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Chapter 3 Test For Forensic Accounting & Fraud Examination, 1 E Mary-jo Kranacher Isbn-10; 047043774x Wiley 2010

Chapter 3 Test for Forensic Accounting & Fraud Examination, 1 e Mary-Jo Kranacher ISBN-10; 047043774X Wiley 2010




Forensic Accounting By Mary-Jo Kranacher, CPA/CFF, CFE Chapter 3 Who Commits Fraud and Why: Criminoo!y and Ethics LEARNING OBJECTIVES 3-1 "escri#e occupationa $raud and a#use% 3-2 Compare and contrast theories o$ crime causation% 3-3 &denti$y the si' situationa cate!ories that cause nonsharea#e pro#ems $rom Cressey(s research% 3-4 "iscuss the essence o$ or!ani)ationa crime% 3- *i+e e'ampes o$ #eha+iora or other en+ironmenta indications o$ $raud% 3-! E'pain the reationship #eteen an empoyee(s position and the e+e o$ the$t accordin! to .oin!er and Car(s research0% 3-" Anay)e the roe o$ corporate !o+ernance mechanisms in $raud pre+ention% 3-# "escri#e corporate !o+ernance #readons in the $aciitation o$ historica $rauduent acts% 3-$ &denti$y ethica issues, con$icts o$ interest, and noncompiance ith corporate poicies and  procedures in the conte't o$ a speci$ic case% 3-1% "iscuss aternati+e courses o$ action in a !i+en scenario ithin the $rameor o$ appropriate ethica conduct% True&F'(se Anser: 1-2/F 1% Without Without +isuay +isuay represent representin! in! the crime scene, scene, +ery di$$erent di$$erent concusions concusions are reached a#out ho committed a crime% 2 Anser: 1-2/F 4% 4% Conspiracy Conspiracy is a means means o$ prosecuti prosecutin! n! the indi+idua indi+iduass in+o+ed in+o+ed in ie!a ie!a or!ani)ed acti+ity% 2 Anser: 1-2/F 3% 3% 5e!i!ence 5e!i!ence appies appies hen hen a person person acts acts in a reasona# reasona#ee and prudent prudent manner% F Anser: 1-2/F 6% Cressey Cressey caed caed em#e))ers em#e))ers 7temptation 7temptation +ioators% +ioators%88 F Page 1 of 24 Anser: 1-2/F 9% Accordin! Accordin! to A#rec A#recht, ht, persona persona inte!rity inte!rity re$ers re$ers to the persona persona code code o$ ethica #eha+ior that each person adopts% 2 Anser: 1-2/F % White-co White-coar ar crime crime is not used interchan! interchan!ea#y ea#y ith ith occupationa occupationa $raud $raud and economic crime% F Anser: 1-2/F ;% ;% For purposes purposes o$ de$ini de$inin! n! occupationa occupationa $raud $raud and a#use, a#use, empoyees empoyees incude incude ony top or midde mana!ers% F Anser: 1-2/F <% <% 2he term hitehite-coar coar crime captures captures the essence essence o$ the type type o$ perpetrator  perpetrator  that one $inds at the heart o$ occupationa $raud and a#use% 2 Anser: 1-2/F =% >r!ani)ationa crimes occur hen entities, companies, corporations, not$or-pro$its, nonpro$its, and !o+ernment #odies, otherise e!itimate and aa#idin! or!ani)ations, are in+o+ed in a crimina o$$ense% 2 Anser: 1-2/F 1?% 2he eement o$ pro'imate cause $or $or ne!i!ence means the painti$$ painti$$ must esta#ish that dama!es resuted $rom the de$endant(s #reach o$ duty% F Anser: 1-2/F 11% &n order to in an aard $or dama!es $or ne!i!ence, ne!i!ence, the [email protected] party must pro+e ia#iity and dama!es% 2 Anser: 1-2/F 14% 2he amount o$ dama!es dama!es pro+en under ne!i!ence may may #e reati+ey uncertain% F Anser: 1-2/F 13% 2he nonsharea#e pro#ems, Cressey in+esti!ated, in+esti!ated, threatened the status o$ the su#@ects, or threatened to pre+ent them $rom achie+in! a hi!her status than the one they occupied at the time o$ their +ioation% 2 Page 2 of 24 Anser: 1-2/F 16% ioations o$ ascri#ed o#i!ations ha+e historicay pro+ed to #e stron! moti+ators o$ $inancia crimes% 2 Anser: 1-2/F 19% Percei+ed opportunity is necessary so that the perpetrator o$ a $raud can mae his ie!a #eha+ior intei!i#e to him and maintain his concept o$ himse$ as a trusted person% F Anser: 1-2/F 1% Cressey(s cassic $raud trian!e heps e'pain the nature o$ a occupationa o$$enders% F Anser: 1-2/F 1;% Accordin! to A#recht, opportunities to commit $raud may #e created #y indi+iduas, or #y de$icient or missin! interna contros% 2 Anser: 1-2/F 1<% &n !enera, increasin! the perception o$ detection may #e the #est ay to deter empoyee the$t, hie increasin! the sanctions that are imposed on occupationa $raudsters i ha+e a imited e$$ect% 2 Anser: 1-2/F 1=% Forma contros can #e #est descri#ed as the ay an empoyee internai)es !roup norms o$ the or!ani)ation% F Anser: 1-2/F 4?% Ethics in+o+es uestions reuirin! re$ecti+e choice and their conseuences to the indi+idua and others decision pro#ems0% 2 Page 3 of 24 )u(ti*(e C+oice 1-M/C 1% Based on a num#er o$ theories, peope o#ey as $or a o$ the $ooin! reasons except : A% 2he $ear o$ punishment B% 2he desire for rewards C% &n order to act in a just and moral manner according to society’s standards. "% "ue to a duty to act Anser: " Portions o$ the &C> Act outa a o$ the $ooin! except : in+estin! ie!a $unds in another #usiness% acuisition o$ a #usiness throu!h ie!a acts% a pri+ate or ci+i ron! or [email protected] other than #reach o$ contract% the conduct o$ #usiness a$$airs ith $unds deri+ed $rom ie!a acts% Anser: 1-M/C 4% A% B% C% "% C 2he e!a standard $or ne!i!ence has a o$ the $ooin! eements except : ire $raud duty% #reach% cause in $act% Anser: 1-M/C 3% A% B% C% "% A Anser: 1-M/C 6% Which o$ the $ooin! is not  one o$ the $our common eements o$ occupationa $raud and a#use $irst identi$ied #y the Association o$ Certi$ied Fraud E'aminers in 1==D A% 2he acti+ity costs the empoyin! or!ani)ation assets, re+enues, or reser+es% B% 2he acti+ity +ioates the empoyee(s $iduciary duties to the or!ani)ation% C% 2he acti+ity is candestine% "% 2he acti+ity is restricted to corporate e'ecuti+es% " Page 4 of 24 Anser: 1-M/C 9% &n terms o$ the de$inition o$ occupationa $raud and a#use, ho is an empoyeeD A% Any person ho recei+es re!uar and periodic compensation $rom an or!ani)ation $or his or her a#or% B% >ny ran and $ie orers% C% Any trust +ioator% "% especta#e #usiness and pro$essiona men% A Anser: 1-M/C % A% B% C% "% " Anser: 1-M/C ;% A o$ the $ooin! are characteristics o$ a#sconders except : A% o occupationa and socioeconomic status B% typicay sin!e or separated $rom their spouse% C% $e !roup associations% "% ha+e stron! socia ties% " Anser: 1-M/C <% .oin!er and Car asserted that mana!ement must pay attention to a o$ the $ooin! aspects o$ poicy de+eopment except :: A% continuous dissemination o$ positi+e in$ormation re$ecti+e o$ the company(s poicies% B% en$orcement o$ sanctions% C% su#stantiay increasin! the interna security presence% "% pu#ici)in! the sanctions% C tatus !ainin! is most typicay associated ith hich o$ the $ooin!D percei+ed economic pay ineuities% no one to share a pro#em ith% re+en!e $or un$air treatment in the orpace% 7eepin! up ith the Joneses8 syndrome% Page 5 of 24 Anser: 1-M/C =% MisD A% B% C% "% B Which principe o$ ethica pro#ems as championed #y John tuart 2he *enerai)ation Principe% 2he tiitarian Principe% 2he &mperati+e Principe% 2he esponsi#iity Principe% 1-M/C 1?% eect the most correct statement $rom those #eo re!ardin! the e!a standards $or ne!i!ence% A% Breach—a determination that the defendant failed to use ordinary or reasonable care in the exercise of that duty % B% easona#eness—a determination that the defendant failed to use ordinary or reasonable care in the exercise of that duty% C% Breach—an actual connection between the defendant’s breach of duty and the plainti’s harm can be established "% Cause in Fact G the defendant must have been the proximate cause or contributed to the injury to the plainti. Anser: A Anser: 1-M/C 11% Accordin! to Cressey, a trust +ioator is #est descri#ed as A% $ictious coatera% B% an em#e))er% C% one ho is iin! to sette $or o status% "% a satis$ied empoyee% B Anser: 1-M/C 14% .oin!er and Car $ound that the same inds o$ empoyees ho en!a!e in orpace de+iance aso en!a!e in empoyee the$t% Accordin! to their research, hich o$ the $ooin! is not a characteristic e+idence o$ the empoyeethie$D A% arri+es eary at or% B% taes on! co$$ee #reas% C% a#uses sic ea+e poicy% "% has so ormanship% A Page 6 of 24 Anser: 1-M/C 13% Common +ioations pertainin! to occupationa $raud and a#use incude a o$ the $ooin! except : A% asset misappropriation% B% pilferage% C% false overtime % "% A o$ these are common +ioations% " Anser: 1-M/C 16% 2he term 7hite coar crime8 as coined #y: A% "onad Cressey% B% te+e A#recht% C% 2he Association $or Certi$ied Fraud E'aminers% "% Edin utherand% " Anser: 1-M/C 19% e!ardin! crimes ie $raud, do Federal law allows organiations to be prosecuted in a manner similar to individuals! A% 5o% B% Hes% C% 5o, #ut internationa a does% "% >ny i$ they are the party ith the deep pocets in the case% B Anser: 1-M/C 1% 2he pendin! asuits in the notes to the $inancia statements o$ 1?Ks o$ most corporations are most iey a o$ the $ooin! except : A% anti"trust actions% B% intellectual property infringements % C% ta' caims% "% &C> acti+ities% " Anser: 1-M/C 1;% &C> typicay addresses hich o$ the $ooin! acti+itiesD A% en+ironmenta issues B% wor#place issues such as lost wages$ disability$ and wrongful death% C% costs and lost pro%ts associated with construction delays% "% money laundering% " Page 7 of 24 Page 8 of 24 Anser: 1-M/C 1<% A o$ the $ooin! are characteristic o$ torts except : A% a private or civil wrong or injury % B% a #reach o$ contract% C% remedy is in the form of an action for damages% "% the party who was injured is entitled to collect damage compensation% B Anser: 1-M/C 1=% &n order to win an award for damages$ the injured party under a negligence claim must generally prove A% reasona#eness and prudence% B% ia#iity and dama!es% C% intentiona +ioation #eyond a reasona#e dou#t% "% a hi!h threshod o$ historic +ioations% B Anser: 1-M/C 4?% Which o$ the $ooin! indi+iduas theori)ed that the earnin! o$ crimina acti+ity usuay occurred ithin intimate persona !roupsD A% "onad Cressey B% te+e A#recht C% Edin utherand "% ichard .oin!er and John Car  C Anser: 1-M/C 41% Iar!e $rauds are typicay associated ith a o$ the $ooin! except : A% Iac o$ se!re!ation o$ duties and responsi#iities% B% Pacin! undeser+ed trust in ey empoyees% C% >peratin! on a crisis #asis "% Worin! ith mana!ement to set reaistic !oas " Anser: 1-M/C 44% aria#es $rom A#recht(s study o$ 7red $a!8 +aria#es pertainin! to occupationa $raud $e into hich o$ the $ooin! to cate!oriesD A% perpetrator characteristics and or!ani)ationa en+ironment% B% socioeconomic !roup and education% C% moti+ation characteristics and education% "% attitudes and ha#its% A Page 9 of 24 Page 10 of 24 Anser: 1-M/C 43% Accordin! to .oin!er and Car(s research, hich o$ the $ooin! are east iey to en!a!e in ie!a #eha+ior in the orpaceD A% youn!er orers% B% oder orers% C% empoyees that $ee they are e'poited% "% dissatis$ied orers% B Anser: 1-M/C 46% e!ardin! the$t, &ollinger and 'lar# were able to con%rm a direct relationship between( A% computeri)ed in+entory contro and sic ea+e poicy% B% an empoyee(s position and the e+e o$ the$t% C% oer e+es o$ income and hi!her e+es o$ the$t% "% 5one o$ these ere con$irmed as a direct reationship% B Anser: 1-M/C 49% With respect to security controls$ &ollinger and 'lar# discovered that most employees regarded these measures to be A% tar!eted toard e'terna security% B% tar!eted toard interna security% C% part o$ increasin! morae% "% part o$ or!ani)ationa trust communication% A 1-M/C 4% Which o$ the $ooin! is a si!ni$icant concusion #ased on the research o$ .oin!er and CarD A% su#stantiay increasin! the internal security presence may reduce employee theft. B% tightening controls over property deviance may create less detrimental acts aecting the productivity of the organiation% C% special attention should be aorded to older employees$ since they have lower levels of %nancial authority and are more li#ely to steal for their retirement % "% increased management sensitivity to its employees would reduce all forms of wor#place deviance. Anser: " Page 11 of 24 Anser: 1-M/C 4;% Which o$ the $ooin! oud #e cassi$ied as a #usiness re+ersa that eads to the perception o$ non-sharea#e $inancia pro#emsD A% pro#ems arisin! $rom in$ation% B% pro#ems arisin! $rom hi!h interest rates% C% pro#ems arisin! $rom economic donturns% "% pro#ems arisin! $rom ha+in! no one to turn to% " Anser: 1-M/C 4<% Which o$ the $ooin! is the most iey reason that Cressey  #eie+es an empoyee tries to so+e a $inancia pro#em in secretD A% #ecause they are a$raid o$ osin! the appro+a o$ those around them% B% #ecause they are a$raid o$ !ettin! arrested% C% #ecause they orry that someone ese i ant part o$ the money they stea% "% #ecause they are a$raid they i ha+e to !o #ac to coe!e% A 1-M/C 4=% )ccording to 'ressey$ the embelers that he studied generally rationalied their crimes by viewing them as all of the following except : A% 2hey +ieed them as essentiay noncrimina% B% 2hey +ieed them as @usti$ied% C% 2hey +ieed them as part of a general irresponsibility for which they were not completely accountable % "% 2hey +ieed them as part o$ sis set% Anser: " Anser: 1-M/C 3?% When independent #usinessmen in Cressey(s study con+erted deposits that had #een entrusted to them, they e'pained it as: A% #orroin!% B% the $unds ere reay theirs, so you can(t stea $rom yourse$% C% e+eryone does it% "% A o$ the a#o+e% " Page 12 of 24 1-M/C 31% ationai)ations o$ on!-term +ioators in Cressey(s study incuded a o$ the $ooin! except : A% they were embeling to #eep their families from shame$ disgrace$ or poverty. B% they ere em#e))in! #ecause theirs as a case o$ necessity% C% their co-orers encoura!ed them to do it% "% they ere em#e))in! #ecause their empoyers ere dishonest and needed to #e $eeced% Anser: C Anser: 1-M/C 34% Cressey(s [email protected] o$ e+ents #asicay says that a three eements must #e present $or the trust +ioation to occur% 2hese e+ents are: A% no $raud pre+ention pro!ram is a+aia#e, the o$$ender acs a conscience, empoyees are $riends ith customers% B% percei+ed non-sharea#e $inancia pro#em, percei+ed opportunity, and the a#iity to rationai)e% C% the perpetrator is not married, is a mae, and needs to #uy a car or other ar!e asset% "% there are no itnesses to the crime, the indi+idua has a stron! chaen!e to  #eat the system, and the indi+idua has a !am#in! pro#em% B Anser: 1-M/C 33% A#recht de+eoped the $raud scae hich incudes the $ooin! components: A% situationa pressures, percei+ed opportunity, and persona inte!rity% B% hi!h persona de#t, i+in! #eyond one(s means, dru! or acoho pro#ems% C% situationa pressures, persona inte!rity, and crimina record% "% 5one o$ the a#o+e are the components $or the $raud scae% A Anser: 1-M/C 36% Iar!e $raud perpetrators are more iey to use the money $or a o$  the $ooin! except : A% to purchase new homes% B% to pay $or e'pensi+e +acations% C% to support e'tramarita a$$airs% "% to pay ta'es% " Page 13 of 24 Anser: 1-M/C 39% Which is considered the oest threshod $or ethica decision main!D A% A pro$essiona code o$ ethics o$ an accountin! or!ani)ation% B% Codes o$ conduct or directi+es a#out hat is #est $or society% C% 2he a% "% Codes o$ conduct !uided #y trust in the underyin! +aues that !uide society% C Page 14 of 24 S+ort Ans,er Ess' Anser: 1-AE 1% 2he de$inition o$ ethics has certain ey eements% What are these $our ey eementsD 1. Ethics in+o+es uestions reuirin! re$ecti+e choice and their conseuenc es to the indi+idua and others decision pro#ems0% 2. Ethics considers the rues and re!uations that are in pace to !uide #eha+ior as e as the conseuences $or #reain! those rues and re!uations% 3. Ethics o$ten reies on mora principes to !uide choices o$ ri!ht and ron!% 2hese ethica $rameors are discussed in more detai #eo0% 4. Ethics is concerned ith outcomes, the assi!ned impact associated ith main! a decision here the impact re$ects the underyin! +aues o$ indi+iduas and or!ani)ations% 2e't pa!e ;0 1-AE 4% Can a a permit an action that is prohi#ited #y a pro$ession(s code o$ ethicsD "iscuss and !i+e an e'ampe% Anser: *t may happen that a law might permit an action that is prohibited by a profession’s code of ethics. )s an example$ for years the )merican *nstitute of 'erti%ed Public )ccountants +)*'P), had rules of ethics that prohibited advertising by its members. -he profession believed that dignity and objectivity were enhanced by #eeping practitioners out of this aspect of the commercial world. -he ./. Federal -rade 'ommission and the ./. 0epartment of 1ustice$ however$ disagreed. -hey decided that the prohibitions against advertising violated the laws barring restraint of trade. -he government forced the profession to eliminate its rules against advertising. -his example illustrates the triumph of one set of values +the government’s belief that competition through advertising would bene%t consumers, over another set +the profession’s belief that dignity should be preserved,. +-ext page 22, Page 15 of 24 Anser: 1-AE 3% 2hree ethica principes pro+ide a $rameor $or ethica decision main!% What are theyD Brie$y summari)e their assumptions% 2he three ethica principes that pro+ide a $rameor $or ethica decision main! incude: 10 the imperati+e principe 40 the utiitarian principe and 30 the !enerai)ation principe% 2he imperati+e principe ignores outcomes by providing directives and rules without exception that are in the best interest of society as a whole. -his unconditional obligation assumes that all people are aware of the rule and all agree to follow the rule. 2he Kantian imperati+e is +ery strict #ut provides an easy to understand framewor# for ethical decision ma#ing. *t is$ however$ almost impossible to follow all of the time$ in practice$ when a person is faced with violating an imperative$ but it alerts persons that they are faced with an ethical problem where they must see# out additional consideration for weighing the conse3uences.  -he utilitarian principle suggests that ethical problems should be solved by weighing the good conse3uences and the bad conse3uences. -he correct course of action is that which provides the most good or minimies the bad. -here are two forms of utilitarianism. -hey are 4act5 and 4rule.5 )ct utilitarianism suggests that it is the conse3uences of the act that matter. 6ule utilitarianism emphasies the bene%ts to society of general rules +similar to a 7antian imperative, and suggests that the decision to brea# a rule is one that re3uires very careful consideration. 6ule utilitarianism re3uires that society as a whole be able to determine which rules are important and ought to be followed. 6ules then are also in8uenced by history$ nationality$ culture$ social goals$ and at some level economics. &owever$ it is di9cult for everyone to agree on universal principles.  -he generaliation principle is an attempt to marry imperatives with utilitarianism. *f the outcome is considered undesirable$ then that conduct ought to be avoided unless the person has a very good reason. :eneraliation provides the 8exibility needed to address the shortcomings of 7ant and the speci%c direction that seems to be missing from utilitarianism. 2e't pa!e ;;0 Page 16 of 24 1-AE 6% 2o #e success$u in any speciai)ed $ied ie $orensic accountin! or $raud e'amination, pro$essionas must ha+e characteristics that set them apart as a  pro$ession% What are these $i+e characteristicsD Anser: 1. ) specialied body of #nowledge. 2. )dmission governed by standards and 3uali%cations. 3. 6ecognition and acceptance by society +a characteristic that in8icts social responsibility bac# on the profession,. 4. /tandards of conduct for dealing with the public$ other professionals$ and clients. 5. )n organiational body devoted to the advancement and responsibilities of the profession. +-ext page 2;, 1-AE 9% What is tone at the top and hy is it an important part o$ ethica #eha+ior in an or!ani)ationD Anser: so prospective employers should see# out prior supervisors. =hile costly$ organiations should consider bac#ground chec#s on prospective employees. 0ue to cost constraints$ organiations may want to restrict the positions for which bac#ground chec#s are completed. -o avoid charges of discrimination$ prospective employers need to complete such chec#s in a consistent manner and in compliance with corporate policy. Finally$ once employees are hired$ they need to be supervised and trained with controls and ethical behavior in mind. +-ext page ?@, A"/)< C. =hat is the %ve"step approach to fraud prevention$ deterrence$ and detection! )nswer( planning, 1. 7now the exposures +brainstorming$ ris# assessment$ audit 2.  -ranslate exposure into li#ely symptoms 3. )lways be on the loo#out for symptoms 4. Build audit and data"mining programs to loo# for symptoms 5. Pursue these issues to their logical conclusion and ground decisions in the evidence +evidence"based decision"ma#ing, Critic'( T+in/ing E0ercise 2hree peope chec into a hote% 2hey pay 3? to the mana!er and !o to their room% 2he mana!er  suddeny remem#ers that the room rate is 49 and !i+es 9 to the #e#oy to return to the peope% >n the ay to the room, the #e#oy reasons that 9 oud #e di$$icut to share amon! three  peope so he pocets 4 and !i+es 1 to each person% 5o each person paid 1? and !ot #ac 1% o they paid = each, totain! 4;% 2he #e#oy has 4, totain! 4=% Where is the missin! 1DL Page 18 of 24 Anser: Be care$u o$ hat you are addin! to!ether% >ri!inay, they paid 3?, they each recei+ed #ac 1, thus they no ha+e ony paid 4;% >$ this 4;, 49 ent to the mana!er $or the room and 4 ent to the #e#oy% Te0t Reie, uestions 4-2 1% "escri#e occupationa $raud and a#use% Anser: Occupational fraud and abuse is de%ned as 4the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organiation’s resources or assets.5 Dccupational fraud and abuse involves a wide variety of conduct by executives$ employees$ managers$ and principals of organiations$ ranging from sophisticated investment swindles to petty theft. 'ommon violations include asset misappropriation$ fraudulent statements$ corruption$ pilferage$ petty theft$ false overtime$ using company property for personal bene%t$ %ctitious payroll$ and sic# time abuses. Page 19 of 24 4-2 4% Compare and contrast Cressey(s and A#recht(s theories o$ crime causation% Anser: Athou!h Cressey $ocused on em#e))ement and A#recht $ocused on occupationa $rauds, their eements ere +ery simiar% Accordin! to A#recht, three elements must be present for a fraud to be committed( a situational pressure$ a perceived opportunity to commit and conceal the dishonest act$ and some way to rationalie +verbalie, the act as either being inconsistent with one’s personal level of integrity or justi%able. )ccording to 'ressey$ the three elements are perceived pressure or a nonshareable %nancial pressure$ a way to secretly resolve the dishonest act or the lac# of deterrence by management via a perceived opportunity$ and %nally some way to rationalie the act$ because the perpetrator does not see him or herself as a criminal. 4-2 3% &denti$y $rom Cressey(s research the si' situationa cate!ories that cause non-sharea#e pro#ems% Anser: 'ressey found that the nonshareable problems encountered by the people he interviewed arose from situations that could be divided into six basic categories( E violation of ascribed obligations E problems resulting from personal failure E business reversals E physical isolation E status gaining E employer"employee relations 4-2 6% "iscuss the essence o$ or!ani)ationa crime% Anser: Organizational crimes occur when entities$ companies$ corporations$ not"for" pro%ts$ nonpro%ts$ and government bodies$ otherwise legitimate and law"abiding organiations$ are involved in a criminal oense. *n addition$ individual organiations can be trust violators when the illegal activities of the organiation are reviewed and approved by persons with high standing in an organiation such as board members$ executives$ and managers. Federal law allows organiations to be prosecuted in a manner similar to individuals. For example$ although the )rthur )ndersen conviction was later overturned by the ./. /upreme 'ourt$ the organiation was Page 20 of 24 convicted of obstruction of justice$ a felony oense that prevented them from auditing public companies. 'orporate violations may include administrative breaches$ such as noncompliance with agency$ regulatory$ and court re3uirements> environmental infringements> fraud and %nancial crimes$ such as bribery and illegal #ic#bac#s> labor abuses> manufacturing infractions related to public safety and health> and unfair trade practices. Anser: 4-2 9% *i+e e'ampes o$ #eha+iora indications o$ $raud% Beha+iora symptoms o$ $raud can incude such #eha+ior as: 'an’t loo# people in the eye the employee’s position only aects the method and amount of the theft after the decision to steal has already been made. Page 21 of 24 4-2 ;% Anay)e the roe o$ corporate !o+ernance mechanisms in $raud pre+ention% Anser: " and ere discussed in some detai ith mem#ers o$ Audit and Compiance Committee% EC reuires that e'chan!es 5HE, AE, and  5A"A0 reuire $inancia iteracy $or a audit committee mem#ers and $inancia e'pertise $or at east one mem#er% At east 6 o$  mem#ers had $inancia e'pertise: o#ert Jaedice, Pro$essor o$ Accountin! at tan$ord ni+ersity Wendy *raham, Ph" in Economics and $ormer Chair o$ Commodity Futures 2radin! Commission Iord John Waeham, CA and British ecy o$ tate $or Ener!y Paoa Ferra) Pereira, President o$ tate Ban o$ io de Janerio • • • • Page 22 of 24 EnronNs B>" re+ieed and appro+ed creation o$ PEs and assi!ned Audit Committee duty to re+ie transactions% B>" ai+ed company(s code o$ ethics $or PE transactions% Audit Committee $aied to adeuatey understand, re+ie, and monitor PEs and EnronNs accountin! and reportin! practices% Anser: 4-2 =% &denti$y ethica issues, con$icts o$ interest, and noncompiance ith corporate poicies and procedures in the Enron case% Enron had a code o$ ethics that prohi#ited mana!ers and e'ecuti+es $rom #ein! in+o+ed in another #usiness entity that did #usiness ith their on company% But these codes o$ ethics ere +ountary and ere essentiay set aside #y the #oard o$  directors% 2he e!a structure aoed mana!ers to enter these arran!ements, hich constituted a con$ict o$ interest and hie the mana!ers and e'ecuti+es had a $iduciary duty to act in the #est interest o$ the company and its sharehoders, there as considera#e discretion $or them to e'ercise their on #usiness  @ud!ment a#out hat as in the #est interest o$ the company% By succum#in! to !reed and dishonesty #y secrety e'ercisin! stoc options and $asey reportin! the  per$ormance reaity o$ the $irm to other staehoders, top Enron mana!ers a#andoned the #asic standards o$ inte!rity and created a noncompiance reaity that as much di$$erent than *AAP or EC reportin! standards had e+er ima!ined% "iscuss aternati+e courses o$ action in the Enron case ithin the G"-6H A@. $rameor o$ appropriate ethica conduct% Anser: Alternative decisions may result in variations of good and bad conse3uences. -herefore$ the tas# is a di9cult one and the choice must be left to individuals. *t is impossible to provide a blueprint for every situation with laws$ rules$ and exceptions.  -he bottom line is that civilied societies are based on trust with underlying values and implicit codes of conduct that guide our behavior. -he decision process is di9cult$ and the range of possible outcomes suggests that the right choice is not always obvious. -hough doing the right thing can be di9cult$ as members of society$ we have a responsibility to reach for that goal every day$ without exception. *n practice$ fraud and forensic professionals can start with rules$ laws$ and 7antian imperatives to identify ethical situations +ethical dilemmas, that re3uire more in"depth evaluation. Dnce the ethical problems have been identi%ed$ the Page 23 of 24 evaluation process begins and professionals can use their own framewor# for ethical problem solving$ including using personal rules and processes for decision ma#ing. -he fraud and forensic professional is not alone and should solicit the input and opinions of other practicing professionals. *n some cases$ guidance and advice from professional organiations and associations can assist the individual in ma#ing the best decision. )fter careful consideration of the alternative outcomes and the decision is made$ the professional can then move forward to implement that decision. -his process will help to ensure that the anticipated goals are realied while also attempting to mitigate any negative conse3uences.