Concept explainers
Each of the following scenarios is based on facts in an
actual fraud. Categorize each scenario as primarily indicating (1)
an incentive to commit fraud, (2) an opportunity to commit
fraud, or (3) a rationalization to commit fraud. State your reasoning
for each categorization.
a. There was intense pressure to keep the corporation’s stock
from declining further. This pressure came from investors,
analysts, and the CEO, whose financial well-being was significantly
dependent on the corporation’s stock price.
b. A group of top-level management was compensated (mostly
in the form of stock options) well in excess of what would be
considered normal for their positions in this industry.
c. Top management of the company closely guards internal
financial information, to the extent that even some employees
on a need-to-know basis are denied full access.
d. Managing specific financial ratios is very important to the
company, and both management and analysts are keenly
observant of variability in key ratios. Key ratios for the company
changed very little even though the ratios for the overall
industry were quite volatile during the time period.
e. In an effort to reduce certain accrued expenses to meet budget
targets, the CFO directs the general accounting department
to reallocate a division’s expenses by a significant
amount. The general accounting department refuses to acquiesce
to the request, but the
corporate office. An accountant in the general accounting
department is uncomfortable with the journal entries required
to reallocate divisional expenses. He brings his concerns to the CFO, who assures him that everything will be fine and
that the entries are necessary. The accountant considers
resigning, but he does not have another job lined up and is
worried about supporting his family. Therefore, he never
voices his concerns to either the internal or external auditors.
f. Accounting records were either nonexistent or in a state of
such disorganization that significant effort was required to
locate or compile them.
Step by stepSolved in 2 steps
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