978-0134474021 Chapter 5 Solutions Manual Part 3

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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