Chapter 2: Why People Commit Fraud

Question 1

Who commits Fraud?

Answer 1

Anyone can commit fraud. Fraudsters are more alike college students than they are incarcerated property offenders.

Question 2

Elements of the Fraud Triangle

Answer 2

Perceived Opportunity, Perceived Pressure, and Rationalization

Question 3

The Fraud Scale

Answer 3

shows the relationship between opportunity, pressure, and rationalization on a sliding scale.

ex: If there is high pressure and high opportunity, less rationalization is needed to commit fraud.

Question 4

Four main groups of pressures

Answer 4

Financial Pressures
Vices
Work-Related Pressures
Other Pressures

Question 5

What provides Opportunity?

Answer 5

Lack of internal controls, asymmetrical information, and ignorance, apathy, or incapacity for guilt.

Question 6

How to establish a good control environment?

Answer 6

Having good management modeling and labeling, good communications (vertically and horizontally with management), a clear organizational structure, and an effective internal audit department.

Question 7

COSO Framework

Answer 7

cERAcAICM

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communications
5. Monitoring

Question 8

What should a good accounting system ensure?

Answer 8

Transactions are:
Valid
Properly authorized
complete
properly classified
reported in the proper period
properly valued
summarized correctly

Question 9

5 Primary Control Activities

Answer 9

SAPID
1. Segregation of Duties
2. Authorization
3. Physical Safeguards
4. Independent Checks
5. Documentation

Question 10

Dual Custody

Answer 10

two individuals work together to complete a task

Question 11

Inability to Judge the Quality of Performance

Answer 11

There are certain products that are difficult to judge either the completion or quality of such as the performance of a lawyer or a doctor; you have to trust that they are doing their job properly

Question 12

Failure to Discipline Fraud Perpetrators

Answer 12

It is expensive and takes a lot of time to prosecute fraudsters, so they just dismiss them.
This leads to them just building a stronger resume and getting even better jobs with more responsibilities and more opportunities for fraud. It also sets a bad example.

Question 13

Asymmetrical Information

Answer 13

One person knows more than the other and can take advantage of the imbalance of information.

Question 14

Ignorance, Apathy, or Incapacity for guilt

Answer 14

Some fraudsters don’t care about others, so they take advantage of those who are “vulnerable” such as the elderly or foreign individuals.

Question 15

Rationalization

Answer 15

trying to make themselves feel better about committing fraud

Question 16

Why do people recruit for fraud

Answer 16

most frauds require collusion: especially financial statement fraud.

Question 17

power

Answer 17

the probability that a person can carry out his or her own will despite resistance

Question 18

5 types of power

Answer 18

1. reward power
2. coercive power
3. expert power
4. legitimate power
5. referent power

Question 19

reward power

Answer 19

the ability of a fraud perpetrator to convince a potential victim that he or she will receive a certain benefit through participation in the fraud scheme.

Question 20

coercive power

Answer 20

the ability of the fraud perpetrator to make an individual perceive punishment if he or she does not participate in the fraud

Question 21

expert power

Answer 21

the ability of the fraud perpetrator to influence another person because of expertise or knowledge.

Question 22

legitimate power

Answer 22

the ability of the fraud perpetrator to convince a potential perpetrator that he or she truly has power over him or her.

Question 23

referent power

Answer 23

the ability of the perpetrator to relate to the potential co-conspirator

Question 24

For Successful Collusion

Answer 24

the main perpetrator must have an element of perceived power, and the potential co-conspirator must believe in that power.