, or penalize violators. Compliance systems provide economic incentives for voluntary compliance to the laws and use administrative efforts to control violations before they occur.

However, compliance strategies have been criticized by some criminologists. These experts believe that such strategies have little effect, as sanctions are imposed after the infraction occurs. Since economic penalties are common punishments for violators, these penalties are of little consequence in the case of large, wealthy corporations.

Question 9

According to Occupational Fraud 2022: A Report to the Nations, what was the MOST COMMON behavioral red flag displayed by perpetrators prior to the discovery of their frauds?

A. Complaining about lack of authority
B. Divorce or family problems
C. Living beyond their means
D. Addiction problems

Answer 9

C. Living beyond their means

See pages 4.265 in the Fraud Examiner’s Manual

As part of the study for Occupational Fraud 2022: A Report to the Nations, survey respondents were presented with a list of common warning signs and asked which, if any, were displayed by the perpetrator prior to the discovery of the fraud. The most frequently cited behavioral red flag in the reported cases involved fraudsters living beyond their financial means. This warning sign was noted in 39% of all cases in the study.

Question 10

Human beings’ innate instinct to do as they are instructed and obey authority figures can result in otherwise ethical employees committing a crime on their organization’s behalf.

A. True
B. False

Answer 10

A. True

See pages 4.222-4.223 in the Fraud Examiner’s Manual

Organizations display criminogenic tendencies due to their reinforcement of obedience to people in positions of authority. Human beings have an innate instinct to do as they are instructed. Although individuals generally have an internal balance that gives equal weight to obeying authority and adhering to one’s own personal conscience and understanding of right and wrong, certain situations might arise in the workplace that cause obedience to be perceived as the more favorable action. For example, employees might receive a command from someone whom they view as an authority figure that might cause them to take a potentially bad or harmful course of action to comply with the command. Individuals who are otherwise ethical might commit wrongdoing to please management or another figure of authority because they feel they have no other choice.

In hierarchal organizations that encourage obedience and engage in fraudulent behavior at the highest levels, lower-level staff members’ resistance to disobey people in positions of authority can result in them feeling like they must take part in the fraudulent behavior, even when such behavior is inconsistent with their personal moral code. In an experiment conducted by Dr. Stanley Milgram, a social psychologist, over 60% of the participants were willing to shock another person when pushed to do so by an authority figure; thus, it is reasonable to expect that a similar percentage of people will commit fraud when ordered to do so by their superiors in the workplace.

Question 11

Which of the following is NOT one of the ways that businesses rationalize illegal conduct according to Silk and Vogel’s research?

A. Government regulations are unjustified because the additional costs of regulations and bureaucratic procedures significantly decrease profits.
B. Corporate violations that involve large sums of money often target a very small number of victims who are able to absorb the sizable losses.
C. Regulation is unnecessary because the matters being regulated are unimportant.
D. Violations aim to protect the value of stock and ensure an adequate return for stockholders.

Answer 11

B. Corporate violations that involve large sums of money often target a very small number of victims who are able to absorb the sizable losses.

See pages 4.225 in the Fraud Examiner’s Manual

In their research, Silk and Vogel found several beliefs used by businesses to rationalize illegal conduct:

• Government regulations are unjustified because the additional costs of regulations and bureaucratic procedures significantly decrease profits.
• Regulation is unnecessary because the matters being regulated are unimportant.
• Although some corporate violations involve large sums of money, the damage is so spread among a large number of consumers that, individually, there is little loss.
• Violations are caused by economic necessity; they aim to protect the value of stock, to ensure an adequate return for stockholders, and to protect the job security of employees by ensuring the financial stability of the corporation.

Question 12

Cressey found that embezzlers’ offenses are motivated by situations that either threaten their status or threaten to prevent them from achieving a higher status.

A. True
B. False

Answer 12

A. True

See pages 4.234 in the Fraud Examiner’s Manual

Through his research, Cressey found that the non-shareable problems encountered by the people he interviewed arose from situations that could be divided into six basic categories: violation of ascribed obligations, problems resulting from personal failure, business reversals, physical isolation, status gaining, and employer-employee relations. All these situations in some way dealt with status-seeking or status-maintaining activities by the subjects. In other words, the non-shareable problems threatened the status of the subjects or threatened to prevent them from achieving a higher status than the one they occupied at the time of their violation.

Question 13

Which of the following is one of the three elements that have the most influence on crime according to the routine activities theory?

A. The availability of suitable targets
B. The presence of motivated offenders
C. The absence of capable guardians
D. All of the above

Answer 13

D. All of the above

See pages 4.118 in the Fraud Examiner’s Manual

Routine activities theory, a variation of classical theory, asserts that both the motivation to commit crime and the supply of offenders is constant. There will always be a certain number of people, motivated by greed, lust, and other forces, who are inclined toward lawbreaking. The determining factor, particularly in predatory crimes, such as those involving violence and theft, are the activities of potential victims. There are three important elements that influence crime:

• The availability of suitable targets, such as companies and individuals
• The absence of capable guardians, such as auditors and security personnel
• The presence of motivated offenders, such as unhappy or financially challenged employees

Routine activities theory states that crime occurs in specific instances where these three elements come together. For example, it predicts that crime is likely to occur when an employee (i.e., the motivated offender) has access to a company’s payroll (i.e., the suitable target) and there are few controls (i.e., capable guardians) to prevent the employee from embezzling money.

Question 14

According to criminologist Charles McCaghy, _____________ is/are the single most compelling factor behind deviance by organizations.

A. Employee demands
B. Profit pressure
C. Government regulation
D. None of the above

Answer 14

B. Profit pressure

See pages 4.221-4.222 in the Fraud Examiner’s Manual

Criminologist Charles McCaghy says profit pressure is “the single most compelling factor behind deviance by industry, whether it be price fixing, the destruction of competition, or the misrepresentation of a product,” such as making a poor-quality product that will wear out and need to be replaced. Clinard and Yeager say certain industries, such as the drug and chemical businesses, have such severe competition and strong profit motivations due to demands for continual development of new products that they might feel pressured to falsify test data, market new products before their full effects are known, or engage in unethical sales techniques that can have disastrous effects on humans and the environment.

Question 15

White-collar criminals are more likely to be fined than to face prison terms as punishment.

A. True
B. False

Answer 15

A. True

See pages 4.210 in the Fraud Examiner’s Manual

More often than prison, the punishment of choice for white-collar criminals is the imposition of fines. Whereas 6% of the “common criminals” in one notable survey received fines, all the antitrust violators received fines.

Question 16

Which of the following is one of the ways Silk and Vogel found that businesses rationalize illegal or noncompliant conduct?

A. Compliance with government regulations is too costly
B. Violations aim to protect the job security of employees
C. The damage done by violations is spread among a large number of parties
D. All of the above

Answer 16

D. All of the above

See pages 4.225 in the Fraud Examiner’s Manual

In their research, Silk and Vogel found several beliefs used by businesses to rationalize illegal conduct:

• Government regulations are unjustified because the additional costs of regulations and bureaucratic procedures significantly decrease profits.
• Regulation is unnecessary because the matters being regulated are unimportant.
• Although some corporate violations involve large sums of money, the damage is so spread among a large number of consumers that, individually, there is little loss.
• Violations are caused by economic necessity; they aim to protect the value of stock, to ensure an adequate return for stockholders, and to protect the job security of employees by ensuring the financial stability of the corporation.

Question 17

According to Occupational Fraud 2022: A Report to the Nations, most white-collar crime cases are referred to law enforcement for prosecution.

A. True
B. False

Answer 17

A. True

See pages 4.212 in the Fraud Examiner’s Manual

According to Occupational Fraud 2022: A Report to the Nations, the ACFE’s global study on occupational fraud and abuse, 58% of occupational fraud cases were referred to law enforcement for prosecution. Of those that were prosecuted, the majority (44%) pleaded guilty or no contest, and another 22% were convicted at trial. As the data show, most fraud cases brought to a court of law generally result in an unfavorable outcome for the offender.

Question 18

A person’s social status plays no role in their ability to commit white-collar crime.

A. True
B. False

Answer 18

B. False

See pages 4.204 in the Fraud Examiner’s Manual

What is loosely called “class” or “social status” does have an effect on crimes. For example, one defendant used his position as chairperson of a local bank board to set up loans for his ailing wood chip company. The loans would never have been approved without the position’s influence, and the chairperson never reported the loans in the proxy statement to the bank’s shareholders.

Question 19

Which of the following is considered a white-collar crime?

A. An accounting clerk steals incoming payments from customers and makes falsified journal entries to cover their tracks
B. A city official receives kickbacks for tailoring contract requirements to specific vendors
C. A stockbroker profits from trades made based on insider knowledge about a company
D. All of the above

Answer 19

D. All of the above

See pages 4.202 in the Fraud Examiner’s Manual

Although there is no academic consensus, one current definition of white-collar crime is that proposed by Albert J. Reiss, Jr., and Albert Biderman: “White-collar crime violations are those violations of law to which penalties are attached that involve the use of a violator’s position of economic power, influence, or trust in the legitimate economic or political institutional order for the purpose of illegal gain, or to commit an illegal act for personal or organizational gain.”

Question 20

Sociologist Edward Gross has asserted that organizations’ reliance on profit makes them inherently prone to committing fraud.

A. True
B. False

Answer 20

A. True

See pages 4.219 in the Fraud Examiner’s Manual

Sociologist Edward Gross has asserted that all organizations are inherently “criminogenic” (i.e., prone to committing crime), but they are not necessarily criminal. Gross makes this assertion because of the reliance on the bottom line. Without necessarily meaning to, organizations can invite fraud as a means of obtaining goals. Economist Oliver Williamson noted that because of a department’s concern with reaching its goals, managers might maximize their department’s own interests to the detriment of the organization.

Question 21

According to Occupational Fraud 2022: A Report to the Nations, most occupational frauds are committed by ___________; median losses are highest in frauds committed by ___________.

A. Owners/executives; managers
B. Employees; employees
C. Owners/executives; employees
D. Employees; owners/executives

Answer 21

D. Employees; owners/executives

See pages 4.260 in the Fraud Examiner’s Manual

According to Occupational Fraud 2022: A Report to the Nations, staff-level employees commit the most fraud schemes; ACFE’s study indicates that 37% of the cases were perpetrated by nonmanagement-level employees. The research also shows that there is a strong correlation between the fraud perpetrator’s level of authority and the size of the fraud. While owners/executives only committed 23% of the frauds in the study, the schemes committed by these individuals resulted in a median loss of $337,000, which was 2.5 times larger than the median loss caused by managers and 6 times larger than the median loss caused by low-level employees. A significant correlation between authority and fraud loss has been found in every edition of the report dating back to 1996. This correlation likely reflects the fact that high-level fraudsters tend to have greater access to an organization’s assets than low-level personnel. They might also have greater technical ability to commit and conceal fraud, and they may be able to use their authority to override or conceal their crimes in ways that low-level employees cannot.

Question 22

According to the social control theory, an individual considering criminal behavior will likely ask themselves which of the following questions?

A. “What will my family or friends think if they find out?”
B. “What is the legal punishment if I get caught?”
C. “How likely is it that the crime will be detected?”
D. “In what way can I rationalize this behavior?”

Answer 22

A. “What will my family or friends think if they find out?”

See pages 4.125 in the Fraud Examiner’s Manual

According to Travis Hirschi, social control theory “assumes the bond of affection for conventional persons is a major deterrent to crime. The stronger this bond, the more likely the person is to take it into account when and if he contemplates a criminal act.” The theory suggests that people confronted with the possibility of violating a law are likely to ask themselves questions such as, “What will my family or friends think if they find out?” Individuals believe that other people whose opinions are important to them will be disappointed or ashamed, and to the extent that they care deeply that these people will feel this way, they will be deterred from committing a criminal act.

Question 23

Which of the following statements BEST exemplifies the rationalization component of the Fraud Triangle?

A. “I need the money to repay my drug dealer so that no one will find out about my habit.”
B. “I’m confident I won’t get caught.”
C. “Management is dishonest, so why shouldn’t I be?”
D. “I’m in so much debt; I don’t have any other way to pay my bills.”

Answer 23

C. “Management is dishonest, so why shouldn’t I be?”

See pages 4.236 in the Fraud Examiner’s Manual

One side of the Fraud Triangle represents rationalization. Cressey pointed out that rationalization is not an after-the-fact means of justifying a theft that has already occurred. Significantly, rationalization is a necessary component of the crime before it takes place; in fact, it is a part of the motivation for the crime. Because embezzlers do not view themselves as criminals, they must justify their misdeeds before they ever commit them. Examples of rationalizations include “The company owes me,” “No one will really get hurt by such a small amount of missing money,” and “Management is dishonest, so why shouldn’t I be?”

Question 24

The Fraud Triangle hypothesis can be used to explain every instance of fraudulent conduct.

A. True
B. False

Answer 24

B. False

See pages 4.240 in the Fraud Examiner’s Manual

Cressey’s classic Fraud Triangle helps explain the nature of many—but not all—occupational offenders. For example, although academicians have tested his model, it has still not fully found its way into practice in terms of developing fraud prevention programs. Common sense dictates that no one model—not even Cressey’s—fits every situation.

Question 25

According to Occupational Fraud 2022: A Report to the Nations, what is the primary reason why organizations decline to prosecute white-collar crime cases?

A. They determine that prosecution would be too costly.
B. They plan to recover losses civilly.
C. They believe their internal discipline is sufficient.
D. They feel that there is a lack of evidence.

Answer 25

C. They believe their internal discipline is sufficient.

See pages 4.212-4.213 in the Fraud Examiner’s Manual

Once a fraud has been discovered, there are various reasons why organizations choose to handle cases internally versus referring them to law enforcement for prosecution. According to Occupational Fraud 2022: A Report to the Nations, 50% of companies declined to refer cases to law enforcement because they believed their organization’s internal discipline mechanisms were sufficient. Another common reason organizations prefer to handle fraud incidents internally is a fear of negative publicity; 30% of respondents cited this as their primary reason for not referring the case for potential prosecution. A fraud allegation, even if ultimately found to be untrue, could damage an organization’s ability to retain customers and generate revenue in the future. According to the study, 20% of respondents said that prosecution would be too costly, 10% stated that there was a lack of evidence, and 5% preferred to pursue a civil suit.

Question 26

While organizations can directly calculate financial damages and losses resulting from a fraud scheme, it is much more difficult to estimate the indirect costs they might face in the future.

A. True
B. False

Answer 26

A. True

See pages 4.226 in the Fraud Examiner’s Manual

The direct cost of fraud relates to the amount of financial damages and losses resulting from a fraud scheme. While organizations can calculate fraud losses directly, it is much more difficult to estimate the indirect costs associated with fraud.

Question 27

Research has shown that many executives justify illegal behavior as simply being common practice in the business world.

A. True
B. False

Answer 27

A. True

See pages 4.221 in the Fraud Examiner’s Manual

In his research, Dr. Gilbert Geis found that individuals are often trained in illegal behavior as part of their occupational roles. Similarly, Schrager and Short say criminal behavior stems more from the roles an employee is expected to fulfill than from individual pathology. Many executives know their behavior is illegal but tend to justify their behavior as simply being common practice in the business world. Clinard and Yeager believed that, in rationalizing their behavior, corporations follow a general tendency to obey laws selectively (i.e., obeying according to situational needs and determined by factors like social class and occupation).

Question 28

The theory of differential association is used frequently to explain white-collar criminality. Which of the following is one of the assertions or principles of differential association?

A. Criminal behavior is an expression of an individual’s general needs and values but is not explained by them.
B. People are genetically predisposed to be criminals.
C. Criminal behavior is acquired through participation with large groups in an impersonal setting.
D. Learning is the same as imitation.

Answer 28

A. Criminal behavior is an expression of an individual’s general needs and values but is not explained by them.

See pages 4.123-4.124 in the Fraud Examiner’s Manual

The theory of differential association was developed by criminologist Edwin Sutherland. It states that: (1) criminal behavior is learned; (2) it is learned from other people in a process of communication; (3) criminal behavior is acquired through participation with intimate personal groups; (4) the learning process includes the shaping of motives, drives, rationalizations, and attitudes; (5) the directions of motives are learned from the favorable or unfavorable interpretations of applicable laws; (6) a person becomes a criminal because of an excess of conclusions favorable to violation of the law over conclusions unfavorable to violation of the law; (7) differential association may vary in frequency, duration, priority, and intensity; (8) learning criminal behavior involves all the mechanisms of other learning; (9) learning differs from imitation; and (10) while criminal behavior is an expression of general needs and values, it is not explained by these needs and values.

Question 29

According to Diane Vaughan, an employee who is truly loyal to a company would never commit fraud on the company’s behalf.

A. True
B. False

Answer 29

B. False

See pages 4.219 in the Fraud Examiner’s Manual

Diane Vaughan, the author of Controlling Unlawful Organizational Behavior: Social Structure and Corporate Misconduct, believes that organizations can be criminogenic because they encourage loyalty. This, in turn, causes company personnel to sometimes perceive that the organization might be worth committing crime for to maintain and further its goals. The use of formal and informal rewards and punishments, plus social activities and pressures to participate, link an employee’s needs and goals to the company’s success. When a company achieves its goals, its employees prosper. This is to mean that the interests of an organization and its employees coincide, which might cause unlawful conduct to be committed by individuals on the organization’s behalf.

Question 30

An accounting clerk stealing incoming customer payments is an example of:

A. Both organizational crime and occupational crime
B. Neither organizational crime nor occupational crime
C. Organizational crime
D. Occupational crime

Answer 30

D. Occupational crime

See pages 4.214 in the Fraud Examiner’s Manual

Organizational crime is that which is committed by businesses, particularly corporations, and the government. In contrast, occupational crime involves illegal actions committed by individuals during their occupation. For example, an accounting clerk stealing incoming customer payments would be considered an occupational crime. An antitrust offense, such as bid rigging or price fixing, would be an organizational crime.

Organizational crime occurs in the context of complex relationships and expectations among boards of directors, executives, and managers on one hand and among parent corporations, corporate divisions, and subsidiaries on the other.

Question 31

The term occupational crime covers which of the following types of white-collar offenses?

A. Crimes by individuals
B. Crimes by officials
C. Crimes by professionals
D. All of the above

Answer 31

D. All of the above

See pages 4.230-4.231 in the Fraud Examiner’s Manual

Gary Green, in refining the white-collar crime concept, uses the term occupational crime, which he defines as “any act punishable by law which is committed through opportunity created in the course of an occupation which is legal.” Green further delineates occupational crime into four categories:

• Crimes for the benefit of an employing organization (organizational occupational crime)
• Crimes by officials through exercise of their government-based authority (government authority occupational crime)
• Crimes by professionals in their capacity as professionals (professional occupational crime)
• Crimes by individuals as individuals

Question 32

Most people who commit occupational fraud are repeat offenders with prior criminal records.

A. True
B. False

Answer 32

B. False

See pages 4.263-4.264 in the Fraud Examiner’s Manual

The ACFE’s research indicates that most occupational fraudsters have no prior history of criminal fraud convictions. Only 6% of the perpetrators studied in Occupational Fraud 2022: A Report to the Nations had previously been convicted of a fraud-related offense, which is consistent with the findings in every study dating back to 1996. This suggests that most occupational fraudsters are first-time offenders. Additionally, 83% of the fraudsters had never been punished or terminated by an employer for fraud or abuse.

Question 33

ccording to B. F. Skinner’s behaviorist theories, destructive workplace behavior, such as fraud, can be deterred by rewarding honesty and openness.

A. True
B. False

Answer 33

A. True

See pages 4.104 in the Fraud Examiner’s Manual

Skinner suggests conditioning incompatible behavior that interferes with the person’s undesired acts. Instead of punishing a child’s emotional tantrums, for example, the behaviorist rewards the child for controlling emotional outbursts, driving the tantrums into extinction by not responding and reinforcing the stoical behavior. A destructive behavior is offset by an incompatible productive one. Since fraud involves dishonesty, secretiveness, and antagonistic behaviors, an astute manager finds ways to reward the opposite behaviors—honesty, openness, and cooperation.

Question 34

According to Diane Vaughan, encouraging employee loyalty through social interactions, such as company parties and social functions, can contribute to the organization being more inherently inclined to commit crime.

A. True
B. False

Answer 34

A. True

See pages 4.219 in the Fraud Examiner’s Manual

Organizations can be criminogenic because they encourage loyalty. According to Diane Vaughan, the reasons are that:

• The organization tends to recruit and attract similar individuals.
• Rewards are given to those who display characteristics of unyielding loyalty.
• Long-term loyalty is encouraged through company retirement and benefits.
• Loyalty is encouraged through social interaction, such as company parties and social functions.
• Frequent transfers and long working hours encourage isolation from other groups.
• Specialized job skills can discourage personnel from seeking employment elsewhere.

In addition, organizations are more inherently prone to committing crime when management links employees’ needs and goals to the company’s success using formal and informal rewards and punishments, plus social activities and pressures to participate. When a company achieves its goals, its employees prosper. This is to mean that the interests of an organization and its employees coincide, which might cause unlawful conduct to be committed by individuals on the organization’s behalf.

Question 35

According to the ACFE’s research, employees are the MOST COMMON source of tips that lead to the detection of fraud.

A. True
B. False

Answer 35

A. True

See pages 4.251 in the Fraud Examiner’s Manual

Employees are a valuable source of information for discovering potential fraud. Occupational Fraud 2022: A Report to the Nations shows that half of all tips (55%) that led to the detection of fraud were provided by employees of the victim organizations. This is more than the amount provided by any other source.

Question 36

According to rational choice theory, which of the following actions can deter crime?

A. Increasing the potential for financial gain
B. Reducing opportunities for criminal activity
C. Exerting external pressure and influence
D. Decreasing personal risk to the perpetrator

Answer 36

B. Reducing opportunities for criminal activity

See pages 4.117 in the Fraud Examiner’s Manual

Rational choice theory is the theory that the decision to commit a crime is a rational and careful choice on the perpetrator’s part with the goal of an intended benefit. Before committing a crime, the offender performs a cost-benefit analysis that “weighs the chances of getting caught, the severity of the expected penalty and the value to be gained by committing the act.” Criminal activity will only occur when the opportunity to engage in it is present.

Rational choice theory presents crime as a conscious choice that must be met with reduced opportunities for criminal activity and increased personal risk for deterrence methods to be successful.

Question 37

According to Occupational Fraud 2022: A Report to the Nations, only a small percentage of perpetrators are punished when they are disciplined internally.

A. True
B. False

Answer 37

B. False

See pages 4.212 in the Fraud Examiner’s Manual

According to Occupational Fraud 2022: A Report to the Nations, of perpetrators who were disciplined internally, 61% were terminated, 12% were either placed on probation or suspended, and 11% were permitted or required to resign.

Question 38

Research shows that a criminal’s social status or class is the determining aspect of white-collar crime.

A. True
B. False

Answer 38

B. False

See pages 4.204 in the Fraud Examiner’s Manual

Of all factors, organizational opportunity remains the determining aspect of white-collar crime. Research shows that a criminal’s position in an organization and their ability to organize the scheme have far more bearing on the crime than social status or class alone.

Question 39

According to the theory of differential association that is used to explain white-collar criminality, learning criminal behavior involves mechanisms that are different from those used in other types of learning.

A. True
B. False

Answer 39

B. False

See pages 4.123-4.124 in the Fraud Examiner’s Manual

The theory of differential association was developed by criminologist Edwin Sutherland. It states that: (1) criminal behavior is learned; (2) it is learned from other people in a process of communication; (3) criminal behavior is acquired through participation with intimate personal groups; (4) the learning process includes the shaping of motives, drives, rationalizations, and attitudes; (5) the directions of motives are learned from the favorable or unfavorable interpretations of applicable laws; (6) a person becomes a criminal because of an excess of conclusions favorable to violation of the law over conclusions unfavorable to violation of the law; (7) differential association may vary in frequency, duration, priority, and intensity; (8) learning criminal behavior involves all the mechanisms of other learning; (9) learning differs from imitation; and (10) while criminal behavior is an expression of general needs and values, it is not explained by these needs and values.

Question 40

Which of the following is an example of the non-shareable financial need component of the Fraud Triangle?

A. Gambling debts
B. Addiction problems
C. Credit card debt from excessive shopping
D. All of the above

Answer 40

D. All of the above

See pages 4.232-4.233 in the Fraud Examiner’s Manual

One side of the Fraud Triangle represents a perceived non-shareable financial need. As Cressey explained, “In all cases of trust violation encountered, the violator considered that a financial problem which confronted him could not be shared with persons who, from a more objective point of view, probably could have aided in the solution of the problem.” In addition to being non-shareable, the problem that motivates the fraudster is described as “financial” because these are problems that can generally be solved by the theft of cash or other assets. Examples of such situations include financial needs caused by gambling debts, addiction problems, or credit card debt from excessive shopping.

Question 41

According to Occupational Fraud 2022: A Report to the Nations, more frauds are uncovered by external audit than by any other form of detection.

A. True
B. False

Answer 41

B. False

See pages 4.250 in the Fraud Examiner’s Manual

One of the principal goals of the ACFE’s research is to identify how past frauds were detected so that organizations can apply that knowledge to their future anti-fraud efforts. Occupational Fraud 2022: A Report to the Nations shows that the leading detection methods are tips, internal audit, and management review. This finding is not surprising, as these have been the three most common means of detecting occupational fraud in every edition of the report since 2010. Collectively, these three detection methods were cited in 70% of the cases in the ACFE’s most recent study. Tips were by far the most common means of detection for 42% of cases—more than internal audit (16%) and management review (12%) combined. External audit only accounted for 4% of detected frauds.

Question 42

According to Diane Vaughan, linking employees’ needs and goals to the company’s success can encourage unlawful conduct by individuals on the organization’s behalf.

A. True
B. False

Answer 42

A. True

See pages 4.219 in the Fraud Examiner’s Manual

Diane Vaughan, the author of Controlling Unlawful Organizational Behavior: Social Structure and Corporate Misconduct, believes that organizations can be criminogenic because they encourage loyalty. This, in turn, causes company personnel to sometimes perceive that the organization might be worth committing crime for to maintain and further its goals. The use of formal and informal rewards and punishments, plus social activities and pressures to participate, link an employee’s needs and goals to the company’s success. When a company achieves its goals, its employees prosper. This is to mean that the interests of an organization and its employees coincide, which might cause unlawful conduct to be committed by individuals on the organization’s behalf.

Question 43

Social control theory suggests that the less attached an individual is to social institutions and groups, the greater the chances that the individual violates the law.

A. True
B. False

Answer 43

A. True

See pages 4.124-4.125 in the Fraud Examiner’s Manual

Essentially, social control theory argues that the institutions of the social system train and pressure those with whom they are in contact into patterns of conformity. Schools prepare for adjustment in society; peers force the ethos of success and conventional behavior; and parents strive to instill law-abiding habits in their children—even parents who themselves sometimes violate the rules. The theory suggests that if a person fails to become attached to the variety of control agencies of the society, that person’s chances of violating the law increase.

Question 44

According to Occupational Fraud 2022: A Report to the Nations, which of the three major categories of occupational fraud is the MOST COMMON?

A. Identity theft
B. Corruption
C. Financial statement fraud
D. Asset misappropriation

Answer 44

D. Asset misappropriation

See pages 4.247 in the Fraud Examiner’s Manual

All occupational frauds fall into one of three major categories: asset misappropriation, corruption, or financial statement fraud. Of these categories, asset misappropriation is by far the most common, occurring in 86% of the cases studied in Occupational Fraud 2022: A Report to the Nations. However, asset misappropriation is also the least costly, causing a median loss of $100,000. Corruption schemes are the next most common form of occupational fraud, with 50% of the cases in the study involving some form of corrupt act. These schemes resulted in a median loss to the victim organizations of $150,000. The least common and most costly form of occupational fraud is financial statement fraud, which occurred in 9% of the cases and caused a median loss of $593,000.

Question 45

Through his research, Dr. Steve Albrecht found which of the following personal characteristics to be the top-ranked motivating factor to commit fraud?

A. Living beyond means
B. Dislike of company
C. Criminal personality
D. Dislike of boss

Answer 45

A. Living beyond means

See pages 4.241 in the Fraud Examiner’s Manual

In Dr. Steve Albrecht’s study, the researchers gave internal auditors at companies that had experienced frauds two sets of 25 motivating factors and asked which factors were present in the frauds they had dealt with. Participants were asked to rank these factors on a seven-point scale indicating the degree to which each factor existed in their specific frauds. Based on this study, the top three most highly ranked factors from the list of personal characteristics were (1) living beyond their means, (2) an overwhelming desire for personal gain, and (3) high personal debt.

Question 46

According to Occupational Fraud 2022: A Report to the Nations, which of the three major categories of occupational fraud has the highest median loss?

A. Financial statement fraud
B. Asset misappropriation
C. Corruption
D. Identity theft

Answer 46

A. Financial statement fraud

See pages 4.247 in the Fraud Examiner’s Manual

All occupational frauds fall into one of three major categories: asset misappropriation, corruption, or financial statement fraud. Of these categories, asset misappropriation is by far the most common, occurring in 86% of the cases studied in Occupational Fraud 2022: A Report to the Nations. However, asset misappropriation is also the least costly, causing a median loss of $100,000. Corruption schemes are the next most common form of occupational fraud, with 50% of the cases in the study involving some form of corrupt act. These schemes resulted in a median loss to the victim organizations of $150,000. The least common and most costly form of occupational fraud is financial statement fraud, which occurred in 9% of the cases and caused a median loss of $593,000.

Question 47

Which of the following represents one of the sides of the Fraud Triangle?

A. Rationalization
B. Perceived opportunity
C. Perceived non-shareable financial need
D. All of the above

Answer 47

D. All of the above

See pages 4.232 in the Fraud Examiner’s Manual

While working on his Ph.D. in the 1940s, Donald R. Cressey focused his research on embezzlers. His findings resulted in a hypothesis that, over the years, has become known as the Fraud Triangle. One side of the triangle represents a perceived non-shareable financial need. The second side represents perceived opportunity, and the final side represents rationalization. The role of the non-shareable problem is important. Cressey said, “When the trust violators were asked to explain why they refrained from violation of other positions of trust they might have held at previous times, or why they had not violated the subject position at an earlier time, those who had an opinion expressed the equivalent of one or more of the following quotations: (a) ‘There was no need for it like there was this time.’ (b) ‘The idea never entered my head.’ (c) ‘I thought it was dishonest then, but this time it did not seem dishonest at first.’ ”

Question 48

Systems based on the compliance theory of crime control attempt to achieve conformity to the law without having to detect, process, or penalize violators.

A. True
B. False

Answer 48

A. True

See pages 4.229-4.230 in the Fraud Examiner’s Manual

Enforcement strategies include two main theories: compliance and deterrence. Compliance is designed to achieve conformity to the law without having to detect, process, or penalize violators. Compliance systems provide economic incentives for voluntary compliance to the laws and use administrative efforts to control violations before they occur. In contrast, deterrence is designed to detect law violations, determine who is responsible, and penalize offenders to deter future violations. Deterrence systems try to control the immediate behavior of individuals, not the long-term behaviors targeted by compliance systems.

Question 49

Edward Gross and other criminologists have asserted that organizations are inherently:

A. Exploitative
B. Averse to misconduct
C. Criminogenic
D. None of the above

Answer 49

C. Criminogenic

See pages 4.219 in the Fraud Examiner’s Manual

Sociologist Edward Gross has asserted that all organizations are inherently “criminogenic” (i.e., prone to committing crime), but they are not necessarily criminal. Without necessarily meaning to, organizations can invite fraud as a means of obtaining goals. Gross makes this assertion because of the reliance on the bottom line.

Question 50

Efforts to control corporate crime generally include which of the following approaches?

A. Government intervention
B. Consumer action
C. Voluntary changes in corporate attitudes
D. All of the above

Answer 50

D. All of the above

See pages 4.227 in the Fraud Examiner’s Manual

Efforts to control corporate crime follow three approaches: voluntary change in corporate attitudes and structure; strong intervention by the government to force changes in corporate structure, accompanied by legal measures to deter or punish; or consumer action. Voluntary changes would involve the development of stronger business ethics and certain corporate organizational reforms. Government controls might involve corporate chartering, deconcentration and divestiture, larger and more effective enforcement staffs, stiffer penalties, wider use of publicity as a sanction, and possibly the nationalization of corporations. Consumer group pressures might be exerted through lobbying, selective buying, boycotts, and the establishment of large consumer cooperatives.

Question 51

The two primary strategies to control corporate criminal behavior are:

A. Compliance and deterrence
B. Deterrence and enforcement
C. Enforcement and compliance
D. None of the above

Answer 51

A. Compliance and deterrence

See pages 4.229-4.230 in the Fraud Examiner’s Manual

Enforcement strategies include two main theories: compliance and deterrence. Compliance is designed to achieve conformity to the law without having to detect, process, or penalize violators. Compliance systems provide economic incentives for voluntary compliance to the laws and use administrative efforts to control violations before they occur. In contrast, deterrence is designed to detect law violations, determine who is responsible, and penalize offenders to deter future violations. Deterrence systems try to control the immediate behavior of individuals, not the long-term behaviors targeted by compliance systems.

Question 52

White-collar defendants are less likely to insist on a trial than other offenders.

A. True
B. False

Answer 52

B. False

See pages 4.208 in the Fraud Examiner’s Manual

White-collar defendants are more likely to insist on a trial than other offenders. In at least 90% of criminal cases, defendants will plead guilty, avoiding the expense and effort of a trial. But in one notable study, more than 18% of white-collar defendants (as opposed to the usual 10%) pleaded “not guilty.” In cases like bank embezzlement, which are usually “simple cases with clear evidence,” plea bargains are easily negotiated and “prosecutors may actively seek guilty pleas.”

Question 53

A positive reinforcement presents a positive stimulus in exchange for the desired response.

A. True
B. False

Answer 53

A. True

See pages 4.102-4.103 in the Fraud Examiner’s Manual

Reinforcement and punishment of behavior are distinguished by the way that positive and negative forces are applied. A positive reinforcement presents a positive stimulus in exchange for the desired response. For example, a parent might say to a child, “You have cleaned your room. Good. Here is the key to the car.” The behavior (cleaning) is reinforced by the awarding of the positive stimulus (the car key). In contrast, a negative reinforcement withdraws a negative stimulus in exchange for the desired response. Continuing the example, the parent might say, “I will stop hassling you if you clean this room.” The negative stimulus (hassling) is withdrawn when the appropriate behavior is performed.

In an act of punishment, the punisher applies a negative stimulus when faced with an undesired behavior. A parent, seeing that their child has failed to clean their room, adds “wash the car” to the list of chores the child must do. Punishment may also be administered by withdrawing a positive stimulus, such as, “Your room is still filthy, so you cannot use the car.”

Question 54

According to Dr. Steve Albrecht’s Fraud Scale model, the variables that drive the occurrence of occupational fraud include:

A. Situational pressure
B. Personal integrity
C. Perceived opportunity
D. All of the above

Answer 54

D. All of the above

See pages 4.242 in the Fraud Examiner’s Manual

Dr. Steve Albrecht developed the Fraud Scale, which included the components of situational pressures, perceived opportunities, and personal integrity. The Fraud Scale shows that when situational pressures and perceived opportunities are high and personal integrity is low, occupational fraud is much more likely to occur than when the opposite is true.

Question 55

Which of the following is TRUE according to the differential reinforcement theory?

A. Behavior is reinforced by negative stimuli.
B. Behavior is weakened when punishment is avoided.
C. Behavior is reinforced when rewards are gained.
D. Behavior is weakened by positive stimuli.

Answer 55

C. Behavior is reinforced when rewards are gained.

See pages 4.126 in the Fraud Examiner’s Manual

According to the differential reinforcement theory, people learn social behavior by operant conditioning—behavior controlled by stimuli that occur after the behavior. Behavior is reinforced when rewards are gained (positive reinforcement) or punishment is avoided (negative reinforcement). It is weakened by negative stimuli (punishment) and loss of reward (punishment). Whether deviant or criminal behavior begins or persists depends on the degree to which it has been rewarded or punished, as well as the rewards or punishments attached to its alternatives.

Question 56

Criminal activities involving corporations stem primarily from the organization’s subcultures and values rather than from the attitudes and characteristics of the individuals committing the crimes.

A. True
B. False

Answer 56

A. True

See pages 4.216 in the Fraud Examiner’s Manual

Criminal activities involving corporations often originate from organizational subcultures and values and are developed over time. While individuals execute the criminal enterprise, their attitudes and characteristics are of little importance, as an organization will replace those employees unwilling to participate in a criminal activity.

Question 57

Dr. Steve Albrecht’s research indicates that the personal characteristics MOST COMMON among fraud perpetrators are a tendency to live beyond their means, an overwhelming desire for personal gain, and high personal debt.

A. True
B. False

Answer 57

A. True

See pages 4.241 in the Fraud Examiner’s Manual

In Dr. Steve Albrecht’s study, the researchers gave internal auditors at companies that had experienced frauds two sets of 25 motivating factors and asked which factors were present in the frauds they had dealt with. Participants were asked to rank these factors on a seven-point scale indicating the degree to which each factor existed in their specific frauds. Based on this study, the top three most highly ranked factors from the list of personal characteristics were (1) living beyond their means, (2) an overwhelming desire for personal gain, and (3) high personal debt.

Question 58

Which of the following behavioral responses involves withdrawing a positive stimulus or applying a negative stimulus in response to an undesired behavior?

A. Positive reinforcement
B. Negative reinforcement
C. Punishment
D. None of the above

Answer 58

C. Punishment

See pages 4.102-4.103 in the Fraud Examiner’s Manual

Reinforcement and punishment of behavior are distinguished by the way that positive and negative forces are applied. A positive reinforcement presents a positive stimulus in exchange for the desired response. For example, a parent might say to a child, “You have cleaned your room. Good. Here is the key to the car.” The behavior (cleaning) is reinforced by the awarding of the positive stimulus (the car key). In contrast, a negative reinforcement withdraws a negative stimulus in exchange for the desired response. Continuing the example, the parent might say, “I will stop hassling you if you clean this room.” The negative stimulus (hassling) is withdrawn when the appropriate behavior is performed.

In an act of punishment, the punisher applies a negative stimulus when faced with an undesired behavior. A parent, seeing that their child has failed to clean their room, adds “wash the car” to the list of chores the child must do. Punishment may also be administered by withdrawing a positive stimulus, such as, “Your room is still filthy, so you cannot use the car.”

Question 59

According to Occupational Fraud 2022: A Report to the Nations, which of the following is the MOST COMMON internal response an organization will take when management discovers that one of its employees has committed fraud?

A. Suspension
B. Probation
C. Permitted resignation
D. Termination

Answer 59

D. Termination

See pages 4.212 in the Fraud Examiner’s Manual

According to Occupational Fraud 2022: A Report to the Nations, of perpetrators who were disciplined internally, 61% were terminated, 12% were either placed on probation or suspended, and 11% were permitted or required to resign.

Question 60

According to Occupational Fraud 2022: A Report to the Nations, having job rotations or mandatory vacations among employees can help reduce the financial impact of fraud on an organization.

A. True
B. False

Answer 60

A. True

See pages 4.258-4.259 in the Fraud Examiner’s Manual

As part of the study for Occupational Fraud 2022: A Report to the Nations, the ACFE compared the losses experienced by the victim organizations that had specific controls in place against the losses experienced by those that had not implemented each control. Interestingly, the presence of every control analyzed was correlated with lower fraud losses. For example, organizations that had job rotations and mandatory vacations in place experienced a 54% reduction in fraud losses. Job rotations and mandatory vacations were also associated with one of the most significant reductions in fraud duration, indicating that this control is among the most useful tools in the fight against fraud.

Question 61

Dr. Steve Albrecht conducted research that focused on fraud-related red flags in two principal categories: perpetrator characteristics and organizational environment. Which of the following was the organizational-environment factor that was most present in the frauds studied?

A. Lack of clear lines of authority
B. Too much trust in key employees
C. Inadequate attention to details
D. None of the above

Answer 61

B. Too much trust in key employees

See pages 4.240-4.241 in the Fraud Examiner’s Manual

Dr. Steve Albrecht’s research included an examination of red flags or indicators of occupational fraud and abuse that fell into two principal categories: perpetrator characteristics and organizational environment. The purpose of the study was to determine which of the red flags were most important to the commission (and therefore to the detection and prevention) of fraud. The researchers gave study participants two sets of 25 motivating factors and asked which factors were present in the frauds they had dealt with. Participants were asked to rank these factors on a seven-point scale indicating the degree to which each factor existed in their specific frauds.

The ten most highly ranked factors from the list dealing with organizational environment were:

1. Placing too much trust in key employees
2. Lack of proper procedures for authorization of transactions
3. Inadequate disclosures of personal investments and incomes
4. No separation of authorization of transactions from the custody of related assets
5. Lack of independent checks on performance
6. Inadequate attention to details
7. No separation of custody of assets from the accounting for those assets
8. No separation of duties between accounting functions
9. Lack of clear lines of authority and responsibility
10. Department that is not frequently reviewed by internal auditors

Question 62

In the area of criminological theory, ____________ is the theory that tries to prevent crime by using the threat of criminal sanctions.

A. Deterrence
B. Punishment
C. Adherence
D. None of the above

Answer 62

A. Deterrence

See pages 4.230 in the Fraud Examiner’s Manual

As a strategy to control crime, deterrence is designed to detect law violations, determine who is responsible, and penalize offenders to deter future violations. Deterrence systems try to control the immediate behavior of individuals, not the long-term behaviors targeted by compliance systems. Deterrence theory assumes that humans are rational in their behavioral patterns. Humans seek profit and pleasure while they try to avoid pain. Deterrence assumes that an individual’s propensity toward lawbreaking is in inverse proportion to the perceived probability of negative consequences.

Question 63

According to Occupational Fraud 2022: A Report to the Nations, more occupational frauds are committed by men than by women.

A. True
B. False

Answer 63

A. True

See pages 4.262 in the Fraud Examiner’s Manual

A sizeable majority of the fraudsters studied in Occupational Fraud 2022: A Report to the Nations (73%) were males. Men also caused larger median losses ($125,000) than females ($100,000). Men are perpetrating an increasing percentage of frauds, but the gap in losses between men and women has narrowed.

Question 64

Criminological research has generally concluded that punishing an individual for undesirable behavior will temporarily suppress the behavior if the punishment is applied directly and continuously, but the behavior will likely return once the punishment is discontinued.

A. True
B. False

Answer 64

A. True

See pages 4.102 in the Fraud Examiner’s Manual

Behavioral studies, such as those conducted by B. F. Skinner, show that punishment is the least effective method of changing behavior. According to Skinner, punishment brings a temporary suppression of the behavior but only with constant supervision and application. In repeated experiments, Skinner found that punishment—either applying a negative stimulus or taking away a positive one—effectively extinguished a subject’s behavior, but the behavior returned when the punishment was discontinued. In other words, the subject would suppress the behavior if the punishment was applied directly and continuously, but as soon as the punishment was withdrawn for a while, the behavior was attempted again; if there was no punishment following the attempt, the subject began to behave as before.

Question 65

According to a study conducted by Dr. Steve Albrecht, occupational crime perpetrators who were interested primarily in “beating the system” committed larger frauds than those who believed their pay was not adequate.

A. True
B. False

Answer 65

A. True

See pages 4.243 in the Fraud Examiner’s Manual

According to Dr. Steve Albrecht, perpetrators who were interested primarily in “beating the system” committed larger frauds. However, perpetrators who believed their pay was not adequate committed primarily small frauds. Lack of separation of responsibilities, placing undeserved trust in key employees, imposing unrealistic goals, and operating on a crisis basis were all pressures or weaknesses associated with large frauds. College graduates were less likely to spend their illegal income on extravagant vacations, recreational property, extramarital relationships, and expensive automobiles. Finally, those with lower salaries were more likely to have a prior criminal record.

Question 66

Which of the following is TRUE regarding organizational structure?

A. Misbehavior is more likely to be detected in a complex organizational structure than in a simple organizational structure
B. Companies with departments that are isolated geographically have a reduced risk of fraud
C. The existence of many specialized departments within a company generally increases the overall risk of fraud within the organization
D. All of the above

Answer 66

C. The existence of many specialized departments within a company generally increases the overall risk of fraud within the organization

See pages 4.217 in the Fraud Examiner’s Manual

Complex companies provide a structure that can encourage misbehavior. They provide many settings where misconduct is possible. They isolate those settings in departments and in locations around a city, a country, or the world. This isolation, in turn, means that information about what one part of a company is doing might be unknown in another part. All this reduces the risk that misbehavior will be detected and punished. The larger a company grows, the more specialized its subunits tend to become, and this specialization thereby breeds a higher risk of fraud. An internally diversified company might have few employees who fully understand the detailed workings.

Additionally, specialization tends to hide illegal activities, especially where a firm’s tasks are kept separate and unrelated. Employees cannot gather knowledge about all the particulars of how a firm works. This protects a company from the effects of personnel turnover and leaks of information because no employee knows all the details of the company. The same secrecy, however, raises the chances for misconduct.

Question 67

The indirect costs often experienced by organizations following a fraud include reduced employee productivity, reputational damage, and a loss of competitive advantage.

A. True
B. False

Answer 67

A. True

See pages 4.226 in the Fraud Examiner’s Manual

While organizations can calculate fraud losses directly, it is much more difficult to estimate the indirect costs associated with fraud. One of the biggest indirect consequences an organization might experience after a fraud occurs is damage to its reputation. With the ability of information to spread quickly over the internet and social media sites, all it takes is a rumor of misconduct within an organization for reputational harm to occur. Businesses that enjoyed a competitive advantage in a certain industry might lose their leverage over other competitors in the market. In addition, employees might lose confidence in the security of their jobs in the aftermath of a fraud, leading to a loss of productivity within an organization. Since it is impossible to monetize these indirect costs or determine how long the ramifications will linger, indirect costs can be a large detriment to victim organizations’ future success.

Question 68

According to the authors of Crimes of the Middle Classes, which of the following factors has contributed to the rising problem of economic crime?

A. The increased opportunity for wrongdoing as a result of advancing information technologies
B. The economy’s increased reliance on credit
C. The distribution of large amounts of money from government programs
D. All of the above

Answer 68

D. All of the above

See pages 4.211 in the Fraud Examiner’s Manual

The authors of Crimes of the Middle Classes propose several factors that have contributed to the rising problem of economic crime:

• The economy increasingly runs on credit, which often means an increase in personal debt. The offenders from a sample often showed serious discrepancies “between their resources and their commitments.”
• New information technologies mean that the opportunity for wrongdoing is growing, and many of the techniques are not widely comprehended by businesses or individuals.
• Government programs distributing large amounts of money make an enticing target for embezzlement.
• The importance of credentials in a professionalized society might influence individuals “to inflate the credentials, or to make them up when they do not exist.” This tendency involves everything from cheating on school entrance exams to falsifying credit applications.
• Most broadly, the authors observe an overarching culture based on affluence and ever-higher levels of success. Media sources, and advertising in general, promise that no one has to settle for second best, prompting those who find themselves running behind to make an attempt to conceal the difference, crossing ethical and sometimes legal lines.

Question 69

Rational choice theory suggests that crime is a conscious decision that can be deterred by reducing opportunities for criminal activity and increasing personal risk to potential perpetrators.

A. True
B. False

Answer 69

A. True

See pages 4.117 in the Fraud Examiner’s Manual

Rational choice theory is the theory that the decision to commit a crime is a rational and careful choice on the perpetrator’s part with the goal of an intended benefit. Criminal activity will only occur when the opportunity to engage in it is present.

Based on this theory, the best way to reduce crime is by making it more difficult to commit. Removing individuals’ opportunities to commit crime should lessen its occurrence. This idea is strongly supported by deterrence methods in the form of target hardening and punishment. Target hardening refers to preventive controls that aim to reduce or avoid the likelihood of a crime occurring. Examples include locking doors, separating duties, physically safeguarding assets, and using online two-factor authentication. Deterrence theory states that punishment should be swift, certain, and severe for it to be an effective deterrent. Thus, if someone in an organization commits fraud and their swift, certain, and severe punishment is made apparent, the rest of the organization will be deterred against committing that crime. Rational choice theory presents crime as a conscious choice that must be met with reduced opportunities for criminal activity and increased personal risk for deterrence methods to be successful.

Question 70

According to B. F. Skinner, which of the following is the MOST EFFECTIVE way to modify a person’s behavior?

A. Punishment
B. Positive reinforcement
C. Ignoring it
D. None of the above

Answer 70

B. Positive reinforcement

See pages 4.102-4.103 in the Fraud Examiner’s Manual

B. F. Skinner concluded that behavior is most effectively modified by managing and altering desires through reinforcement—that is, by replacing destructive behaviors with productive ones instead of trying to punish an already existing impulse.

Further, behavioral studies, such as those conducted by Skinner, show that punishment is the least effective method of changing behavior. According to Skinner, punishment brings a temporary suppression of the behavior but only with constant supervision and application. Punishment is ineffective in manipulating behavior because it works by providing negative consequences—administering penalties and taking away desirables.

Question 71

When ordered by their superiors to commit fraud, many employees will do so even if it conflicts with their personal values, morals, and ethics.

A. True
B. False

Answer 71

A. True

See pages 4.222-4.223 in the Fraud Examiner’s Manual

Organizations display criminogenic tendencies due to their reinforcement of obedience to people in positions of authority. Human beings have an innate instinct to do as they are instructed. Although individuals generally have an internal balance that gives equal weight to obeying authority and adhering to one’s own personal conscience and understanding of right and wrong, certain situations might arise in the workplace that cause obedience to be perceived as the more favorable action. For example, employees might receive a command from someone whom they view as an authority figure that might cause them to take a potentially bad or harmful course of action to comply with the command. Individuals who are otherwise ethical might commit wrongdoing to please management or another figure of authority because they feel they have no other choice.

In hierarchal organizations that encourage obedience and engage in fraudulent behavior at the highest levels, lower-level staff members’ resistance to disobey people in positions of authority can result in them feeling like they must take part in the fraudulent behavior, even when such behavior is inconsistent with their personal moral code. In an experiment conducted by Dr. Stanley Milgram, a social psychologist, over 60% of the participants were willing to shock another person when pushed to do so by an authority figure; thus, it is reasonable to expect that a similar percentage of people will commit fraud when ordered to do so by their superiors in the workplace.

Question 72

Which of the following is NOT one of the factors that Diane Vaughan cites as contributing to organizations being inherently prone to committing crime?

A. Long-term loyalty is encouraged through company retirement and benefits.
B. Rewards are given to employees who challenge the company or how it works.
C. Employees are frequently transferred and expected to work long hours.
D. Organizations tend to recruit and attract similar individuals.

Answer 72

B. Rewards are given to employees who challenge the company or how it works.

See pages 4.219 in the Fraud Examiner’s Manual

Organizations can be criminogenic because they encourage loyalty. According to Diane Vaughan, the reasons are that:

• The organization tends to recruit and attract similar individuals.
• Rewards are given to those who display characteristics of unyielding loyalty.
• Long-term loyalty is encouraged through company retirement and benefits.
• Loyalty is encouraged through social interaction, such as company parties and social functions.
• Frequent transfers and long working hours encourage isolation from other groups.
• Specialized job skills can discourage personnel from seeking employment elsewhere.