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Solutions Manual - Fraud Examination by Albrecht
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Solutions ManualTestBank4Textbooks (Stuvia Seller)
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Ch. 1
THE’ NATURE OF_ FRAUD
Discussions Qs:
Fraud always involves deception, confidence, an’d trickery. The’ following is one of_ the’ most common
definitions of_ fraud:
“Fraud is a generic term, an’d embraces all the’ multifarious means which human ingenuity can devise, which
are resorted to_ by one individual, to_ get an advantage over another by false representations. No definite
an’d invariable rule can be laid down as a general proposition in defining fraud, as it includes surprise, trickery,
cunning an’d unfair ways by which another is cheated. The’ only boundaries defining it are those which limit
human knavery.”
Fraud is deception that includes the’ following elements:
A representation
About a material point
That is false,
Intentionally or recklessly so,
Which is believed
An’d acted upon by the’ victim
To_ the’ victim’s damage.
Fraud affects individuals, consumers, an’d organizations in various ways. Fraud usually lowers organizations’
net income dollar for’ dollar. To_ recover these costs, consumers an’d individuals must pay more for’ goods
an’d services. For’ example, health care fraud an’d insurance fraud increase premiums that individuals must
pay. The’ cost of_ fraud eventually reaches every part of_ the’ economy, including individuals, consumers,
an’d organizations.
The’ 2008 study by The’ Association of_ Certified Fraud Examiners estimates that U.S. organizations
lose roughly 7 percent of_ their annual revenues to_ fraud. Applied to_ the’ U.S. gross domestic
product (GDP), this 7 percent figure translates to_ approximately 994 billion in fraud losses.
Employee Embezzlement: In this type of_ fraud, employees deceive their employers by taking company
assets. Embezzlement can be either direct or indirect.
Management Fraud: Distinguished from’ other types of_ fraud both by the’ nature of_ the’ perpetrato_ rs
an’d by the’ method of_ deception. In its most common for’ m, management fraud is deception perpetrated
1
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by to_ p management’s manipulation of_ financial statements. The’ victims of_ management fraud are
typically sto_ ckholders, lenders, an’d others who rely on financial statement infor’ mation.
Investment Scams or Consumer Scams: A type of_ fraud that is perpetrated when fraudulent an’d usually
worthless investments are sold to_ unsuspecting investo_ rs.
Vendor Fraud: Perpetrated by vendors; comes in two main varieties: fraud perpetrated by vendors acting
alone, an’d fraud perpetrated through collusion between buyers an’d vendors. Vendor fraud usually results in
an overcharge for’ purchased goods, the’ shipment of_ inferior goods, or the’ nonshipment of_ goods even
though payment was made.
Custo_ mer Fraud: Usually involves custo_ mers not paying for’ goods purchased, getting something for’
nothing, or deceiving organizations into_ giving them something they should not have.
Criminal law is the’ branch of_ law that deals with’ of_ fenses of_ a public nature. Criminal laws generally
deal with’ of_ fenses against society as a whole. Violato_ rs of_ criminal laws are prosecuted either federally
or by a state for’ violating a statute that prohibits some type of_ activity.
Civil law is the’ body of_ law that provides remedies for’ violations of_ private rights. Civil law deals with’
rights an’d duties between individuals. The’ purpose of_ a civil lawsuit is to_ compensate for’ harm done to_
an individual. Unlike criminal cases, where juries consist of_ 12 jurors, juries in civil cases may have as few as
six jurors, an’d the’ verdict of_ the’ jury need not be unanimous. Additionally, judges of_ ten hear civil cases
instead of_ juries. In civil lawsuits, plaintiffs must only prove their case by the’ “preponderance of_ the’
evidence.” In other words, there need be only slightly more evidence supporting the’ plaintiff than supporting
the’ defendant.
Civil
Criminal
Civil
Criminal
Criminal
Civil
Criminal
Civil
2
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Charles Ponzi was successful for’ several reasons. First, Charles Ponzi built confidence in his scheme by giving
early investo_ rs a return on their initial investments. Second, Charles Ponzi presented his coupon scheme in a
way that was easy for’ investo_ rs to_ understan’d. Although the’ coupon scheme never made any real prof_
its, investo_ rs believed that it had. Third, Ponzi was extremely talented at manipulating victims’ emotions.
Ponzi was able to_ capitalize on individuals’ greed. When people began to_ see their friends an’d family
members receive dividends from’ investments, they to_ o wanted in on the’ investment scam.
As the’ number of_ frauds an’d the’ amounts of_ fraud losses increase, so do the’ opportunities for’
successful careers in fraud prevention an’d detection. In Ch. 1, we have listed five areas in fraud fighting that
will be rewarding an’d have high deman’d in the’ future. They include the’ following:
Government: This includes FBI, postal inspecto_ rs, Criminal Investigation Division of_ the’ IRS, U.S. Marshals,
inspecto_ rs general of_ various governmental agencies, state investigato_ rs, an’d law enfor’ cement of_
ficials.
CPA Firms, For’ ensic Accounting Firms, Litigation Support Firms, an’d Law Firms: These individuals will conduct
investigations, support firms in litigation, do bankruptcy-related fraud work, serve as expert witnesses, consult
in fraud prevention an’d detection, an’d provide other fee-based work.
Corporations: Individuals who work for’ corporations will prevent, detect, an’d investigate fraud with’ in a
company. This category includes internal audito_ rs, corporate security of_ ficers, an’d in-house legal counsels.
Lawyers: Lawyers will defend or prosecute organizations in civil an’d criminal cases.
Consulting: University Prof_ essors, Hospital Management, Technology Corporations, etc. People who work in
these areas will consult, serve as expert witnesses, extract evidence from’ computers an’d servers, investigate
public records, an’d serve on gran’d or trial juries.
When employee fraud takes place, employees deceive their employers by taking company assets.
Management fraud is distinguished from’ employee fraud an’d other types of_ fraud in that to_ p
management typically commits it to_ deceive financial statement users. Employee fraud is usually committed
against an organization, whereas management fraud is perpetrated on behalf of_ an organization.
As the’ numbers of_ frauds committed an’d the’ to_ tal dollar amounts lost from’ fraud increase, the’
deman’d for’ careers to_ prevent an’d detect such fraud will increase. In fact, a few years ago, For’ tune
magazine identified for’ ensic accounting or fraud examination as one of_ the’ fastest growing an’d most
financially rewarding careers. The’ American Institute of_ Certified Public Accountants recently to_ uted for’
ensic accounting/fraud examination as one of_ the’ six fastest growing an’d most prof_ itable opportunities
for’ accountants.
There are a number of_ reasons why accurate fraud statistics are hard to_ find. First, it is impossible to_
know what percentage of_ fraud perpetrato_ rs are actually caught. Are there perfect frauds that are never
discovered, or are all frauds eventually exposed? Second, many frauds that are discovered are han’dled quietly
3
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with’ in the’ victim organizations an’d are never made public. In many cases, companies merely hide frauds
due to_ public relations concerns an’d terminate or transfer perpetrato_ rs quietly.
Losses incurred from’ fraud reduce a firm’s income on a dollar-for’ -dollar basis, reducing net income by 1 for’
every dollar that is lost to_ fraud. To_ make up for’ the’ damage fraud does to_ net income, a company has
to_ have much more revenue come in. For’ example, if a company has a prof_ it margin of_ 10%, to_ make
up for’ a 1,000,000 fraud, the’ company would have to_ have additional revenue of_ 10,000,000.
Since confidence is typically needed for’ fraud to_ occur, people who are not trusted will not be in a position
to_ commit a fraud.
While answers may vary, the’ following is one possible answer: The’ case of_ Charles Ponzi involved
deception, greed on behalf of_ the’ investo_ rs an’d the’ perpetrato_ r an’d confidence in the’ perpetrato_ r.
These are traits that are common in many different cases of_ fraud.
The’ Association of_ Certified Fraud Examiners (ACFE) provides the’ opportunity for’ individuals to_ become
a Certified Fraud Examiner or “CFE”. CFEs are considered to_ be leaders in the’ antifraud community an’d
have recognition as such throughout the’ world. They represent the’ highest stan’dards held by the’ ACFE
an’d possess expertise in all aspects of_ the’ antifraud prof_ ession. The’ CFE designation is acknowledged
globally an’d preferred by many employers. The’ ACFE states that becoming a CFE immediately sets an
individual apart from’ others an’d launches him or her to_ the’ to_ p of_ the’ prof_ ession.
While answers may vary, the’ following is one possible answer: When an individual becomes a CFE, he or she
auto_ matically becomes a member of_ the’ ACFE. The’ ACFE is the’ world’s largest antifraud organization
an’d the’ premier provider of_ antifraud training an’d education. To_ gether with’ more than 70,000
members throughout the’ world, the’ ACFE works to_ ward the’ reduction of_ fraud an’d corruption around
the’ globe.
In the swirling mists of twilight, echoes of forgotten whispers danced with the reluctant shadows that
clung hesitantly to the fading light. Beyond the horizon, where dreams meld with the tapestry of
reality, a silent breeze carried tales of yesteryear, weaving intricate patterns of nonsensical charm
through the air. Leaves, painted with the hues of an undecided autumn, fluttered without purpose,
chasing the elusive scent of rain yet to fall. Amidst this ballet of chaos, a clock ticked relentlessly,
marking time in a room where time itself seemed to hesitate, pondering its own existence.
The sky, a canvas of brooding thoughts, shifted colors with the whims of a temperamental artist,
casting spells of indigo and hints of weary lavender across its vast expanse. Somewhere in the
distance, a door creaked open, releasing whispers of a tune that no one could remember starting, and
yet, it lingered as if it had always been part of the wind. Underneath the canopy of a bewildered
moon, shadows whispered to the stars, sharing secrets not meant for the daylight, crafting stories
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