,Solution manual for Forensic Accounting and
Fraud Examination, 2nd Edition by Mary-Jo
Kranacher
Hello all ,
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Our website :
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,End of Chapter Material
Chapter 1
ANSWER KEY – CHAPTER 1 END OF CHAPTER MATERIAL
CRITICAL THINKING
CT-1 Anthony and Cleopatra. Everything needed to answer the question “how did they die?” is
contained in the following passage:
Anthony and Cleopatra are lying dead on the floor in a villa. Nearby on the floor is a broken
bowl. There is no mark on either of their bodies, and they were not poisoned. With this
information, determine how they died.
Solution. Suffocation. Why? Anthony and Cleopatra are fish. This fact would be observed as soon as the
investigator enters the room. Fish out of water, “lying dead on the floor” would lead to suffocation as
the most likely cause of death. The issue is one of assumptions. Most readers assume that Anthony and
Cleopatra are people. This tends to limit the ability of the reader to “think outside the box” to derive the
proper solution. The challenge is that most people make assumptions and do not even realize that an
assumption is being made. For forensic accounting and fraud examination professionals, it’s critical to
keep an open mind, overtly (to the extent possible) identify all assumptions and base conclusions solely
on the evidence available.
CT-2 The Light Switch. A man stands at one end of a 100 meter curved hallway where he cannot see
the end. Next to him are three light switches, and at the end of the hall is one incandescent light.
How many feet will the man have to walk to definitively say which light switch operates the light?
Solution. 100 meters. How do we know for sure?
Flip on switch 1 and leave it one for a minute or two, then switch it off
Flip on switch 2 and immediately walk 100 meters to the end of the hallway
If:
The Light is On, Then Switch 2 Controls the Light;
The Light is Off but Warm, Then Switch 1 Controls the Light;
The Light is Off and Cold, Then Switch 3 Controls the Light
REVIEW QUESTIONS
1-1 Define fraud and identify a potentially fraudulent situation.
Answer: Fraud is an intentional deception, whether by omission or co-mission, that
causes its victim to suffer an economic loss and/or the perpetrator to realize a gain.
Potentially fraudulent situations may include, for example:
Misappropriation of funds, securities, supplies, or other assets.
Impropriety in the handling or reporting of money or financial transactions.
Profiteering as a result of insider knowledge of company activities.
Disclosing confidential and proprietary information to outside parties.
Disclosing to others, securities activities engaged in or contemplated by the company.
1|Page
, Accepting or seeking anything of material value from contractors, vendors, or persons
providing services/materials to the Company. Exception: Gifts less than US $50 in value.
Destruction, removal, or inappropriate use of records, furniture, fixtures, and
equipment.
1-2 Differentiate between fraud and abuse.
Answer: Although both fraud and abuse involve an intentional deception that causes its
victim to suffer an economic loss and/or the perpetrator to realize a gain, abuse does
not rise to the level of fraud. Abuse is often a way to describe a variety of petty crimes
and other counterproductive behavior, such as surfing the web while at work, coming to
work late or leaving early, using sick leave when not sick, that have become common
and even silently condoned in the workplace.
1-3 Describe the services that a forensic accountant might provide related to a marital
dispute.
Answer: Forensic accountants may assist attorneys with assembling the financial
information necessary to either bolster (if hired by the plaintiff) or undercut (if hired by
the defendant) a case. This may include, for example, locating hidden marital assets or
income, calculating the present value of future cash flow from retirement plans and
providing testimony in the case.
1-4 Explain the differences between an audit, fraud examination, and forensic accounting
engagement.
Answer: Audits, fraud examinations, and forensic accounting engagements have six major
differences:
1. Timing - Audits are conducted on a regular recurring basis while a fraud examination is
nonrecurring and is only conducted on sufficient predication. A forensic accounting
engagement is also nonrecurring and is only conducted after an allegation of
misconduct.
2. Scope - The scope of an audit is general while the scope of a fraud examination or
forensic accounting engagement is specific. Audits are a general examination of
financial information for material misstatements while fraud examiners and forensic
accountants are engaged to resolve a specific allegation.
3. Objective - The objective of auditing is to express an opinion on the financial statements
of an organization. The objective of a fraud examination is to determine whether or not
fraud has taken place and to determine who is responsible, while a forensic accounting
engagement is to determine the financial impact of the allegations.
4. Nature of the relationship - Auditing is non-adversarial while fraud examination is
adversarial in nature. The forensic accountant is independent.
5. Methodology - Auditing primarily entails examining financial data, while fraud
examination and forensic accounting involve gathering sufficient financial and non-
financial evidence to meet their objective.
6. Approach - Auditors are required to approach an audit with professional
skepticism while fraud examiners and forensic accountants attempt to establish
sufficient proof to meet their objective.
2|Page
, 1-5 Explain the theory of the fraud triangle.
Answer: The fraud triangle provides an explanation for the conditions necessary for
fraud to occur – perceived pressure, perceived opportunity, and rationalization.
1-6 List the legal elements of fraud.
Answer: Under common law, fraud includes four essential elements:
1. A material false statement
2. Knowledge that the statement was false when it was spoken
3. Reliance on the false statement by the victim
4. Damages resulting from the victim’s reliance on the false statement
1-7 Identify common fraud schemes.
Answer: Common fraud schemes include asset misappropriation, corruption, and false
statements.
1-8 Give examples of non-fraud forensic and litigation advisory engagements.
Answer: Engagements may be criminal, civil or administrative cases that involve
economic damage claims, workplace or matrimonial disputes, or asset and business
valuations.
1-9 Describe the fraud examiner/forensic accountant’s approach to investigations.
Answer: Fraud examination and forensic accounting entail examining documents,
reviewing records, and interviewing witnesses.
1-10 Explain fraud examination methodology.
Answer: Fraud examination involves obtaining documentary evidence, interviewing
witnesses and potential suspects, writing investigative reports, testifying to findings, and
assisting in the general detection and prevention of fraud.
MULTIPLE CHOICE QUESTIONS
1. Which of the following is not an essential element of fraud?
a. A material false statement
b. Knowledge that the statement was false when it was spoken
c. Evidence that the statement was false
d. Damages resulting from the victim’s reliance on the falsestatement
Answer: C. Evidence is not an essential element. Evidence supporting each element is assumed.
2. Select from the following situations the one that should not be defined as abuse:
3|Page
, a. A human resources employee surfs the Internet, including searching forcollege
friends on social media during working hours.
b. A human resources employee calls in sick and then spends the day getting acar
repaired, going to the DMV and shopping at a local retail outlet.
c. A human resources employee surfs the Internet, including social media during working
hours for information about prospectiveemployees.
d. A human resources employee takes their laptop home for the weekend to searchfor
college friends on social media.
Answer: C. Because the search is “for information about prospective employees” is not an inappropriate
use of company assets.
3. Which of the following is true with regard to the relative importance ofinterviewing?
a. Auditors never interview clients and interviewing plays little role inauditing.
b. In a civil litigation setting, very little interviewing is performed by attorneys through the
deposition process.
c. Interviewing is an integral part of auditing, fraud examination and forensic accounting and
all such professionals should develop and refine interviewingskills.
d. In general, auditors are provided exceptional training in interviewing skills and
techniques.
Answer: C. Interviewing is an integral part of auditing, fraud examination and forensic accounting and all
such professionals should develop and refine interviewing skills.
4. Which scenario is an example of larceny?
a. Brook borrowed a company computer and didn’t intend to return it.
b. Larry took cash from the register and replaced it with an IOU.
c. Mary used a company vehicle without her supervisor’spermission.
d. Daniel accepted a new car from a vendor to influence his current companyto
purchase additional merchandise from this vendor.
Answer: A. larceny is a “naked” theft with no effort at concealment. Answer B provide some element of
concealment. Answer C doesn’t imply that the usage was for personal purposes. Answer D is more
consistent with corruption.
5. The following evidence might help anti-fraud professionals understand and possibly identify
which of the following types of fraud perpetrators?
a. The perpetrator who has stolen from and been fired by two previous employers in the
last 4 years.
b. Two perpetrators who collude to steal hundreds of thousands of dollars and splitthe
stolen cash.
c. A financially well-off perpetrator who has been stealing from his House of Worship
every week for the last 15 years.
d. The perpetrator whose spouse is diagnosed with a rare cancer that is not covered by
the employee’s health insurance but whose treatment will be very expensive and cost
more than the employee earns and the employees was the only one with access to bank
accounts and accounting records.
4|Page
,Answer: D. The evidence is pretty powerful in that the employee has a need and exclusive access to
cash and an ability to cover-up any missing cash.
6. Which of the following is a true statement about fraud statistics?
a. Position tends to have only a minor impact on the frequency of fraud but higher level
personnel (e.g., managers) tend to steal lower dollar amounts.
b. Men tend to steal more frequently than women.
c. Large corporations tend to be the biggest victims of fraudsters in terms of frequency and
dollar losses.
d. Men and women tend to steal at the same frequency and at approximately the same
dollar values.
Answer: B. Data clearly demonstrate that men are more often perpetrators.
7. Which of the following is a true statement about the detection of fraud?
a. The combined frequency of tips and accidents in discovering fraud exceeds the
combined frequency of internal and externalaudits.
b. Law enforcement plays a significant role in the detection of white collar (economic)
crimes.
c. Internal controls when properly designed are almost bullet proof in terms of
preventing fraud.
d. For the purposes of understanding how fraud is discovered, whistleblower hotlines are
the only method proven to detect fraud.
Answer: A. The combined frequency of tips and accidents in discovering fraud exceeds the combined
frequency of internal and external audits.
8. Which of the following would likely be characterized as a forensic accounting investigation rather
than a fraud examination?
a. An employee submits unsupported damage claims to his employer, provides false
documents and statements, and deposits the insurance proceeds in his bank account.
b. A husband submits altered bank account statements to his wife’s attorney duringtheir
divorce case.
c. A plaintiff claims that a breach of contract by a vendor resulted in a loss of business and
ultimate bankruptcy.
d. The state taxing agency has accused a state resident of filing a false tax return,
claiming that income appears in their bank account but does not appear as income on
their tax filings.
Answer: C. Breach of contract and bankruptcy without allegations of fraudulent conduct are normally
classified as forensic accounting issues.
9. Given the elements of fraud, which element is most often associated with evidence of intent by
the perpetrator?
a. The conversion.
b. The concealment.
5|Page
, c. The act.
d. All three elements are indicative of intent.
Answer: B. Concealment often entails an overt act to cover-up the fraud and is consistent with intent.
10. Which of the following is a true statement about fraud examination methodology?
a. Remediation requires a critical examination of internal controlweaknesses.
b. Fraud can always be prevented.
c. Predication is almost always discovered near the end of theinvestigation.
d. Deterrence is most closely associated with making sure that perpetrators spend time in jail
for their crimes.
Answer: A. One activity associated with remediation is the examination of how did this happen with an
eye towards prevention of similar acts in the future.
FRAUD CASEBOOK
Bernie Madoff
Read the following articles or other related articles regarding the Bernie Madoff case and then answer
the questions below:
Sources:
Jason Zweig, “How Bernie Madoff Made Smart Folks Look Dumb,” Wall Street Journal, December 13,
2008
Zachary Goldfarb, “SEC Broadens Its Probe of Failures in Madoff Case,” Washington Post, January 6,
2009.
Summary and Solution to Discussion Questions:
Bernard Madoff, 70, ran an investment fund that serviced pensions, institutional investors,
endowments and the rich and famous. As it turns out, it was all a Ponzi scheme, where in
December 2008, according to the SEC, Madoff admitted to stealing $50 billion. How does $50
billion just vanish?
The firm was Bernard L. Madoff Investment Securities LLC and it reported steady monthly
returns of approximately 1% for nearly two decades. When someone is successful, no one
wants to look too closely. Given that Madoff had the trust of wealthy persons, universities,
charities and other investment fund managers, due diligence was not performed. For decades,
Madoff was well known on Wall Street and had an impeccable reputation for success. In
addition, he emphasized secrecy and exclusivity. Investors were more afraid of not being
invited to invest than they were about the risk of losing money. With this country club
mentality, his activities were not very well scrutinized.
Even when allegations were made and opportunities to examine Madoff’s LLC arose, those
responsible failed to unveil what was really going on. The SEC and lawmakers are trying to
understand these failures. While some of the $50 billion may ultimately be found, most likely
6|Page
, investors will get little money when it’s all said and done.
Short Answer Questions
1. What type of fraud scheme did Bernie Madoff commit?
2. What was Bernie Madoff’s monthly average return to his clients?
3. How long did this monthly average return last?
4. Describe the demographics of Bernie Madoff’s customer base.
5. How was Madoff’s scheme discovered?
6. Did anyone attempt to inform the regulators about Madoff’s scheme? If so, who?
Answers to Short Answer Questions
1. Ponzi scheme
2. 1% per month
3. Nearly two decades
4. Wealthy individuals, universities, charities and other investment fund managers
5. Auditor, Securities and Exchange Commission (SEC)
6. Harry Markopolos
Discussion Questions
1. In general, would you define Bernie Madoff’s clients as sophisticated investors or naive? Why?
2. Whether you described Bernie Madoff’s customers as naïve or sophisticated, what trait(s)
allowed his clients to become victims?
3. Why wasn’t Bernie Madoff’s scheme caught earlier?
Answers to Discussion Questions can be found within the Fraud Casebook Summary.
BRIEF CASES
1. Assume that an organization maintains and uses one checking account. Further assume that a
representative of the bank where the checking account is located has alerted law enforcement that the
checking account has deposit activity that has several cash deposits that are just below $10,000. As
readers will learn in later chapters, the U.S. Treasury Department has reporting requirements for
financial institutions that require that cash transactions of $10,000 or more be reported to the U.S.
Federal Government on a Currency Transaction Report (CTR) form. CTRs are analyzed using big data and
data analytics techniques to identify potential money launderers.
Case Discussion: Consider the following questions:
(a) If the deposits observed by the bank representative are less than $10,000, why is the bank
representative concerned?
Solution: Perpetrators knowledgeable about the Federal CTR cut-off of $10,000 could “structure”
deposits just below the reporting threshold in an attempt to conceal nefarious cash-based activities.
7|Page
, (b) Assuming that an examination of this issue is launched by law enforcement, what is the scope of
the examination?
Solution: Student should focus in on the fact that this is a relatively narrow issue. The textbook reviews
differences between an audit, fraud and forensic accounting engagements. Students should identify that
this is a forensic accounting engagement (i.e., the intersection between accounting and the law). The
scope centers on deposit activity, particularly determining if a pattern of deposit amounts just below
$10,000 exists.
(c) Assuming that an examination of this issue is launched by law enforcement, should a forensic
accountant or fraud examiner subpoena all bank and company records for the past five years?
Why or why not?
Solution: No. The students should work within the scope of the engagement. As such, that would
necessitate an examination of recent bank statements to determine if the deposit activity is consistent
with “structuring” of deposits just below the $10,000 reporting threshold. Once the bank statements
from several months were collected, those statements could be examined to see if a pattern of
structured deposits exists (several or numerous deposits just below the $10,000 reporting limit). Once a
pattern of structuring is identified, the evidentiary request would expand to see when the structuring
seems to have begun and end. From there, investigators would start to collect additional evidence
consistent with the act, concealment (structuring is inherently part of concealment) and conversion
(benefit), answering the questions of who, what, when, where and how. As such, arbitrarily subpoenaing
five years of statements is not appropriate at the outset.
(d) What would be the first step in an examination of this issue?
Solution: Confirm that evidence is supportive of the act: structuring deposits just below the $10,000
threshold. See also the answer provided in part c.
2. Assume that a company receives a tip that the company is being “ripped off.” The tip alleges that a
company employee with checking account and recordkeeping authority is accepting and paying invoices
from a contractor for work that is not being performed and is not needed.
Case Discussion: Answer the following questions:
(a) What is the scope of work that a forensic accountant or fraud examiner would consider at this
point in time? Why?
Solution: The scope should focus on, and be limited to, the collection and analysis of evidence
associated with the allegation: inappropriate expense disbursements.
(b) How does this scope of work differ from an (i) audit of the victim company’s financial
statements or (ii) an engagement to complete the company’s current year’s tax return?
Solution: (i) The scope of the allegations is much more restricted and limited in comparison to an audit.
The audit of the financial statements is about fairness of the reporting of the financial statements
(balance sheet, income statement and statement of cash flows). This is a much broader scope than the
allegations associated with inappropriate expense disbursements. For example, at this point in time, the
8|Page
Fraud Examination, 2nd Edition by Mary-Jo
Kranacher
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
,End of Chapter Material
Chapter 1
ANSWER KEY – CHAPTER 1 END OF CHAPTER MATERIAL
CRITICAL THINKING
CT-1 Anthony and Cleopatra. Everything needed to answer the question “how did they die?” is
contained in the following passage:
Anthony and Cleopatra are lying dead on the floor in a villa. Nearby on the floor is a broken
bowl. There is no mark on either of their bodies, and they were not poisoned. With this
information, determine how they died.
Solution. Suffocation. Why? Anthony and Cleopatra are fish. This fact would be observed as soon as the
investigator enters the room. Fish out of water, “lying dead on the floor” would lead to suffocation as
the most likely cause of death. The issue is one of assumptions. Most readers assume that Anthony and
Cleopatra are people. This tends to limit the ability of the reader to “think outside the box” to derive the
proper solution. The challenge is that most people make assumptions and do not even realize that an
assumption is being made. For forensic accounting and fraud examination professionals, it’s critical to
keep an open mind, overtly (to the extent possible) identify all assumptions and base conclusions solely
on the evidence available.
CT-2 The Light Switch. A man stands at one end of a 100 meter curved hallway where he cannot see
the end. Next to him are three light switches, and at the end of the hall is one incandescent light.
How many feet will the man have to walk to definitively say which light switch operates the light?
Solution. 100 meters. How do we know for sure?
Flip on switch 1 and leave it one for a minute or two, then switch it off
Flip on switch 2 and immediately walk 100 meters to the end of the hallway
If:
The Light is On, Then Switch 2 Controls the Light;
The Light is Off but Warm, Then Switch 1 Controls the Light;
The Light is Off and Cold, Then Switch 3 Controls the Light
REVIEW QUESTIONS
1-1 Define fraud and identify a potentially fraudulent situation.
Answer: Fraud is an intentional deception, whether by omission or co-mission, that
causes its victim to suffer an economic loss and/or the perpetrator to realize a gain.
Potentially fraudulent situations may include, for example:
Misappropriation of funds, securities, supplies, or other assets.
Impropriety in the handling or reporting of money or financial transactions.
Profiteering as a result of insider knowledge of company activities.
Disclosing confidential and proprietary information to outside parties.
Disclosing to others, securities activities engaged in or contemplated by the company.
1|Page
, Accepting or seeking anything of material value from contractors, vendors, or persons
providing services/materials to the Company. Exception: Gifts less than US $50 in value.
Destruction, removal, or inappropriate use of records, furniture, fixtures, and
equipment.
1-2 Differentiate between fraud and abuse.
Answer: Although both fraud and abuse involve an intentional deception that causes its
victim to suffer an economic loss and/or the perpetrator to realize a gain, abuse does
not rise to the level of fraud. Abuse is often a way to describe a variety of petty crimes
and other counterproductive behavior, such as surfing the web while at work, coming to
work late or leaving early, using sick leave when not sick, that have become common
and even silently condoned in the workplace.
1-3 Describe the services that a forensic accountant might provide related to a marital
dispute.
Answer: Forensic accountants may assist attorneys with assembling the financial
information necessary to either bolster (if hired by the plaintiff) or undercut (if hired by
the defendant) a case. This may include, for example, locating hidden marital assets or
income, calculating the present value of future cash flow from retirement plans and
providing testimony in the case.
1-4 Explain the differences between an audit, fraud examination, and forensic accounting
engagement.
Answer: Audits, fraud examinations, and forensic accounting engagements have six major
differences:
1. Timing - Audits are conducted on a regular recurring basis while a fraud examination is
nonrecurring and is only conducted on sufficient predication. A forensic accounting
engagement is also nonrecurring and is only conducted after an allegation of
misconduct.
2. Scope - The scope of an audit is general while the scope of a fraud examination or
forensic accounting engagement is specific. Audits are a general examination of
financial information for material misstatements while fraud examiners and forensic
accountants are engaged to resolve a specific allegation.
3. Objective - The objective of auditing is to express an opinion on the financial statements
of an organization. The objective of a fraud examination is to determine whether or not
fraud has taken place and to determine who is responsible, while a forensic accounting
engagement is to determine the financial impact of the allegations.
4. Nature of the relationship - Auditing is non-adversarial while fraud examination is
adversarial in nature. The forensic accountant is independent.
5. Methodology - Auditing primarily entails examining financial data, while fraud
examination and forensic accounting involve gathering sufficient financial and non-
financial evidence to meet their objective.
6. Approach - Auditors are required to approach an audit with professional
skepticism while fraud examiners and forensic accountants attempt to establish
sufficient proof to meet their objective.
2|Page
, 1-5 Explain the theory of the fraud triangle.
Answer: The fraud triangle provides an explanation for the conditions necessary for
fraud to occur – perceived pressure, perceived opportunity, and rationalization.
1-6 List the legal elements of fraud.
Answer: Under common law, fraud includes four essential elements:
1. A material false statement
2. Knowledge that the statement was false when it was spoken
3. Reliance on the false statement by the victim
4. Damages resulting from the victim’s reliance on the false statement
1-7 Identify common fraud schemes.
Answer: Common fraud schemes include asset misappropriation, corruption, and false
statements.
1-8 Give examples of non-fraud forensic and litigation advisory engagements.
Answer: Engagements may be criminal, civil or administrative cases that involve
economic damage claims, workplace or matrimonial disputes, or asset and business
valuations.
1-9 Describe the fraud examiner/forensic accountant’s approach to investigations.
Answer: Fraud examination and forensic accounting entail examining documents,
reviewing records, and interviewing witnesses.
1-10 Explain fraud examination methodology.
Answer: Fraud examination involves obtaining documentary evidence, interviewing
witnesses and potential suspects, writing investigative reports, testifying to findings, and
assisting in the general detection and prevention of fraud.
MULTIPLE CHOICE QUESTIONS
1. Which of the following is not an essential element of fraud?
a. A material false statement
b. Knowledge that the statement was false when it was spoken
c. Evidence that the statement was false
d. Damages resulting from the victim’s reliance on the falsestatement
Answer: C. Evidence is not an essential element. Evidence supporting each element is assumed.
2. Select from the following situations the one that should not be defined as abuse:
3|Page
, a. A human resources employee surfs the Internet, including searching forcollege
friends on social media during working hours.
b. A human resources employee calls in sick and then spends the day getting acar
repaired, going to the DMV and shopping at a local retail outlet.
c. A human resources employee surfs the Internet, including social media during working
hours for information about prospectiveemployees.
d. A human resources employee takes their laptop home for the weekend to searchfor
college friends on social media.
Answer: C. Because the search is “for information about prospective employees” is not an inappropriate
use of company assets.
3. Which of the following is true with regard to the relative importance ofinterviewing?
a. Auditors never interview clients and interviewing plays little role inauditing.
b. In a civil litigation setting, very little interviewing is performed by attorneys through the
deposition process.
c. Interviewing is an integral part of auditing, fraud examination and forensic accounting and
all such professionals should develop and refine interviewingskills.
d. In general, auditors are provided exceptional training in interviewing skills and
techniques.
Answer: C. Interviewing is an integral part of auditing, fraud examination and forensic accounting and all
such professionals should develop and refine interviewing skills.
4. Which scenario is an example of larceny?
a. Brook borrowed a company computer and didn’t intend to return it.
b. Larry took cash from the register and replaced it with an IOU.
c. Mary used a company vehicle without her supervisor’spermission.
d. Daniel accepted a new car from a vendor to influence his current companyto
purchase additional merchandise from this vendor.
Answer: A. larceny is a “naked” theft with no effort at concealment. Answer B provide some element of
concealment. Answer C doesn’t imply that the usage was for personal purposes. Answer D is more
consistent with corruption.
5. The following evidence might help anti-fraud professionals understand and possibly identify
which of the following types of fraud perpetrators?
a. The perpetrator who has stolen from and been fired by two previous employers in the
last 4 years.
b. Two perpetrators who collude to steal hundreds of thousands of dollars and splitthe
stolen cash.
c. A financially well-off perpetrator who has been stealing from his House of Worship
every week for the last 15 years.
d. The perpetrator whose spouse is diagnosed with a rare cancer that is not covered by
the employee’s health insurance but whose treatment will be very expensive and cost
more than the employee earns and the employees was the only one with access to bank
accounts and accounting records.
4|Page
,Answer: D. The evidence is pretty powerful in that the employee has a need and exclusive access to
cash and an ability to cover-up any missing cash.
6. Which of the following is a true statement about fraud statistics?
a. Position tends to have only a minor impact on the frequency of fraud but higher level
personnel (e.g., managers) tend to steal lower dollar amounts.
b. Men tend to steal more frequently than women.
c. Large corporations tend to be the biggest victims of fraudsters in terms of frequency and
dollar losses.
d. Men and women tend to steal at the same frequency and at approximately the same
dollar values.
Answer: B. Data clearly demonstrate that men are more often perpetrators.
7. Which of the following is a true statement about the detection of fraud?
a. The combined frequency of tips and accidents in discovering fraud exceeds the
combined frequency of internal and externalaudits.
b. Law enforcement plays a significant role in the detection of white collar (economic)
crimes.
c. Internal controls when properly designed are almost bullet proof in terms of
preventing fraud.
d. For the purposes of understanding how fraud is discovered, whistleblower hotlines are
the only method proven to detect fraud.
Answer: A. The combined frequency of tips and accidents in discovering fraud exceeds the combined
frequency of internal and external audits.
8. Which of the following would likely be characterized as a forensic accounting investigation rather
than a fraud examination?
a. An employee submits unsupported damage claims to his employer, provides false
documents and statements, and deposits the insurance proceeds in his bank account.
b. A husband submits altered bank account statements to his wife’s attorney duringtheir
divorce case.
c. A plaintiff claims that a breach of contract by a vendor resulted in a loss of business and
ultimate bankruptcy.
d. The state taxing agency has accused a state resident of filing a false tax return,
claiming that income appears in their bank account but does not appear as income on
their tax filings.
Answer: C. Breach of contract and bankruptcy without allegations of fraudulent conduct are normally
classified as forensic accounting issues.
9. Given the elements of fraud, which element is most often associated with evidence of intent by
the perpetrator?
a. The conversion.
b. The concealment.
5|Page
, c. The act.
d. All three elements are indicative of intent.
Answer: B. Concealment often entails an overt act to cover-up the fraud and is consistent with intent.
10. Which of the following is a true statement about fraud examination methodology?
a. Remediation requires a critical examination of internal controlweaknesses.
b. Fraud can always be prevented.
c. Predication is almost always discovered near the end of theinvestigation.
d. Deterrence is most closely associated with making sure that perpetrators spend time in jail
for their crimes.
Answer: A. One activity associated with remediation is the examination of how did this happen with an
eye towards prevention of similar acts in the future.
FRAUD CASEBOOK
Bernie Madoff
Read the following articles or other related articles regarding the Bernie Madoff case and then answer
the questions below:
Sources:
Jason Zweig, “How Bernie Madoff Made Smart Folks Look Dumb,” Wall Street Journal, December 13,
2008
Zachary Goldfarb, “SEC Broadens Its Probe of Failures in Madoff Case,” Washington Post, January 6,
2009.
Summary and Solution to Discussion Questions:
Bernard Madoff, 70, ran an investment fund that serviced pensions, institutional investors,
endowments and the rich and famous. As it turns out, it was all a Ponzi scheme, where in
December 2008, according to the SEC, Madoff admitted to stealing $50 billion. How does $50
billion just vanish?
The firm was Bernard L. Madoff Investment Securities LLC and it reported steady monthly
returns of approximately 1% for nearly two decades. When someone is successful, no one
wants to look too closely. Given that Madoff had the trust of wealthy persons, universities,
charities and other investment fund managers, due diligence was not performed. For decades,
Madoff was well known on Wall Street and had an impeccable reputation for success. In
addition, he emphasized secrecy and exclusivity. Investors were more afraid of not being
invited to invest than they were about the risk of losing money. With this country club
mentality, his activities were not very well scrutinized.
Even when allegations were made and opportunities to examine Madoff’s LLC arose, those
responsible failed to unveil what was really going on. The SEC and lawmakers are trying to
understand these failures. While some of the $50 billion may ultimately be found, most likely
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, investors will get little money when it’s all said and done.
Short Answer Questions
1. What type of fraud scheme did Bernie Madoff commit?
2. What was Bernie Madoff’s monthly average return to his clients?
3. How long did this monthly average return last?
4. Describe the demographics of Bernie Madoff’s customer base.
5. How was Madoff’s scheme discovered?
6. Did anyone attempt to inform the regulators about Madoff’s scheme? If so, who?
Answers to Short Answer Questions
1. Ponzi scheme
2. 1% per month
3. Nearly two decades
4. Wealthy individuals, universities, charities and other investment fund managers
5. Auditor, Securities and Exchange Commission (SEC)
6. Harry Markopolos
Discussion Questions
1. In general, would you define Bernie Madoff’s clients as sophisticated investors or naive? Why?
2. Whether you described Bernie Madoff’s customers as naïve or sophisticated, what trait(s)
allowed his clients to become victims?
3. Why wasn’t Bernie Madoff’s scheme caught earlier?
Answers to Discussion Questions can be found within the Fraud Casebook Summary.
BRIEF CASES
1. Assume that an organization maintains and uses one checking account. Further assume that a
representative of the bank where the checking account is located has alerted law enforcement that the
checking account has deposit activity that has several cash deposits that are just below $10,000. As
readers will learn in later chapters, the U.S. Treasury Department has reporting requirements for
financial institutions that require that cash transactions of $10,000 or more be reported to the U.S.
Federal Government on a Currency Transaction Report (CTR) form. CTRs are analyzed using big data and
data analytics techniques to identify potential money launderers.
Case Discussion: Consider the following questions:
(a) If the deposits observed by the bank representative are less than $10,000, why is the bank
representative concerned?
Solution: Perpetrators knowledgeable about the Federal CTR cut-off of $10,000 could “structure”
deposits just below the reporting threshold in an attempt to conceal nefarious cash-based activities.
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, (b) Assuming that an examination of this issue is launched by law enforcement, what is the scope of
the examination?
Solution: Student should focus in on the fact that this is a relatively narrow issue. The textbook reviews
differences between an audit, fraud and forensic accounting engagements. Students should identify that
this is a forensic accounting engagement (i.e., the intersection between accounting and the law). The
scope centers on deposit activity, particularly determining if a pattern of deposit amounts just below
$10,000 exists.
(c) Assuming that an examination of this issue is launched by law enforcement, should a forensic
accountant or fraud examiner subpoena all bank and company records for the past five years?
Why or why not?
Solution: No. The students should work within the scope of the engagement. As such, that would
necessitate an examination of recent bank statements to determine if the deposit activity is consistent
with “structuring” of deposits just below the $10,000 reporting threshold. Once the bank statements
from several months were collected, those statements could be examined to see if a pattern of
structured deposits exists (several or numerous deposits just below the $10,000 reporting limit). Once a
pattern of structuring is identified, the evidentiary request would expand to see when the structuring
seems to have begun and end. From there, investigators would start to collect additional evidence
consistent with the act, concealment (structuring is inherently part of concealment) and conversion
(benefit), answering the questions of who, what, when, where and how. As such, arbitrarily subpoenaing
five years of statements is not appropriate at the outset.
(d) What would be the first step in an examination of this issue?
Solution: Confirm that evidence is supportive of the act: structuring deposits just below the $10,000
threshold. See also the answer provided in part c.
2. Assume that a company receives a tip that the company is being “ripped off.” The tip alleges that a
company employee with checking account and recordkeeping authority is accepting and paying invoices
from a contractor for work that is not being performed and is not needed.
Case Discussion: Answer the following questions:
(a) What is the scope of work that a forensic accountant or fraud examiner would consider at this
point in time? Why?
Solution: The scope should focus on, and be limited to, the collection and analysis of evidence
associated with the allegation: inappropriate expense disbursements.
(b) How does this scope of work differ from an (i) audit of the victim company’s financial
statements or (ii) an engagement to complete the company’s current year’s tax return?
Solution: (i) The scope of the allegations is much more restricted and limited in comparison to an audit.
The audit of the financial statements is about fairness of the reporting of the financial statements
(balance sheet, income statement and statement of cash flows). This is a much broader scope than the
allegations associated with inappropriate expense disbursements. For example, at this point in time, the
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