The company lacks good control activities or procedures. Mainly, it lacks segregation of duties, a good system of authorizations, independent checks, physical safeguards, and documents or records.
Helen was a trusted employee. The company also lacked good control activities. To perpetrate the fraud, all she had to do was continue to process the checks to the terminated vendor and sign the vouchers.
The fraud would have been detected if the company had possessed a good internal audit department, combined with security or loss prevention programs. A good accounting system would have helped in the discovery of the fraud and would have made it difficult for Helen to conceal.
Case 4 1. Ruth Mishkin was a trusted employee and she was in charge of paying bills, balancing accounts, and handling cash management. A gambling addiction caused Ruth to have an immense pressure to commit fraud so that she would have additional funds with which to gamble. Because Ruth was a trusted employee, her bosses put her in charge of paying bills, balancing bank accounts, and handling other cash management chores. This lack of segregation of duties provided an easy opportunity to commit fraud.
When people are addicted to a vice such as gambling, they feel tremendous pressure. With so much pressure, it takes only a little rationalization and a small opportunity for someone to perpetrate a fraud. Case 5 1. The company should implement independent checks and segregation of duties controls. The accountant should not be posting to the General Ledger, paying the bills, and signing the checks. The CEO or someone else should sign the checks. The accountant should be prosecuted civilly and criminally for mail fraud, embezzlement, and money laundering.
In addition, it would be a simple task to have the auditors run a computer analysis on the addresses of vendors to look for companies with the same addresses. The company should implement segregation of duties controls. The warehouse manager should not be able to both receive returned items and issue the credit memos. The accounts receivable department should create credit memos, which are then taken to the warehouse where additional goods can be issued.
In addition, another worker must process returned defective merchandise. Both the manager and the worker should sign off. The warehouse manager should be prosecuted, and his son should spend more time in the gym.
A system of authorizations should be implemented. The board should not allow the CEO to fire his employees and rehire them as contractors. The accountant who prepares payroll records should notice this problem. In addition, if the CEO prepares payroll records, there is also no segregation of duties. The CEO should be prosecuted for tax fraud and money laundering. Authorization and segregation of duties controls should be implemented. The accounts payable clerk should not have custody of the supplies she purchases.
Supplies should be logged into a warehouse and then distributed as needed. She should not be able to sign checks. Case 6 1. The pharmacy has a high risk of fraud. Alexia has great pressure to provide well for her family. Alexia also has the opportunity to commit fraud, as she has the responsibility for accounting and is the only worker.
She could easily steal cash and manipulate the accounting records. Therefore, the risk for fraud is high in this case. It would be very important to explain to the owner the high risk of fraud at the pharmacy. Important control activities are missing. Background checks, segregation of duties, and other controls would lower the risk of fraud. Case 7 1. Joel has many opportunities to commit fraud.
He is a trusted friend of the family. At the restaurant, there is no segregation of duties, system of authorizations, independent checks, or physical safeguards to prevent Joel from committing fraud. An increase in revenues accompanied by a decrease in profits may signal a possible fraud. In this case, as in most cases, a few simple controls could substantially reduce the opportunities for fraud. For example, Bob and Tom could install an automated register into which all sales would be recorded.
They could have mystery shoppers eat at the restaurant and pay in cash in order to see if the receipts were recorded. They could make the deposits and reconcile the bank account themselves. Possible answers might be: Segregation of duties—do not allow Joel to do everything he is doing.
System of authorizations. Independent checks. Physical safeguards—such as automated registers. Case 8 The major fraud opportunity in this case was the inability to judge the quality of performance of the optometrist.
Another factor was the lack of access to information. The insurance companies had no way of knowing that many of the services being billed for were not actually being performed, or that many of the patients did not even exist. Case 9 A couple of possibilities may explain the rationalization element of the fraud triangle.
The second possibility is that Hammond knew that the accounts were or might be misleading, false, or deceptive. Although he may have thought this, if the other two factors are present, it is easy to rationalize that even though they may be false, they also may be real or genuine.
Instead of looking at the situation objectively, he probably rationalized the possibility of it being a legitimate opportunity. Case 10 1. Reasons why Len should pursue prosecution: a.
Prosecution sets precedence within the company that fraud will not be tolerated. Prosecution brings about justice. Prosecution may result in recovery of stolen funds because of ordered restitution payments. Prosecution will help prevent dishonest employees from defrauding other organizations.
Reasons Len might not want to pursue prosecution are: a. Fear that negative publicity will hurt the image of the CPA firm. He might feel badly for the employee or his family. Answers may vary. However, prosecution is probably more beneficial in deterring future fraudulent activities within the firm. Case 11 1. Yes, it is a fraud to charge the company for personal lunches that you submit as business expenses. Fraud is often defined by the rules of an organization, and charging the company for personal expenses is intentionally not following the rules.
In this example, all three elements of fraud may be present: pressure, opportunity, and rationalization. The opportunity to commit fraud is high, and certainly rationalization is present. It is difficult from the limited facts to know whether a pressure is present. How one responds to the mentor is a subjective answer. If the new employee was aware that such charges represented fraud, she should decline to participate and let the mentor know that she does not agree with charging lunches against company policy.
Additional steps could be taken to notify supervisors and suggest that they further educate company personnel regarding company policies. Case 12 1. Opportunity and pressure are both present in this case. Although the owner of the store maintains close relationships with employees, controls are minimal, and should an employee choose to be dishonest as this example illustrates , he or she would have ample opportunity to steal.
The third ingredient for fraud to occur is rationalization, and given the high pressure and opportunity, rationalization only needs to be low to moderate in this case. In the future, you should be more concerned with internal controls, greater emphasis on segregation of duties, potentially implementing better computer systems and login authorizations, and possibly even surveillance cameras. Fraud is always less costly to prevent or detect early, and anything you can do to reduce fraud would be wise.
Case 13 1. Lauersen could have felt some pressure to make fertility treatments affordable for his patients. Lauersen perceived that the insurance company did not check carefully on the types of surgeries performed, and therefore it was easy for him to lie about the surgeries.
Lauersen may have felt that he was helping women who could not afford to have children. This was the primary factor in his decision to commit fraud. Lauersen could have recommended different insurance companies that covered fertility surgeries.
Case 14 1. The fraud triangle includes perceived pressures perceived opportunity, and some way to rationalize the fraud as acceptable.
Perceived Pressure: As a single mother of four, it may be difficult for Nancy to provide for her family. These perceived financial pressures could motivate Nancy to take money from the doctor. Opportunity: Because there is no segregation of duties, Nancy has the opportunity to keep the cash she collects from the customers and write off the account when the books show that all funds have not been collected. Without appropriate controls in place, Nancy has several opportunities to commit fraud.
Rationalization: Nancy does not feel that she is paid enough to meet her current financial needs. She may rationalize that she deserves an increase in pay to meet her needs. Nancy may rationalize that she is just borrowing the money and will repay it later. As a trusted employee, she may rationalize that the doctor would want her to take a little extra money for her needs; after all, she needs the money much more than the doctor. The critical duties of writing checks, making bank deposits, and reconciling bank statements should be segregated and dual custody control should be implemented.
Nancy should not be collecting, recording, and depositing payments all by herself. An additional employee may need to be hired. Commonly, an outsourced billing office is used as a check and balance. Each of these activities can be given dual custody by both Nancy and another person.
Although this control can often be expensive, it may. Case 15 1. Joe had several financial pressures: his wife just had a fourth child; they had just purchased a new home; and he had experienced a severe drop in commissions earned.
His opportunity arose from the fact that the company had poor internal controls over petty cash. Shortages were usually written off. The company could have prevented the fraud from occurring by having better controls over the petty cash. For example, the company could have had one person be the petty cash custodian requiring anyone with a need for petty cash to go through that person. There should also have been periodic reconciliations of the petty cash fund.
Case Studies Case Study 1 1. The office manager works alone and has significant opportunities to alter the books or accounts of customers and pocket money for himself.
Employees working unaccompanied can also take side jobs and pocket the receipts for themselves. Additionally, they can use the chemicals to provide lawn care to family and friends at no cost. Fraud symptoms that should be looked for or that are evident in this case include: less time with office manager, more chemicals being used than necessary, employee homes receiving unpaid services, and increased revenues with declining profits.
Employees may have taken on new customer jobs and pocketed the money because the customers are not entered on the computer system. The office manager should be monitored more closely, and the accounts should be checked on a more regular basis. The owner will have to spend more time ensuring that the office work is done correctly. Daily checks on supplies may be necessary to make sure employees are not using chemicals for personal gains. Putting these controls in place will cost more employee time but may provide greater benefit by reducing costs.
Case Study 2 1. Pressures: James was heavily in debt. New discussion emphasizes how technology is often used to accomplish fraud and how it can be used most effectively to detect fraud. Important Notice: Media content referenced within the product description or the product text may not be available in the ebook version.
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