Fraud Examination Albrecht, 2014 SH

Chapter 1:

Discussion Questions

2. Fraud in general has a harmful nature towards individuals, consumers, and organizations.
People has trust issue as there were a lot of fraud going on undetected. Individuals, consumers,
and even organizations have to pay more for goods and services needed as there is more cost
resulting from fraud bills and also the cost to conduct an investigation for the fraudulent act.
Many organizations profit is decreased because of fraud committed by its employees, suppliers,
or customers. When an organization is being a victim of fraud, its financial performance will not
look appealing to investors so the organization will manipulate their financial statement to lure
the investors. As the investors are misguided, they will lose their confidence in investing and
become skeptical the stock market price will go down and impact a country economic condition.
That is one example on how fraud is an important issue to be handled.

3. a. Employee embezzlement, in which the employees are stealing their employer assets. This
type of fraud can be found easily anywhere.
b. Vendor fraud, a fraud where vendor supply lower quality products than the real products that
had been agreed upon before or it overcharge the customers.
c. Customer fraud, this fraud happens when the customers pay less than what it should be or even
do not pay at all.
d. Management fraud, it occurs when the management of a company alter the companys
financial or annual statement so that the companys performance looks good and able to attract
and convince possible investors.
e. Investment scams and other consumer fraud decrease the trust of investors to invest their
money as they are afraid to put their money into a fraudulent scheme. This fraud can happen
online or in person. It is when an investor is deceived to buy a worthless investment.

6. Ponzi was able to gain the public trust by paying the amount of money promised to his
investors. When the public saw that Ponzi can be trusted, many people started to put their money
in the company as their greed for more instant money was ushering them to invest. As Ponzi kept
on able to pay his obligation, the public started to have more confidence in him. Hence, his fraud
Fraud Examination Albrecht, 2014 SH

scheme was so successful back then. However, when there was a bad rumor and people started to
doubt his business and lose their faith in him, his fraud scheme was beginning to crumble.

8. Employee fraud is a type of fraud done by employee in which the employees tricked their
employer by stealing companys assets. For example, the employees set up bogus employee in
the companys system and steal the money for the bogus employees wage. Whereas the
management fraud is when the top management modify the number in the company financial
statement so that the company performance looks outstanding and attract investors to invest their
money in the company.

Cases:

Case 3

1. Customer Fraud
2. Investment scam
3. Employee embezzlement
4. Management fraud
5. Vendor fraud
6. Miscellaneous fraud

Case 7
1. Yes, the employee embezzlement is committed and the firm becomes the victim when Bob use
firms money to pay for his lunch.
2. As the intern of the company to report any fraud that will harm company and have integrity in
working, and also as a part of the society to have a high awareness of fraud and have willingness
to prevent fraud.

Case 10
Auditing is conducted to ensure the stakeholders whether a company is reporting their
performance correctly or not. It is done regularly, generally checking all information available
regarding the company and focusing more to the financial data. While, fraud examination is only
Fraud Examination Albrecht, 2014 SH

conducted when there is fraud or any suspicion of fraud in order to know is the fraud really
happening or not and who is responsible for it. So, it is not done regularly and also it is done by
interviewing people related to the case, reviewing the documents, reviewing data from outside,
and so on. It is better for a fraud examiner to have experience in accounting or auditing.

Case Studies:

Case Study 4
1. Conduct an investigation whether the report regarding the understatement of production cost is
true. If it is proven to be true then give the information to the top management and suggest to ask
the manager who commit fraud to give the correct information, fire him, and fine him to give
some sort of a warning for other employees, should they commit fraud they will also be punished
that way. The fine also acts as a leverage to the company loss caused by the fraudulent act.

2. The top management needs to be included in making the decision regarding the fraud.
Although there are some downsides of involving the top management, such as a longer time to
make decision and less trust in the lower management, it is necessary to be done. The top
management needs to have an insight of what is really happening in the company. They may not
be immediately involved in solving this issue, but they have to be involved or at least informed,
regardless of who they are.

3. If the fraudulent leads to significant amount in the financial statement, the company may
suffer loss or at least a decrease in their net income. When this happened, the investors will lose
their trust in the company and start to draw their money from the company. It will be hard for the
company to attract new investors as their company does not look good anymore. When the
company does not have enough capital or fund to sustain its basic business activities, the
company then will be bankrupt.
Fraud Examination Albrecht, 2014 SH

Chapter 2:

Discussion Questions

1. Anyone can become a fraud perpetrator, especially people who are considerably older and
having distinct characteristics with criminals, but similar to the college students. Fraud
perpetrators are more religious, better educated, have more self-control, less likely to have
criminal records, have motivation to have achievements than criminals. However, they are
similar with college students with only have some differences such as more dishonest,
experience more psychic pain, more independent, more socially weird, more emphatic than
college students.

2. Many kinds of pressure such as survival instinct, responsibility to achieve something, pressure
to maintain a good performance at work, have been some of the reasons on why people commit
fraud. When people need something e.g. money instantly, they will do anything even deceiving
others. Greed also can drive people to do fraudulent act, for example, a vendor charge its
customers 20% more than it should in order to have more profit.

3. The three key elements of why people committing fraud, which are pressure, opportunity, and
rationalization. The benefits to know and analyze the fraud triangle are help in investigating a
fraud, prevent fraudulent act, and recognize who are most likely to commit fraud. It is very hard
to know who is the fraud perpetrator, prevent fraud, or in other words battling fraud, hence the
triangle is important to help us in fighting against fraudulent act.

source:
http://www.computerworld.com/article/2845934/security0/malicious-insider-psychology-when-
pressure-builds-up-in-the-fraud-triangle.html
Fraud Examination Albrecht, 2014 SH

4. Fraud scale is an alternative method of the fraud triangle, which measure the level of pressure
and opportunity to commit fraud, as well as personal integrity level of each individual. It helps in
determining the likelihood of a fraud to happen. E.g., the less pressure and opportunity high level
of integrity means less likely for people to commit fraud, and vice versa.

Cases

Case 1
1. Control activities is not working well, as the managers were able to allow large credit
transaction without the authorization and verification of the customers. An automated system that
contains the customer database (historical purchase, credit limit, personal information, etc)
would be one of many ways to prevent the lack of control activities in this kind of situation. The
system has to be designed to be able to send a notification to the customers for every purchases
they made for their authorization. Besides, segregation of duty between the ones who receive
customers order and the ones who authorized the sales is important.
2. Assessing and managing risks, monitoring, and control activities are needed in this situation.
The management must have to keep in mind that they cannot fully trust their subordinates and
that everyone may do fraudulent acts especially the accountant, regarding the financial statement
of the company. By realizing this, the manager has to devise a way to prevent the fraud from
happening. Management can supervise accountants in their job, can assign two accountants to
make the financial report separately in order to have objective and correct numbers, and also
train their staffs to have more integrity and more awareness about fraudulent act.
3. The control activity is very little regarding this situation; the management should not have to
assign one worker to handle all work related to the storeroom. There should be a segregation of
duty between recording the inventory movements and counting the inventory, so that it will
minimize the risk of the worker conducting fraud. The supervisor also has to monitor the
performance of the workers and may conduct an unannounced inspection to ensure that there is
no fraud.
4. Communication element is obviously lacking in this situation, as it is related to timeliness.
Management should have a strict policy and framework to guide the employees to perform
better. The control from the manager or supervisor have to be improved also as the supervisor
Fraud Examination Albrecht, 2014 SH

would be able to ask the staffs to work faster and efficiently so that receiving reports can be
filled out exactly when the shipments arrived.

Case 4
1. The trust of the management for her to have a sole authority in handling the company cash
management without any supervision makes it very easy for Ruth to steal the company fund.
2. To satisfy her hobby in gambling, Ruth needs a lot of money that leads her to commit fraud in
order to get the money.
3. As the management have trusted Ruth, it gives her the sole authority to handle her work which
is the managing the company money and no supervision from the management itself, it believes
that Ruth will not do fraud and is good at her job.
4. Anything can be the motivation of people committing fraud with no exception of gambling.
When people need or want something, they will try their best to obtain it. While good people will
work hard in the right way to achieve it, people who lack integrity will do anything possible,
ethical or not, to acquire it including doing fraudulent scheme.

Case Study

Case Study 2
1. James had to meet his financial obligations and afterwards his greed, are what had been
pressuring him to commit fraud. His belief that the Club House will bring him to success blinded
him to do the fraud in order to obtain some money, this is his way of rationalizing the fraudulent
act he did. There are a lot of opportunities as the insurance company did not investigate further
about the incidents, lack of verification regarding the customer bills overcharged, and that James
managed to find loopholes in the merger and acquisition policy so that he was able to manipulate
his company condition to boost the stocks price.
2. James sudden luxurious lifestyle while having debt and an acquisition with an inactive
company are the signs that there may be a fraud going on in the company. Common people
would not live glamorously when they have debt to be paid off, they will use their money to pay
their debt first rather than use if for unnecessary things. Firms also do not make an acquisition
Fraud Examination Albrecht, 2014 SH

with an inactive firm unless their business are complimentary and there is a good possibility that
the acquisition will boost the company.
3. The bank should have asked for confirmation to their clients regarding their use of credit card,
the insurance should have stricter policy and thorough investigations before granting a claim,
there should have been an auditor to assess the firm and also the Federal Agency or the agency
who is in charge in granting the acquisition should have observed the reasons behind the
acquisition and known the real condition of both companies.