Albrecht: Fraud Examination, 4e

Chapter3

FIGHTINGFRAUD:ANOVERVIEW

DiscussionQuestions

1. Fraudpreventionisimportantbecauseitisthemostcosteffectivewaytoreduce
lossesfromfraud.Oncefraudoccurs,therearenowinners.

2. Creatingacultureofhonestyandhighethicshelpstoreducefraudinvariousways.
Managementthroughitsownactionscanshowthatdishonest,questionable,or
unethicalbehaviorwillnotbetolerated.Byhiringtherightkindofemployees,
managementcanselectpeoplewhoarelesslikelytorationalizetheirillegalor
unethicalactionsasacceptable.Bycommunicatingexpectations,managementcan
givefraudawarenesstrainingthathelpsemployeesunderstandpotentialproblems
theymayencounterandhowtoresolveorreportthem.Andbycreatinganhonesty
drivenculture,managementcanhelptodevelopapositiveworkenvironment.
Researchindicatesthatfraudoccurslessfrequentlywhenemployeeshavefeelingsof
ownershiptowardtheirorganizationthanwhentheyfeelabused,threatened,or
ignored.

3. Identifyingsourcesandmeasuringriskmeansthatanorganizationneedsaprocessin
placethatbothdefinesareasofgreatestriskandevaluatesandtestscontrolsthat
minimizethoserisks.Risksthatareinherentintheenvironmentofanorganization
canoftenbeaddressedwithanappropriatesystemofcontrol.Onceriskshavebeen
assessed,theorganizationcanidentifyprocesses,controls,andotherproceduresthat
canminimizerisks.Appropriateinternalsystemsincludewelldevelopedcontrol
environments,effectiveaccountingsystems,andappropriatecontrolprocedures.

4. Becausemostfraudsincreasedramaticallyovertime,itisextremelyimportantthat
whenfraudsoccurtheybedetectedearly.Onceafraudhasbeencommitted,there
arenowinners.Perpetratorslosebecausetheysufferhumiliationandembarrassment
aswellaslegalpunishment.Usually,theymustmaketaxandrestitutionpayments,
andtherearefinancialpenaltiesandotheradverseconsequences.Victimslose
becauseassetsarestolenandtheyincurlegalfees,losttime,negativepublic
exposure,andotheradverseconsequences.Theinvestigationoffraudcanbevery
expensive.Organizationsandindividualsthathaveproactivefraudprevention
measuresusuallyfindthatthosemeasurespaybigdividends.

5. Whenfraudissuspecteditisimportanttoconductathoroughreviewinorderto(a)
avoidwronglytargetinginnocentpeople;(b)gathersufficientfactualevidenceabout

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Albrecht: Fraud Examination, 4e

thesuspectedfraud;and(c)ensureacompletereportofallthefactsand
circumstances,bothincriminatingandexonerating,isprepared.

6. Thetypesofevidenceproducedwhileinvestigatingfraudcanbeclassifiedinto
evidencesquare.Theevidencesquareincludestestimonialevidence,documentary
evidence,physicalevidence,andpersonalobservation.Testimonialevidenceincludes
evidencegatheredfrominterviews,interrogations,andhonestytests.Documentary
evidenceincludesevidencegatheredfrompaper,computers,andotherwrittenor
printedsources.Physicalevidenceincludesfingerprints,tiremarks,weapons,stolen
property,identificationnumbersormarkersonstolenobjects,andothertangible
evidencesthatcanbeassociatedwiththeft.Personalobservationincludesevidence
collectedbytheinvestigatorsthemselves,includinginvigilation,surveillance,and
covertoperations.

7. Theevidencesquareallowsustoidentifythedifferenttypesofevidencethatcanand
shouldbegathered,toidentifytheevidencegathered,andthentocategorizepossible
evidencesothatitiseasilyunderstoodandcorrelatedwithallothersourcesof
evidenceintheinvestigation.

8.
a. Surveillancepersonalobservation
b. Tiremarksphysicalevidence
c. Honestytesttestimonialevidence
d. Interviewtestimonialevidence
e. Acomputerharddrivephysicalevidence(SomewouldclassifythisaS
documentaryevidence.)
f. Afinancialstatementanalysisdocumentaryevidence
g. Apaperreportdocumentaryevidence
h. Identificationnumbersonvehiclesphysicalevidence
i. Auditoffinancialstatementspersonalobservation(Somewouldclassify
thisas documentaryevidence.)
j. Checkstubsdocumentaryevidence
k. Fingerprintsphysicalevidence
l. Backgroundchecksdocumentaryevidence(Somewouldclassifythisas
personalobservation.)
m. Interviewtestimonialevidence

9. Oneofthemajordecisionsacompanyorfraudvictimmustmakewhenfraudis
committediswhatkindoffollowupactionsshouldbetaken.Mostorganizationsand
othervictimsoffraudusuallymakeoneofthreechoices:takenolegalaction,pursue
civilremedies,and/orpursuecriminalactionagainsttheperpetrators.

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Albrecht: Fraud Examination, 4e

10. Civilproceedingsseektoreclaimtheassetsstoleninthefraud.Often,withemployee
fraud,theemployeequicklyliquidatesandspendstheproceedsofthefraud.Thus,
thereisusuallyverylittletoreclaiminacivilsuit.However,whenfraudinvolving
organizationsoccurs,civilactionsareoftenusefulbecausethoseorganizationshave
assets(deeppockets)fromwhichtheycanpaythedamages.

11. Managementoftenavoidstakinglegalactionagainstfraudperpetratorsbecauseofthe
legalcostandthebadpublicityforthecompany.Theyjustifythatthelegalcostsand
timespentaremorethanthevalueofwhatwasstolen,andwhatwasstolenisless
valuablethanthecompanysgoodreputation.Theyfailtorecognizethattheyare
destroyingthecompanyscultureofhonesty,andopeningthemselvesupforfuture,
potentiallylarger,frauds.

True/False

1. True

2. False.Whileahotlinefortipscanhelpdetectfraud,therearetwofundamental
activitiesthatpreventfraud:takingstepstocreateandmaintainacultureofhonesty
andhighethics,andassessingtheriskoffraudanddevelopingconcreteresponsesto
mitigatetherisksandeliminateopportunitiesforfraud.

3. False.Animportantstepincreatingacultureofhonestyinvolvesdevelopinga
positiveworkenvironment.

4. True

5. True

6. True

7. False.Whenaperpetratorisnotcaught,hisconfidenceinthefraudschemewill
increaseandhewillusuallybecomeincreasinglygreedy.

8. True

9. True

10. False.Physicalevidenceincludesfingerprints,tiremarks,weapons,stolenproperty,
etc.Paper,computer,andwrittendocumentsareusuallyclassifiedasdocumentary
evidencethatarepartoftheconcealmentscheme.

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Albrecht: Fraud Examination, 4e

11. True

12. False.Preventingfraudisgenerallythemostcosteffectivewaytoreducefraud
losses.

13. True

14. True

15. False.Expectationsaboutpunishmentmustbeclearlycommunicatedfromtop
managementthroughouttheorganizationtoeffectivelyimplementafraudprevention
program.

16. False.Fraudsusuallystartsmallandgetlargerandlargerifnotdetected.

17. True

18. True

19. True

20. True

21. False.ManyfraudsinvolvetheCEO,sotellingonlytheCEOcouldbeineffective.
Forthisreason,SarbanesOxleyrequirespubliccompaniestohaveindependent
whistleblowingsystems,socompanymanagementisnotinvolvedinthewhistle
blowingsystem.SherronWatkinsofEnronnotifiedtheChairmanofEnronofa
brewingscandal,butitwasnotenough.

22. False.Eventhoughcompletepreventionisusuallynotpossible,preventingfraudis
generallythemostcosteffectivewaytoreducelossesfromfraud.

23. False.Preventingfraudisgenerallythemostcosteffectivewaytoreducelossesfrom
fraud.

24. False.Mostfraudperpetratorsarefirsttimeoffenderswhohavepositivereputations
intheirwork,community,family,andchurchenvironments.

MultipleChoice

1. c

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Albrecht: Fraud Examination, 4e

2. d

3. b

4. a

5. a

6. b

7. d

8. c

9. d

10. d

11. d

12. d

13. d

14. a

15. d

16. a

17. a

18. c

19. d

20. d

21. c

22. b

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Albrecht: Fraud Examination, 4e

ShortCases

Case1

1. Thereareatleastfivecriticalelementsincreatinganethicalculture:
a. Havingtopmanagementmodelappropriatebehavior.
b. Hiringtherightkindofemployees.
c. Communicatingexpectationsthroughouttheorganizationandrequiring
periodicwrittenconfirmationofacceptanceofthoseexpectations.
d. Creatingapositiveworkenvironment.
e. Developingandmaintaininganeffectivepolicyforhandlingcasesoffraud.

2. Eachoftheelementslistedabovewouldneedtobeimplementedwithinthecompany.
Inorderformanagementtomodelappropriatebehavior,theywouldneedtoaccept
andunderstandcompanypolicyandchoosetomodelthatbehavior.Tohiregood
employees,thecompanyshouldperformbackgroundchecksonpotentialemployees.
Expectationsforcompanyemployeesshouldbeclearlycommunicatedthrougha
corporatecodeofconduct.Managementwouldneedtotakethenecessarystepsto
createapositiveworkenvironment.Whenfrauddoesoccur,managementmust
handlethecaseefficientlyandeffectivelyandthenperformthenecessarystepsto
ensurethatfrauddoesnotoccuragain.Aswell,managementmustcommunicateto
employeesthatfraudwillnotbetoleratedwithinthecompany.

Case2

Detectionandinvestigationarestepsthataretakenoncefraudhasoccurred.Atthispoint,
muchofthedamagehasalreadybeensustainedvictimsassetsarestolen,victimsmust
incurlegalfees,losttime,negativepublicexposure,andotheradverseconsequences.
Investigationoffraudistypicallyveryexpensive.Organizationsandindividualsthathave
proactivefraudpreventionmeasuresgenerallyfindthatthosemeasurespaybigdividends.

Case3

Becausemostfraudsincreasedramaticallyovertime,itisextremelyimportantthatwhen
fraudsoccurtheybedetectedearly.Inmostcases,thefraudlossesthatanorganization
experiencesinthefinalfewmonthsofafraudarehigherthanthetotallossesinthefirstfew
yearsofthefraud.

Case4

1. Researchhasshownthatitisemployeesandmanagers,notauditors,whodetectmost
frauds.Toeffectivelypreventanddetectfraud,employeesandmanagersmustbe
taughthowtowatchforandrecognizefraudsymptoms.Bytrainingemployeesand

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Albrecht: Fraud Examination, 4e

managersaboutfraud,thecompanywillsavethousandsofdollars;manyfraudswill
beprevented,andifafrauddoesoccur,itwillbedetectedearlier.

2. Oneofthemosteffectivewaystoinvolveemployeesinfraudpreventionand
detectionistoprovideaformalizedprotocolforcommunicationthatinforms
employeesandotherstowhomtheyshouldreportsuspectedfraudandwhatformthat
communicationshouldtake.Theprotocolshouldassureconfidentialityandstressthat
retributionwillnotbetolerated.Organizationsthatareseriousaboutfraudprevention
mustmakeiteasyforemployeesandotherstocomeforwardandmustrewardthem,
notpunishthem,fordoingso.Thesetypesofreportingsystems(whistleblowing
systems)arenowrequiredforpubliccompaniesundertheSarbanesOxleyAct.

Case5

1. Itwouldbeimportanttotellyourbossthatfraudoccurslessfrequentlywhen
employeeshavepositivefeelingsabouttheorganizationorwhentheyfeelownership
intheorganization.Whenemployeesfeelabused,threatened,orignored,theriskfor
fraudincreases.

2. Factorsthathavebeenassociatedwithhighlevelsoffraudandthatdetractfroma
positiveworkenvironmentincludeatopmanagementthatdoesnotcareorpay
attentiontoappropriatebehavior,negativefeedback,andalackofrecognition.
Perceivedinequitiesinanorganization,autocraticratherthanparticipative
management,loworganizationalloyalty,unreasonablebudgetexpectations,
unrealisticallylowpay,poortrainingandpromotionalopportunities,highturnover
and/orabsenteeism,lackofclearorganizationalresponsibilities,andpoor
communicationpracticeswithintheorganizationalsocontributetoahighriskof
fraudanddetractfromapositiveworkenvironment.

Case6

Thiscaseshouldprovidethebasisfordiscussingseveralaspectsofethicsinbusiness.
Studentswilllikelyhavedifferentpointsofview.Theauthorsbelievethatethicscanbe
taught,althoughnotinthesamewaythathistoryormathistaught.Astudentssenseof
ethicsdevelopsovertimeandisreinforcedbydealingwithethicaldilemmas.Theway
peopleapproachanddealwithethicalissuesseemstobeaffectedbylifeexperiences,
includingformaleducation.

Therearefourlevelsofethics:abasicsenseofrightandwrong;applicationofthatbasic
senseofrightandwrongtobusinessinterpretationofvalues;ethicalcouragetomakethe
decisionyouknowisrightevenwhenfacedwithadverseconsequences;andethical
leadershipmodelingethicalbehavior.Whilethefirstonebasicsenseofrightandwrong
maynotbeeffectivelytaughtinschool,theotherthreecan.

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Albrecht: Fraud Examination, 4e

Theauthorshavetriedtoexposestudentstofraudcaseswheredishonestactswere
rationalizedbecauseoflowethics.Byincorporatingethicalissuesinseveralendofchapter
casesthroughoutthebook,hopefullystudentswillhaveanincreasedawarenessofethical
dilemmasencounteredinbusiness.

Case7

Fraudinvestigationisacomplexandsensitivematter.Ifinvestigationsarenotproperly
conducted,thereputationsofinnocentindividualscanbeirreparablydamaged,guiltyparties
cangoundetectedandbefreetorepeattheact,andtheoffendedentitymaynothave
informationtouseinpreventinganddetectingsimilarincidentsorinrecoveringdamages.
Therefore,itisimportantthatfraudinvestigationsnotbeconductedwithoutpredication.

Case8

Therearethreefollowupalternativesavailabletoorganizationsoncefraudhasoccurred:
takenolegalaction,pursuecivilremedies,and/orpursuecriminalactionagainstthe
perpetrators.

Case9

Asisthecaseinmanyorganizations,thelikelihoodoffraudincreaseswhenemployeesare
hiredbasedontheirabilitytogetthejobdoneratherthanbeinghiredfortheirhonestyand
integrity.AlthoughFujimoriwassuccessfulasapresident,hisallegedlackofintegrityledto
ascandalandleftanationwithoutaleaderforanextendedperiodoftime.Thepeoplewould
probablyhavebeenbetterservedbychoosingsomeonewithmoreintegritytoleadthem.

Case10

Backgroundchecksareaverygoodwaytodeterminewhetherpeoplehaveapastthatmaybe
indicativeoffuturefraud.Somefraudperpetratorshavedeceivedeventhebestinterviewers
intothinkingthattheyarehardworking,honestpeople.Especiallyintheearlystagesofa
business,theindividualshiredmoldandcreateacultureattheorganization.Acultureof
honestyordishonesty,aswellaspotentiallossesfromfraud,areatstakeifthewrongpeople
arehired.

Case11

WhiletheMensWarehousehasdisregardedacommonlyrecommendedfraudprevention
policyofbackgroundchecks,theyhavecompensatedforthisbycreatinganextremely
friendlyworkingenvironment,creatingacultureofhonesty.MensWarehouseis
consistentlyrankedintheFortunelistof100BestPlacestoWork,peoplefeelownership

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Albrecht: Fraud Examination, 4e

ofthecompanytheyworkfor,andthusdonotstealfromit.Asaresult,,MensWarehouse
hascreatedacultureofhonestyinanonstandardway.

Case12

Priortothepolicychange,employeefraudwasnotseenasaseriousissue,andprosecutions
wereunlikely.Thegeneralmessagewasthatnothingseriouswillhappentoyouifyou
commitfraud(fraudwasacceptable),andsoitproliferated.But,creatingapolicythatwould
essentiallyprosecuteeveryoneinvolvedinfraud(minimizingthesebadnewsreportstothe
CEO),itwasclearthatfraudwouldnottolerated.Asaresult,fraudwithintheorganization
decreased.

Case13

Jamieneedstounderstandthatmostfraudperpetratorshavenopasthistoryoffraud,andso
seeminglygoodpeoplearesometimesinvolvedinfraud.Sincefraudrequires
confidence,itisusuallythoseyoutrustmostwhoareinthebestpositiontocommitfraud.
BynottakingactionJamieisputtinginjeopardythecultureoftheorganization;thisdestroys
thecultureofhonestythatcouldexistifitwaswellknownthatallfraudwouldbehandled
seriously.

Case14

1. Themanagementofthiscompanyseemstoorelaxed.Theydidnotprovideforan
independentcheckoftheaccountingrecordsandcash.Theycreatedaneasy
opportunityforMarytoembezzle.
a. Therewasaninadequatesegregationofdutiesinthecompany.PeterJones
shouldhavebeenassignedtodosomeofMarysdutiessothattherewasa
reducedopportunityforembezzlement.

2. Thecompanyshouldhavepaidmoreattentiontointernalcontrols,bothpreventive
anddetective.Maryhadnoaccountabilitytoanyone,andnooneevercheckedher
work.

Consistentcommunicationcouldhavebeenoneoftheeffectivewaysofreducingthe
fraud.Thiswouldhavehelpedidentifyandremindtheemployeesofwhatisexpected
ofthembythecompany.Theycouldhavealsorequiredawrittenandsigned
statementthatstatedthepossiblepunishmentforcommittingfraudulentacts.

Periodically,XYZsmanagementshouldhaveaskedPeterJonestotakecareof
Millersbookswhileshewasrequiredtotakevacationtime.Thiswouldhavehelped
detectthefraudatitsearlystages.Additionally,itmighthavepreventedthefraud,
sinceMarywouldhaveknownthatsomeoneelsewouldbecheckingherwork.

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Albrecht: Fraud Examination, 4e

CASESTUDIES

CaseStudy1

1.
a. ThepotentialpressuresforChristocommitfraudare:

1. Thepaythatheisreceivingrelativetotheexpensesofschool,
family,andtechnologywidgetswaslow.Whilelivingonatight
budget,theunexpectedextraexpenses,suchascarrepairsormedical
expensescanputindividualsinapinchandaddtothepressureto
commitfraud.Togetevenwithhisemployerfornotpromotinghim
orfeelingunderpaidfortheresponsibilitywithwhichhecontends
daily.

b. ThepotentialopportunitiesforChristocommitfraudare:

1. Lackofcontrolswithinagrowingtechnologycompany.The
companyisintegratingsoftwareandcorruptingaccountsanditis
easytodisguisefraudinsuchanenvironment.Littleorno
monitoringsystemonthephonycreditcardthatwasprovidedhim.
Failuretoexperiencedisciplineforpastactions.
2. Heisthemosttechnologicallyadvancedinthegroup;therefore,he
maybeabletodeviseawaytomanipulatesystemswithoutthe
knowledgeofhissupervisor.

3. Hewasatrustedemployeeandwasallowedlatitudeinmaking
decisions.

c. ThepotentialrationalizationsthatChriscouldusetojustifyhisactions
include:

1. Chriscouldfeelthathedeserveshigherpayashehasincreasedthe
efficiencyoftheteamandholdstheresponsibilityoftrainingthose
aroundhim.Inotherwords,hisresponsibilitieshaveincreasedbut
hispayhasremainedthesame.

2. Thecreditcardisaphonycreditcardthatresultsinnobillsanddoes
notchargeanyoneforservicesputonthecard.Intheend,someone
willpayforthetransactions,butthechangeswontberecognized
immediately.

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Albrecht: Fraud Examination, 4e

3. ThemoneythatChriscouldstealwouldbeforagoodpurposeto
furtherhiseducation,whichwouldultimatelyincreasehisvalueto
thecompany;therefore,thecompanyisreallybenefitingfromthe
fraud.

2. Thepotentialsymptomsoffraudinclude:

a. Chrisincreasingspendingonthelatesttechnology(lifestylesymptom).

b. Chrismovinghismonitorintoapositionwherenoonecouldseehisscreen
(behavioralsymptom).

c. Chrischanginghisspendinghabitswithoutachangeinsalary(lifestyle
symptom).

d. Chriscreatingmultipleusernamesfortestingpurposes(analyticalsymptom).

3. Jonathoncouldhavereducedthepossibilityoffraudby:

a. PunishingChrisforhisactionsinordertocreateanenvironmentthattells
employeesthatthecompanydoesnottolerateorjustifydishonestyinany
form.

b. Creatinganinternalreportthatmonitorstheusageofthephonycreditcard.
Thiscouldbedoneinconjunctionwithrequiringthatemployeesmaintainan
activitylogofalltransactionsusingthephonycreditcard.Thesetworeports
wouldbecomparedeverymonthforaccuracy.Thecompanycanalsorequire
thatamanagerapproveanytransactionrequiringtheuseofthecreditcard.

c. Providingahotlineforfellowemployeestoreportsuspiciousactivity.

d. Havingindividualsrotateresponsibilityandauditeachothersperformance.

e. Performingrandomchecksonindividualscomputersaspartofcompany
policy.

f. Establishingtightercontrolsandmonitoringsystemsfortheoperationsteam
sothatreportsareruninordertodetermineeffectivenessandanyoutliers
withinanormaldistribution.

CaseStudy2

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1. Thedefinitionoffraudisagenerictermthatembracesallthemeanswhich
humaningenuitycandevise,whichareresortedtobyoneindividual,togetan
advantageoveranotherbyfalserepresentation.Fraudisdeceptionthatincludesthe
followingelements:

Arepresentation
Aboutamaterialpoint
Thatisfalse,
Intentionallyorrecklesslyso,
Whichisbelieved
Andacteduponbythevictim
Tothevictimsdamage

Basedonthedefinitionoffraud,wecananalyzethesituationasfollows:Dereks
companyrepresentedDerekasanSAPexpertimplyingcertaintrainingcapabilities.
Thisrepresentationwasfalseandwasintentional.TheclientbelievedthatDerekwas
anexpertbecausetheyweretoldingoodfaiththathewas.Theclientwasbilledatan
expertbillingrate.ThismeantthattheclientoverpaidforDereksworksincehe
wasntanexpert.

Thiskindofmisrepresentationmaybestandardpracticeinthistypeofbusiness
situation.SomecouldarguethatifDereksfirmdeliveredthesystemontimeandthat
itworkedproperly,itdoesntmatterwhatyoucallthepeoplethatimplementedit;
theygotthejobdone,sowheresthefraud?

Ontheotherhand,thefirmintentionallymisrepresenteditsconsultantscredentials
(materialpoint)eventhoughthecredentialswerefalse.Theclientbelievedthefirm
andpaidthefees(actedupon),believingthatDerekwasinfactanexpert.Even
thoughthispracticemaybestandardinthisindustry,theauthorsbelievethiswould
stillbeconsideredaformoffraud.Iftheclientweretofindoutaboutthefraud,the
fraudwouldprobablynotbringthecompanydown,butitcouldjeopardizethe
relationshipwiththeclient.Ifsomethingweretogowrongwiththeproject,both
firmscouldendupincourt.

2. Mike,thepurchasingmanager,exhibitedlifestylecharacteristicssuchascertain
clothingandthenewmodelBMWthatwereatypicalofsomeoneworkinginhis
positionathiscompany,andheenjoyedtalkingwithhiscolleaguesabouttheclothes
andcars.Helikedtheattention.Inaddition,hisrelationshipwithhissuppliersseemed
alittlesuspicious.Theamountoftimehespentgettingtoknowhissupplierscould
meanthathewasdoinganexcellentjobforhiscompany,butitcouldalsobeseenas
asymptomthathewasntkeepingthepurchasingtransactionsatarmslength.He
guardedhissupplierrelationshipclosely;theserelationshipscouldbefurther
evidencethatfraudwasoccurring.Hisunpredictablebehaviorcouldsignalfraud,too,
aspeoplewhocommitfraudmayfeelscaredandguiltydependingonwhenthey

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Albrecht: Fraud Examination, 4e

perpetratetheirfraud.Finally,thefactthatMikenevertookvacationsisanotherred
flag.Thefactthathenevertookvacationscoupledwithhislengthytermasan
employeecouldhavemeantthatheknewtherewereflawsinthesystemandhecould
workthemtohisadvantage.Peopleinthecompanythoughtthisishowhesaved
moneyforhisclothesandcar,butitalsocouldhavebeentheopportunityto
perpetratehisfraudulentactivities.Combiningtheclothesandcar,theclosesupplier
relationships,thepersonalunpredictability,andthelackofvacationsprobablygives
predicationoffraud,andaninvestigationshouldtakeplace.Thesesymptomsdont
meanthatfraudishappening,butitdoeslooksuspicious.

3. Kathyobviouslyfeltworkpressuretomakeherquarterlysalesnumbers.Whethershe
realizeditornot,thesalesshewasabletogeneratebyshippingproducttocustomers
whodidntorderthemwasafraudulentactivity;itprobablystrainedrelationships
withcustomers,too.Thisactivitymisrepresentedtheactualsalesofthecompanyto
shareholders.

Inthisenvironment,salesshouldberecognizedwhentheyareshipped.By
manipulatingrevenues,thecompanywasabletomisrepresentmonthlysales.Even
thoughthefollowingmonthssaleswereproportionatelylower,thecompanyused
thispracticebecausetheybelievedtheycouldhaveanothermonthtotrytoreach
salesgoals.

Thistypeoffraudisdefinitelyrevenuefraud.Thecompanyisshippingproducts
withoutcustomerordersandrecordingthemassales,eventhoughmanyofthe
productsarereturned.Thesesalesshouldneverberecorded.

InternetAssignments

1.
a. Thereportstatesthattheftbyemployeesaccountsforapproximately30to50
percentofallbusinessfailures.
b. Thereportstatesthatthreequartersofallemployeeshavestolenfromtheir
employersandthatsomeemployeesmayengageintheftbehaviorasaregular
partoftheirlivesonthejob.

2. TheNationalFraudInformationCenter(NFIC)wasestablishedin1992bythe
NationalConsumersLeaguetofightthegrowingmenaceoftelemarketingfraudby
improvingpreventionandenforcement.Itistheonlynationwidetollfreehotlinefor
consumerstogetadviceabouttelephonesolicitationsandreportpossible
telemarketingfraudtolawenforcementagencies.In1996,theInternetFraudWatch
wascreated,enablingtheNFICtoofferconsumersadviceaboutpromotionsin

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Albrecht: Fraud Examination, 4e

cyberspaceandroutereportsofsuspectedonlineandInternetfraudtotheappropriate
governmentagencies.

ConsumerscancalltheNFIChotlineorsendtheirquestionstotheNFICWebsite.
TheNFICstrainedcounselorshelpconsumersidentifythedangersignsofpossible
fraudanddirectthemtotherightplacesformoreinformation,ifneeded.Consumers
canalsoreportsuspectedtelemarketingorInternetfraudthroughtheNFIChotlineor
Website.Thesereportsarerelayedtoavarietyoflocal,state,andfederallaw
enforcementagencies,alertingthemtoproblemsthattheymaywishtoinvestigate
andprovidingthemwiththeammunitiontheyneedtostopfraud.

Debate

WebelieveFredshouldbeencouragedtoturnhimselfin.Ifhedoesnot,youshouldtellhim
thatforhisowngood,youaregoingtoreporthim.Ifheisnotreported,hisfraudswill
probablyincrease.

AnswertofirstStopandThinkQuestions

1. Whydoyouthinkafraudperpetratorwhoiscaughtwouldsuffermore
humiliationandembarrassmentthanabankrobberorotherpropertyoffender?

a. Fraudperpetratorsareusuallyfirsttimeoffenders.Inaddition,theyare
usuallyinpositionsoftrust.Theyoftenhavefamiliesandbackgroundsthat
lookexactlylikethoseofhonestemployees.Whentheyarecaught
committingafraud,eventellingtheirfamiliesisextremelydifficult.Onthe
otherhand,bankrobbersandsimilarpropertyoffendersareusuallyrepeat
criminalswiththeaveragebankrobberhavingarapsheetof11previous
offenses.Tothem,gettingcaughtandsenttojailisjustanotherfreemealand
moreofwhattheyarealreadyusedto.Inaddition,theyusuallydonthold
positionsoftrustlikewhitecollarcriminalsdoandtheyusuallydonthave
familystructureslikefraudperpetrators.Infact,theresearchshowsthat
becauseoftheembarrassmentfactor,whitecollarcriminalswhoare
prosecutedhaveaverylowrecidivism(repeatoffenses)ratewhilewhite
collarcriminalswhoarentprosecutedhaveaveryhighrecidivismrate(why
not,nothingserioushappenedtothem.)

2. Doyoureallybelievethathavingawrittencodeofconductwillreducefraudand
otherdishonestactsinanorganization?

a. Codesofconductareusuallyworthlessiftheyarecreatedandthenignored.
PostingacodeofconductonaWebsiteorevenincludingtheminemployee
handbooksdoeslittlegoodifconstantattentionisntpaidtothem.Thatis
whycompanieslikeRedHatrequireannualcertificationofabidingbythe

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Albrecht: Fraud Examination, 4e

codebyeveryemployeeandwhythecompanyspendslargeamountsof
resourcesinregularethicstraining.Tobeeffective,codesofconductmustbe
endorsedbymanagement,prominentlydisplayed,andreinforcedconstantly.

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