Chapter 2

Question 1

What is Criminology and why do people obey laws?

Answer 1

Criminology: sociological study of crime and criminals
Why obey laws: 1. Fear of punishment 2. Desire for rewards 3. To act morally according to society’s standard

Question 2

What is Occupational Fraud & Abuse?

Answer 2

Use of one’s occupation for personal enrichment through deliberate misuse or misapplication of the employer’s resources and assets

Example: Asset misapprop, corruption, petty theft, fictitious payroll

Question 3

4 Common Elements of Occupational Fraud

Answer 3

1. Activity is clandestine
2. Violates employees Fiduciary duties to org
3. Committed for the purpose of financial benefit to the employee
4. Cost the employing orgs assets, revs, or reserves

Question 4

What is White Collar Crime?

Answer 4

Crime in class formed of respected, business and professional men

Question 5

What is Organizational Crime?

Answer 5

Occurs when legitimate and law abiding orgs are involved in criminal offense - Orgs can be prosecuted

International issue with Foreign Corrupt Practices Act

Ex: Unfair prices, unfair business practices, and tax evasion

Question 6

Define Organized Crime,
Money Laundering,
Mail & Wire Fraud, and
Criminal Conspiracy

Answer 6

Organized Crime - Complex involving many indivs, orgs, and jurisdications
Money Laundering - Taking $ from illegal sources and process it so it appears legit
Mail and wire fraud - Involves schemes that use postal service or interstate wires to execute fraud
Criminal Conspiracy - When 2+ people intend to commit an illegal act & take steps toward implementation

Question 7

Who do fraudsters tend to be?

Answer 7

• Trust violators
• Position of trust w/ Org
• Average person
• More than 1 yr working in org (90%)

Question 8

What is Sutherland’s Theory of Differential Association?

Answer 8

Basic Tenet: crime is learned
- criminal behavior occurred w/ other person in process of communication
- criminality cant occur without help of other ppl
- learning occus within intimate personal groups

Question 10

What is Cressey’s Fraud Triangle Hypothesis?

Answer 10

States 3 circumstances that have led trust violators to be overcome by temptation - w/o 1 trust violation can’t happen

1. Perceived Pressure
2. Perceived Opportunity
3. Rationalization

Question 11

What are Some Nonshareable Financial Pressures?

Answer 11

1. Violations of ascribed obligations
2. Problems resulting from personal failure
3. Business Reversals
4. Physical Isolation
5. Status Gaining
6. Employer - employee relations

Question 12

How do violations of ascribed obligation lead to fraud?

Answer 12

Strong motivator of financial crimes
- Person in trusted position has implied duty and refuse to admit they lost money through some act, because would have to admit unworthy to hold their position

Question 13

What are problems resulting from personal failure?

Answer 13

• Trusted problems person feels they caused and are responsible for
• Afraid to lose status, and afraid to admit to anyone who could help, a consequence of own behavior

Question 14

What is a Business Reversals?

Answer 14

Problems arising from conditions beyond personal control, status a big role, desire to maintain appearance of success

Question 15

Physical Isolation

Answer 15

Trusted person has no one to turn to - does not have anyone to help them

Question 16

Status Gaining

Answer 16

• Motivated by desire to improve status to live beyond means or spend lavishly
• Unwilling to settle for lower status is motivation for trust violation

Question 17

Employer - Employee Relations

Answer 17

• Employee resents status within org, but feels he has no choice but to continue working for org: underpaid, overworked, & underappreciated
• Motivation: Getting Even

Question 18

Why do trust violators chose to solve the problem in secret?

Answer 18

Crucial to be able to resolve the problem in secret
- still facing the same nonshareable financial need

Question 19

Why must there be a perceived opportunity?

Answer 19

Must perceive an opportunity to commit crime without getting caught because want their nonshareable financial pressure to remain a secret

Question 20

Why is Fraud Deterrence important to an org?

Answer 20

Employees that perceive they will be caught are less likely to engage in behavior

Question 21

What is Perception of Detection and how is it intertwined w/ Internal Controls?

Answer 21

Internal controls only have deterrent effect when employees persieve the control exists in design and operation

Question 22

What is rationalization and when does it occur?

Answer 22

Makes illegal behavior intellible to maintain trusted person concept and occurs before theft occurs

Question 23

In terms of rationalizations, what are the three categories subjects fall into?

Answer 23

1. Independent Businessment: in business for themselves and convert money entrusted to them - Excuses: Borrowing money or money is theirs bc entrusted to them
2. LT violaters: Take small amnts of $ over time so borrowing , harder to return funds-> Common excuses: keep families from shame, out of necessesity, employer deserved it
3. Absconders: Take money and run, usually unmarried, lower status than other two categories

Question 24

What is the Fraud Scale? What are the two main categories?

Answer 24

Complete list of pressure, opportunity, and integrity variables –> indicators of occupational fraud and abuse
1. Perpertrator characteristics
2. Organizational environment

Question 25

List Personal Characteristic Fraud Factors

Answer 25

1. Living beyond their means 2. An overwhelming desire for personal gain 3. High personal debts 4. Close association w/ custs 5. Feeling pay not enough 6. Family pressure

Question 26

Organizational Environment Fraud Factors

Answer 26

1. 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 seperation of authorization of transacs from custody of related assets 5. Lack of independent checks 6. Inadequate attention to details 7. No seperation from custody from those accounting 8. No sep in accounting function 9. Lack of clear lines authority and responsibility 10. Department not frequently reviewed by internal auditors

Question 27

What elements does the Fraud Diamond add?

Answer 27

Capability - suggests that many large frauds would not have occurred without the perp having the righ capabilities Who: Wolfe and Hermanson

Question 28

What elements added to form the Fraud Pentagon?

Answer 28

**1. Arrogance** - lack of conscience - attitude of superiority and entitle or greed -- rules do not apply to me attitude **2. Competance**

Question 29

Relationship between Job Satisfaction and Deviance

Answer 29

Employees dissatisfied with their jobs are more likely to resort to illegal behavior to fix the inequity

Question 30

Importance of Employee Perception of Control

Answer 30

Stronger the perception theft would be detected, the less likely that the employee would engage in deviant behavior - Increasing perception of detection best way to deter theft

Question 31

Four Aspects of Policy Development

Answer 31

1. Clear understanding of theft behavior 2. Continuous dissemination of positive info reflective of company policies 3. Enforcement of sactions 4. Publicizing the sactions

Question 32

What does M.I.C.E stand for? What are the most and least frequent motivations?

Answer 32

**M**oney - Most frequent motivation **I**deology - Least frequent motivation - terrorist financing **C**oercion - less frequently **E**go/Entitlement - Most frequent motivation

Question 33

What are Situational Fraudsters?

Answer 33

Law abiding person - under normal circumstances would never consider fraud - closely aligns with fraud triangle

Question 34

What are Predatory Fraudsters?

Answer 34

Seeks out organizations where they can start scheme upon being hired - More complex frauds with better concealment - Fraud triangle: Pressure and rationalization play little role, only need opportunity

Question 35

How does collusion work and why do losses get bigger with more perps?

Answer 35

**Selected based on skill** Predators work together and are able to overcome many steps of antifraud controls --> undermine independent verification --> higher losses

Question 36

Diffs btw Collusive and Solo Frauds

Answer 36

- FS fraud more likely - Larger in $ value - Shorter duration - More likely to be discovered by tip or complaint or internal audit - Less likely in US orgs

Question 37

What are the implications of the Fraud Triangle in Court?

Answer 37

- Cannot use elements to show some has the propensity to commit the fraud - Cant use triangle to speculate on mental state of accused - Historically rejected and deemed unreliable