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5.1 1. How does Miller fit the profile of the average fraud perpetrator?
Like many fraud perpetrators, David Miller was not much different than the
general public in terms of education, values, religion, marriage, and psychological
makeup.
How does he differ?
Miller was not disgruntled and unhappy, nor was he seeking to get even with his
employer.
How did these characteristics make him difficult to detect?
It is often difficult to detect fraud perpetrators because they possess few
characteristics that distinguish them from the public. Most white-collar criminals are
2. Explain the three elements of the opportunity triangle (commit, conceal, convert)
and discuss how Miller accomplished each when embezzling funds from
Associated Communications. What specific concealment techniques did Miller
use?
There are three elements to the opportunity triangle:
1. The perpetrator must commit the fraud by stealing something of value, such as
cash, or by intentionally reporting misleading financial information.
2. To avoid detection, the perpetrator must conceal the crime. Perpetrators must
keep the accounting equation in balance by inflating other assets or decreasing
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3. The perpetrator must convert the stolen asset into some form usable by the
perpetrator if the theft is of an asset other than cash. For example, stolen inventory
3. What pressures motivated Miller to embezzle? How did Miller rationalize his
actions?
Motivation. After David Miller had undergone therapy, he believed his problem with
compulsive embezzlement was an illness, just like alcoholism or compulsive
gambling. He stated that the illness was driven by a subconscious need to be admired
Rationalization. The case does not specify what Miller's rationalizations were. He
may, in fact, have had a number of different rationalizations. The case suggests that
he "needed it" to pay back the money he stole from previous employers. He was
4. Miller had a framed T-shirt in his office that said, “He who dies with the most
toys wins.” What does this tell you about Miller? What lifestyle red flags could
have tipped off the company to the possibility of fraud?
Miller's life seemed to be centered on financial gain and the accumulation of material
goods or, as the quote says, "toys." Such gain, he felt, would lead to prestige and
recognition among his friends in the business community.
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5. Why do companies hesitate to prosecute white-collar criminals?
Negative publicity. Companies are reluctant to prosecute fraud because of the
Exposes system weaknesses. Reporting and prosecuting fraud may reveal
Concern for the perpetrator's family. If an employee is willing to make retribution,
Society is more concerned with "real" crime. Political considerations motivate
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What are the consequences of not prosecuting?
When fraud is not prosecuted, it sends a message to employees and to the public that
How could law enforcement officials encourage more prosecution?
To encourage more fraud prosecution, law enforcement officials must take actions to
6. What could the victimized companies have done to prevent Miller’s
embezzlement?
Not much is said in the case about how Miller committed many of the frauds. In each
of the frauds, it is likely that the theft of cash could have been prevented by tighter
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5.2
1. Figure 5-4 shows the employees and external parties that deal with Heirloom. Explain how Heirloom could defraud the
bank and how each internal and external party except the bank could defraud Heirloom.
2. What risk factor, unusual item, or abnormality would alert you to each fraud?
3. What control weaknesses make each fraud possible?
4. Recommend one or more controls to prevent or detect each means of committing fraud.
There are many ways to perpetrate fraud. Some of the more easily recognizable ways are the following:
1. Ways to Commit Fraud 2. Indication Something is
Wrong
3.Weaknesses
Allowing Fraud
4.Controls to Minimize Fraud
Receivables employees could
Lag between customer payments
and the posting of the payments.
No separation of
duties between cash
Separate custody of cash (opening cash
receipts) from recording (posting payments to
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Customer complaints.
Sales agents could
3. Falsify sales to reach an
incentive level. Agents can book
fictitious contracts, pay with a
money order, send correspondence
Abnormally large number of sales
just before year end, combined
with agent barely reaching an
incentive level
Few and steep
incentive levels that
motivate unwanted
behavior.
More graduated incentives that do not provide
such strong incentives.
Base sales incentives on customer collections,
not on original sales.
5. Steal part of a customer’s
customers paying the $900, which
will be hard to detect since, so
verify if customers are
current before a
are current before each sitting.
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6. Management can bleed the
company or engage in
It is fraud if one owner authorizes
payments, perks, or non-arms length
Company perpetually short of
cash
No apparent controls
to prevent one owner
Require all payments, perks, or
non-arms-length transactions to an owner to be
7. Customers can use photo
coupons without completing their
payments. There are no controls to
Increase in the number of sittings
per current customer.
Photographers are not
required to verify if
customers are current
Set up automatic withdrawals from checking
accounts or automatic charges to credit cards.
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8. Photographers could send in
unused coupons or fake coupons.
Abnormally high rate of
customers using their coupons
Photographers given
an exclusive area.
Pre-number coupons.
9. Heirloom can defraud the bank
Abnormally high number of
Bank does not verify
Analysis of the list, such as
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10. Heirloom can defraud the
bank by misstating its financial
statements in many ways. For
Unusual decrease in the
allowance or bad debt amounts.
with those of the industry or past
years.
There is no mention of
an external audit by
independent CPAs.
An external, independent audit.
Financial statement analysis, such as
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