Forensic Accounting

By Mary-Jo Kranacher, CPA/CFF, CFE

Chapter 3
Who Commits Fraud and Why: Criminology and Ethics
LEARNING OBJECTIVES
3-1 Describe occupational fraud and abuse.
3-2 Compare and contrast theories of crime causation.
3-3 Identify the six situational categories that cause nonshareable problems from Cresseys
research.
3-4 Discuss the essence of organizational crime.
3-5 Give examples of behavioral or other environmental indications of fraud.
3-6 Explain the relationship between an employees position and the level of theft (according to
Hollinger and Clarks research).
3-7 Analyze the role of corporate governance mechanisms in fraud prevention.
3-8 Describe corporate governance breakdowns in the facilitation of historical fraudulent acts.
3-9 Identify ethical issues, conflicts of interest, and noncompliance with corporate policies and
procedures in the context of a specific case.
3-10 Discuss alternative courses of action in a given scenario within the framework of
appropriate ethical conduct.

True/False
Answer:

1-T/F #1. Without visually representing the crime scene, very different conclusions
are reached about who committed a crime.
T

Answer:

1-T/F #2. Conspiracy is a means of prosecuting the individuals involved in illegal

organized activity.
T

Answer:

1-T/F #3. Negligence applies when a person acts in a reasonable and prudent
manner.
F

Answer:

1-T/F #4. Cressey called embezzlers temptation violators.

F

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Answer:

1-T/F #5. According to Albrecht, personal integrity refers to the personal code of
ethical behavior that each person adopts.
T

Answer:

1-T/F #6. White-collar crime is not used interchangeably with occupational fraud
and economic crime.
F

Answer:

1-T/F #7. For purposes of defining occupational fraud and abuse, employees include
only top or middle managers.
F

Answer:

1-T/F #8. The term white-collar crime captures the essence of the type of perpetrator
that one finds at the heart of occupational fraud and abuse.
T

Answer:

1-T/F #9. Organizational crimes occur when entities, companies, corporations, notfor-profits, nonprofits, and government bodies, otherwise legitimate and lawabiding organizations, are involved in a criminal offense.
T

Answer:

1-T/F #10. The element of proximate cause for negligence means the plaintiff must
establish that damages resulted from the defendants breach of duty.
F

Answer:

1-T/F #11. In order to win an award for damages for negligence, the injured party
must prove liability and damages.
T

Answer:

1-T/F #12. The amount of damages proven under negligence may be relatively
uncertain.
F

Answer:

1-T/F #13. The nonshareable problems, Cressey investigated, threatened the status of
the subjects, or threatened to prevent them from achieving a higher status than the
one they occupied at the time of their violation.
T

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Answer:

1-T/F #14. Violations of ascribed obligations have historically proved to be strong

motivators of financial crimes.
T

Answer:

1-T/F #15. Perceived opportunity is necessary so that the perpetrator of a fraud can
make his illegal behavior intelligible to him and maintain his concept of himself
as a trusted person.
F

Answer:

1-T/F #16. Cresseys classic fraud triangle helps explain the nature of all occupational
offenders.
F

Answer:

1-T/F #17. According to Albrecht, opportunities to commit fraud may be created by

individuals, or by deficient or missing internal controls.
T

Answer:

1-T/F #18. In general, increasing the perception of detection may be the best way to
deter employee theft, while increasing the sanctions that are imposed on
occupational fraudsters will have a limited effect.
T

Answer:

1-T/F #19. Formal controls can be best described as the way an employee internalizes
group norms of the organization.
F

Answer:

1-T/F #20. Ethics involves questions requiring reflective choice and their
consequences to the individual and others (decision problems).
T

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Multiple Choice
1-M/C #1. Based on a number of theories, people obey laws for all of the following
reasons except:
A.
The fear of punishment
B.
The desire for rewards
C.
In order to act in a just and moral manner according to
societys standards.
D.
Due to a duty to act
Answer:

D
Portions of the RICO Act outlaw all of the following except:
investing illegal funds in another business.
acquisition of a business through illegal acts.
a private or civil wrong or injury other than breach of contract.
the conduct of business affairs with funds derived from illegal acts.

Answer:

1-M/C #2.
A.
B.
C.
D.
C

The legal standard for negligence has all of the following elements except:
wire fraud
duty.
breach.
cause in fact.

Answer:

1-M/C #3.
A.
B.
C.
D.
A

Answer:

1-M/C #4. Which of the following is not one of the four common elements of
occupational fraud and abuse first identified by the Association of Certified Fraud
Examiners in 1996?
A.
The activity costs the employing organization assets, revenues, or
reserves.
B.
The activity violates the employees fiduciary duties to the organization.
C.
The activity is clandestine.
D.
The activity is restricted to corporate executives.
D

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Answer:

1-M/C #5. In terms of the definition of occupational fraud and abuse, who is an
employee?
A.
Any person who receives regular and periodic compensation from an
organization for his or her labor.
B.
Only rank and file workers.
C.
Any trust violator.
D.
Respectable business and professional men.
A
Status gaining is most typically associated with which of the following?
perceived economic pay inequities.
no one to share a problem with.
revenge for unfair treatment in the workplace.
keeping up with the Joneses syndrome.

Answer:

1-M/C #6.
A.
B.
C.
D.
D

All of the following are characteristics of absconders except:

low occupational and socioeconomic status
typically single or separated from their spouse.
few group associations.
have strong social ties.

Answer:

1-M/C #7.
A.
B.
C.
D.
D

Answer:

1-M/C #8. Hollinger and Clark asserted that management must pay attention to all of
the following aspects of policy development except::
A.
continuous dissemination of positive information reflective of the
companys policies.
B.
enforcement of sanctions.
C.
substantially increasing the internal security presence.
D.
publicizing the sanctions.
C

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Answer:

1-M/C #9.
Mills?
A.
B.
C.
D.
B

Which principle of ethical problems was championed by John Stuart

The Generalization Principle.
The Utilitarian Principle.
The Imperative Principle.
The Responsibility Principle.

1-M/C #10.
Select the most correct statement from those below regarding the
legal standards for negligence.
A.
Breacha determination that the defendant failed to use
ordinary or reasonable care in the exercise of that duty.
B.
Reasonablenessa determination that the defendant failed to
use ordinary or reasonable care in the exercise of that
duty.
C.
Breachan actual connection between the defendants
breach of duty and
the plaintiffs harm can be
established
D.
Cause in Fact the defendant must have been the proximate
cause or
contributed to the injury to the plaintiff.
Answer:
A

Answer:

1-M/C #11.
According to Cressey, a trust violator is best described as
A.
fictious collateral.
B.
an embezzler.
C.
one who is willing to settle for low status.
D.
a satisfied employee.
B

Answer:

1-M/C #12.
Hollinger and Clark found that the same kinds of employees who
engage in workplace deviance also engage in employee theft. According to their
research, which of the following is not a characteristic evidence of the employeethief?
A.
arrives early at work.
B.
takes long coffee breaks.
C.
abuses sick leave policy.
D.
has slow workmanship.
A

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Answer:

1-M/C #13.
Common violations pertaining to occupational fraud and abuse
include all of the following except:
A.
asset misappropriation.
B.
pilferage.
C.
false overtime.
D.
All of these are common violations.
D

Answer:

1-M/C #14.
The term white collar crime was coined by:
A.
Donald Cressey.
B.
Steve Albrecht.
C.
The Association for Certified Fraud Examiners.
D.
Edwin Sutherland.
D

Answer:

1-M/C #15.
Regarding crimes like fraud, do Federal law allows
organizations to be prosecuted in a manner similar to
individuals?
A.
No.
B.
Yes.
C.
No, but international law does.
D.
Only if they are the party with the deep pockets in the case.
B

Answer:

1-M/C #16.
The pending lawsuits in the notes to the financial statements of 10Ks of most corporations are most likely all of the following except:
A.
anti-trust actions.
B.
intellectual property infringements.
C.
tax claims.
D.
RICO activities.
D

Answer:

1-M/C #17.
RICO typically addresses which of the following activities?
A.
environmental issues
B.
workplace issues such as lost wages, disability, and
wrongful death.
C.
costs and lost profits associated with construction delays.
D.
money laundering.
D
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Page 8 of 24

Answer:

1-M/C #18.
All of the following are characteristic of torts except:
A.
a private or civil wrong or injury.
B.
a breach of contract.
C.
remedy is in the form of an action for damages.
D.
the party who was injured is entitled to collect damage
compensation.
B

Answer:

1-M/C #19.
In order to win an award for damages, the injured party
under a negligence claim must generally prove
A.
reasonableness and prudence.
B.
liability and damages.
C.
intentional violation beyond a reasonable doubt.
D.
a high threshold of historic violations.
B

Answer:

1-M/C #20.
Which of the following individuals theorized that the learning of
criminal activity usually occurred within intimate personal groups?
A.
Donald Cressey
B.
Steve Albrecht
C.
Edwin Sutherland
D.
Richard Hollinger and John Clark
C

Answer:

1-M/C #21.
Large frauds are typically associated with all of the following
except:
A.
Lack of segregation of duties and responsibilities.
B.
Placing undeserved trust in key employees.
C.
Operating on a crisis basis
D.
Working with management to set realistic goals
D

Answer:

1-M/C #22.
Variables from Albrechts study of red flag variables pertaining
to occupational fraud fell into which of the following two categories?
A.
perpetrator characteristics and organizational environment.
B.
socioeconomic group and education.
C.
motivation characteristics and education.
D.
attitudes and habits.
A
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Page 10 of 24

Answer:

1-M/C #23.
According to Hollinger and Clarks research, which of the
following are least likely to engage in illegal behavior in the workplace?
A.
younger workers.
B.
older workers.
C.
employees that feel they are exploited.
D.
dissatisfied workers.
B

Answer:

1-M/C #24.
Regarding theft, Hollinger and Clark were able to confirm
a direct relationship between:
A.
computerized inventory control and sick leave policy.
B.
an employees position and the level of theft.
C.
lower levels of income and higher levels of theft.
D.
None of these were confirmed as a direct relationship.
B

Answer:

1-M/C #25.
With respect to security controls, Hollinger and Clark
discovered that most employees regarded these measures to be
A.
targeted toward external security.
B.
targeted toward internal security.
C.
part of increasing morale.
D.
part of organizational trust communication.
A

1-M/C #26.
Which of the following is a significant conclusion based on the
research of Hollinger and Clark?
A.
substantially increasing the internal security presence may
reduce
employee theft.
B.
tightening controls over property deviance may create less
detrimental
acts affecting the productivity of the
organization.
C.
special attention should be afforded to older employees,
since they have lower levels of financial authority and are
more likely to steal for their retirement.
D.
increased management sensitivity to its employees would
reduce all forms
of workplace deviance.
Answer:
D

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Answer:

1-M/C #27.
Which of the following would be classified as a business reversal
that leads to the perception of non-shareable financial problems?
A.
problems arising from inflation.
B.
problems arising from high interest rates.
C.
problems arising from economic downturns.
D.
problems arising from having no one to turn to.
D

Answer:

1-M/C #28.
Which of the following is the most likely reason that Cressey
believes an employee tries to solve a financial problem in secret?
A.
because they are afraid of losing the approval of those around them.
B.
because they are afraid of getting arrested.
C.
because they worry that someone else will want part of the money they
steal.
D.
because they are afraid they will have to go back to college.
A

1-M/C #29.
According to Cressey, the embezzlers that he studied
generally rationalized their crimes by viewing them as all of the
following except:
A.
They viewed them as essentially noncriminal.
B.
They viewed them as justified.
C.
They viewed them as part of a general irresponsibility for
which they
were not completely accountable.
D.
They viewed them as part of skills set.
Answer:
D

Answer:

1-M/C #30.
When independent businessmen in Cresseys study converted
deposits that had been entrusted to them, they explained it as:
A.
borrowing.
B.
the funds were really theirs, so you cant steal from yourself.
C.
everyone does it.
D.
All of the above.
D

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1-M/C #31.
Rationalizations of long-term violators in Cresseys study included
all of the following except:
A.
they were embezzling to keep their families from shame,
disgrace, or
poverty.
B.
they were embezzling because theirs was a case of necessity.
C.
their co-workers encouraged them to do it.
D.
they were embezzling because their employers were dishonest and needed
to be fleeced.
Answer:
C

Answer:

1-M/C #32.
Cresseys conjuncture of events basically says that all three
elements must be present for the trust violation to occur. These events are:
A.
no fraud prevention program is available, the offender lacks a conscience,
employees are friends with customers.
B.
perceived non-shareable financial problem, perceived opportunity, and the
ability to rationalize.
C.
the perpetrator is not married, is a male, and needs to buy a car or other
large asset.
D.
there are no witnesses to the crime, the individual has a strong challenge to
beat the system, and the individual has a gambling problem.
B

Answer:

1-M/C #33.
Albrecht developed the fraud scale which includes the following
components:
A.
situational pressures, perceived opportunity, and personal integrity.
B.
high personal debt, living beyond ones means, drug or alcohol problems.
C.
situational pressures, personal integrity, and criminal record.
D.
None of the above are the components for the fraud scale.
A

Answer:

1-M/C #34.
Large fraud perpetrators are more likely to use the money for all of
the following except:
A.
to purchase new homes.
B.
to pay for expensive vacations.
C.
to support extramarital affairs.
D.
to pay taxes.
D

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Answer:

1-M/C #35.
Which is considered the lowest threshold for ethical decision
making?
A.
A professional code of ethics of an accounting organization.
B.
Codes of conduct or directives about what is best for society.
C.
The law.
D.
Codes of conduct guided by trust in the underlying values that guide
society.
C

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Short Answer Essay

Answer:

1-SAE #1. The definition of ethics has certain key elements. What are these four key
elements?
1. Ethics involves questions requiring reflective choice and their consequences to
the individual and others (decision problems).
2. Ethics considers the rules and regulations that are in place to guide behavior as
well as the consequences for breaking those rules and regulations.
3. Ethics often relies on moral principles to guide choices of right and wrong.
(These ethical frameworks are discussed in more detail below).
4. Ethics is concerned with outcomes, the assigned impact associated with making
a decision where the impact reflects the underlying values of individuals and
organizations. (Text page 76)

1-SAE #2. Can a law permit an action that is prohibited by a professions code of
ethics? Discuss and give an example.
Answer:
It may happen that a law might permit an action that is
prohibited by a
professions code of ethics. As an
example, for years the American Institute of
Certified Public
Accountants (AICPA) had rules of ethics that prohibited
advertising by its members. The profession believed that dignity and
objectivity
were enhanced by keeping practitioners out of this
aspect of the commercial
world. The U.S. Federal Trade
Commission and the U.S. Department of Justice,
however,
disagreed. They decided that the prohibitions against advertising
violated the laws barring restraint of trade. The government
forced the profession
to eliminate its rules against advertising. This example illustrates
the triumph of
one set of values (the governments belief that
competition through advertising
would benefit consumers)
over another set (the professions belief that dignity
should be
preserved). (Text page 77)

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Answer:

1-SAE #3. Three ethical principles provide a framework for ethical decision making.
What are they? Briefly summarize their assumptions.
The three ethical principles that provide a framework for ethical decision making
include: (1) the imperative principle; (2) the utilitarian principle; and (3) the
generalization principle.

The imperative principle ignores outcomes by providing directives and

rules
without exception that are in the best interest of society as
a whole. This
unconditional obligation assumes that all
people are aware of the rule and all
agree to follow the rule.
The Kantian imperative is very strict but provides an easy
to understand
framework for ethical decision making. It 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 seek out additional consideration
for weighing the
consequences.
The utilitarian principle suggests that ethical problems should be
solved by
weighing the good consequences and the bad
consequences. The correct course of
action is that which provides
the most good or minimizes the bad. There are two
forms of
utilitarianism. They are act and rule. Act utilitarianism suggests that
it is the consequences of the act that matter. Rule utilitarianism
emphasizes the
benefits to society of general rules (similar to a
Kantian imperative) and suggests
that the decision to break a
rule is one that requires very careful consideration.
Rule
utilitarianism requires that society as a whole be able to determine which
rules are important and ought to be followed. Rules then
are also influenced by
history, nationality, culture, social goals,
and at some level economics. However,
it is difficult for
everyone to agree on universal principles.
The generalization principle is an attempt to marry imperatives
with
utilitarianism. If the outcome is considered
undesirable, then that conduct ought to
be avoided unless the person
has a very good reason. Generalization provides the
flexibility
needed to address the shortcomings of Kant and the specific direction
that seems to be missing from utilitarianism.
(Text page 77)

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1-SAE #4. To be successful in any specialized field like forensic accounting or fraud
examination, professionals must have characteristics that set them apart as a
profession. What are these five characteristics?
Answer:
1. A specialized body of knowledge.
2. Admission governed by standards and qualifications.
3. Recognition and acceptance by society (a characteristic that
inflicts social
responsibility back on the profession).
4. Standards of conduct for dealing with the public, other
professionals, and
clients.
5. An organizational body devoted to the advancement and
responsibilities of the profession. (Text page 79)

1-SAE #5. What is tone at the top and why is it an important part of ethical behavior
in an organization?
Answer:
Ethics at the organizational level starts with corporate
governance. The Board of
Directors, the Audit Committee,
executives, managers, clerical support, and line
personnel
are the living, breathing embodiment of ethics within the organization.
The Board of Directors, Audit Committee, and corporate officers
set the tone at
the top. Tone at the top refers to a culture that
is open, honest, and communicates
the values of the organization
to persons at all levels, both internal and external to
the
organization. The first step in developing an ethical culture is a code of ethics
signed by all personnel. In addition, the companys position
on ethics should be
posted in visible places, such as
lunchrooms, and communicated across the
organization.
Employee awareness programs such as periodic ethics training are
effective tools, and, of course, leaders lead by example.
Employees will take their
cues from their managers,
managers from executives, and executives from their
interaction with board members, audit committee members, and
auditors. It is
important that individuals in leadership
positions not only communicate the value
of ethical actions,
they must also practice what they preach. In addition, important
financial, operational, and compliance information should be
disseminated to
individuals who need it and can act on it.
Furthermore, individuals at the top must
be willing to listen to those
operating at lower levels of the organization.

Page 17 of 24

Second, the organization should be committed to hiring honest

executives,
managers, and staff. While most organizations
attempt to contact prior employers
and resume references,
many organizations provide only minimal information
about
former employees and are remiss to provide any negative feedback for fear
of legal retribution. References provided by prospective
employees are typically
friends and professional
acquaintances; so prospective employers should seek out
prior
supervisors. While costly, organizations should consider background checks
on prospective employees. Due to cost constraints,
organizations may want to
restrict the positions for which
background checks are completed. To avoid
charges of
discrimination, prospective employers need to complete such checks 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. (Text
page 80)
1-SAE #6. What is the five-step approach to fraud prevention, deterrence,
and detection?
Answer:
planning)

1. Know the exposures (brainstorming, risk assessment, audit

2. Translate exposure into likely symptoms

3. Always be on the lookout for symptoms
4. Build audit and data-mining programs to look for symptoms
5. Pursue these issues to their logical conclusion and ground
decisions in the
evidence (evidence-based decision-making)

Critical Thinking Exercise

Three people check into a hotel. They pay $30 to the manager and go to their room. The manager
suddenly remembers that the room rate is $25 and gives $5 to the bellboy to return to the people.
On the way to the room, the bellboy reasons that $5 would be difficult to share among three
people so he pockets $2 and gives $1 to each person. Now each person paid $10 and got back $1.
So they paid $9 each, totaling $27. The bellboy has $2, totaling $29. Where is the missing $1?"

Page 18 of 24

Answer:

Be careful of what you are adding together. Originally, they paid $30, they
each received back $1, thus they now have only paid $27. Of this $27, $25
went to the manager for the room and $2 went to the bellboy.

Text Review Questions

2-TRQ #1. Describe occupational fraud and abuse.
Answer:
Occupational fraud and abuse is defined as the use of ones
occupation for
personal enrichment through the deliberate
misuse or misapplication of the
employing organizations
resources or assets. Occupational fraud and abuse
involves a
wide variety of conduct by executives, employees, managers, and
principals of organizations, ranging from sophisticated
investment swindles to
petty theft. Common violations include asset misappropriation,
fraudulent
statements, corruption, pilferage, petty theft,
false overtime, using company
property for personal benefit,
fictitious payroll, and sick time abuses.

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2-TRQ #2. Compare and contrast Cresseys and Albrechts theories of crime
causation.
Answer:
Although Cressey focused on embezzlement and Albrecht focused on
occupational frauds, their elements were very similar. According to
Albrecht,
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
rationalize
(verbalize) the act as either being inconsistent with ones personal
level of integrity or justifiable. According to Cressey, the three
elements are
perceived pressure or a nonshareable financial
pressure, a way to secretly resolve
the dishonest act or the lack
of deterrence by management via a perceived
opportunity, and finally some way to rationalize the act, because the
perpetrator
does not see him or herself as a criminal.
2-TRQ #3. Identify from Cresseys research the six situational categories that cause
non-shareable problems.
Answer:
Cressey found that the nonshareable problems encountered by
the people
he interviewed arose from situations that could be divided into
six basic
categories:
violation of ascribed obligations
problems resulting from personal failure
business reversals
physical isolation
status gaining
employer-employee relations
2-TRQ #4. Discuss the essence of organizational crime.
Answer:
Organizational crimes occur when entities, companies,
corporations, not-forprofits, nonprofits, and government
bodies, otherwise legitimate and law-abiding
organizations, are
involved in a criminal offense. In addition, individual
organizations can be trust violators when the illegal activities of the
organization
are reviewed and approved by persons with
high standing in an organization such
as board members,
executives, and managers. Federal law allows organizations to
be prosecuted in a manner similar to individuals. For example,
although the
Arthur Andersen conviction was later
overturned by the U.S. Supreme Court, the
organization was
Page 20 of 24

convicted of obstruction of justice, a felony offense that

prevented them from auditing public companies. Corporate violations
may
include administrative breaches, such as noncompliance
with agency, regulatory,
and court requirements;
environmental infringements; fraud and financial crimes,
such
as bribery and illegal kickbacks; labor abuses; manufacturing infractions
related to public safety and health; and unfair trade
practices.

Answer:

2-TRQ #5. Give examples of behavioral indications of fraud.

Behavioral symptoms of fraud can include such behavior as:
Cant look people in the eye
Embarrassment with friends, family
Irritable and suspicious
Defensive
Argumentative
Unusually belligerent in stating opinions
Needs to see a counselor, psychiatrist, etc.
Complains of being unable to sleep
Drinks too much
Using illegal, illicit drugs
Cant relax

2-TRQ #6. Explain the relationship between an employees position

and the level of theft (according to Hollinger and Clarks
research).
Answer:
Hollinger and Clark were able to confirm a direct relationship
between an
employees position and the level of the theft, with thefts being
highest in jobs with greater access to the things of value in the
organization. Although they found obvious connections between
opportunity and theft (for example, retail cashiers with daily
access to cash had the highest incidence), the researchers
believed opportunity to be . . . only a secondary factor that
constrains the manner in which the deviance is manifested.
Their research indicated that job satisfaction was the primary
motivator of employee theft; the employees position only affects
the method and amount of the theft after the decision to steal
has already been made.

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2-TRQ #7. Analyze the role of corporate governance mechanisms in fraud prevention.
Answer:
Ethics and fraud prevention at the organizational level starts
with corporate governance. The Board of Directors, the Audit
Committee,
executives, managers, clerical support,
and line personnel are the living, breathing
embodiment of ethics
within the organization. The Board of Directors, Audit
Committee,
and corporate officers set the tone at the top. Tone at the top
refers to a culture that is open, honest, and communicates the
values of the
organization to persons at all levels, both
internal and external to the organization.
The first step in developing
an ethical culture is a code of ethics signed by all
personnel.
In addition, the companys position on ethics should be posted
in visible places, such as lunchrooms, and communicated across
the organization.
Employee awareness programs such as
periodic ethics training are effective tools,
and, of course,
leaders lead by example. Employees will take their cues from their
managers, managers from executives, and executives from their
interaction with
board members, audit committee members,
and auditors. It is important that
individuals in leadership
positions not only communicate the value of ethical
actions,
they must also practice what they preach. In addition, important financial,
operational, and compliance information should be disseminated
to individuals
who need it and can act on it. Furthermore,
individuals at the top must be willing
to listen to those
operating at lower levels of the organization.
2-TRQ #8. Describe corporate governance breakdowns in the
facilitation of Enrons fraudulent acts.
Answer:
Many related party transactions were brought to attention of Enrons BOD and
were discussed in some detail with members of Audit and Compliance
Committee. SEC requires that exchanges (NYSE, ASE, and
NASDAQ) require
financial literacy for all audit committee members and
financial expertise for at
least one member. At least 4 of 6 members had
financial expertise:
Robert Jaedicke, Professor of Accounting at Stanford University
Wendy Graham, PhD in Economics and former Chair of Commodity Futures
Trading Commission
Lord John Wakeham, CA and British Secy of State for Energy
Paola Ferraz Pereira, President of State Bank of Rio de Janerio

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Enrons BOD reviewed and approved creation of SPEs and assigned Audit
Committee duty to review transactions. BOD waived companys code of ethics
for SPE transactions. Audit Committee failed to adequately understand, review,
and monitor SPEs and Enrons accounting and reporting practices.

Answer:

2-TRQ #9. Identify ethical issues, conflicts of interest, and noncompliance with
corporate policies and procedures in the Enron case.
Enron had a code of ethics that prohibited managers and executives from being
involved in another business entity that did business with their own company. But
these codes of ethics were voluntary and were essentially set aside by the board of
directors. The legal structure allowed managers to enter these arrangements,
which constituted a conflict of interest and while the managers and executives had
a fiduciary duty to act in the best interest of the company and its shareholders,
there was considerable discretion for them to exercise their own business
judgment about what was in the best interest of the company. By succumbing to
greed and dishonesty by secretly exercising stock options and falsely reporting the
performance reality of the firm to other stakeholders, top Enron managers
abandoned the basic standards of integrity and created a noncompliance reality
that was much different than GAAP or SEC reporting standards had ever
imagined.

2-TRQ #10.
Discuss alternative courses of action in the Enron case within the
framework of appropriate ethical conduct.
Answer:
Alternative decisions may result in variations of good and bad
consequences.
Therefore, the task is a difficult one and the
choice must be left to individuals. It
is impossible to provide
a blueprint for every situation with laws, rules, and
exceptions.
The bottom line is that civilized societies are based on trust with
underlying values and implicit codes of conduct that guide our
behavior. The
decision process is difficult, and the range of
possible outcomes suggests that the
right choice is not
always obvious. Though doing the right thing can be difficult,
as members of society, we have a responsibility to reach for that goal
every day,
without exception.
In practice, fraud and forensic professionals can start with rules,
laws, and
Kantian imperatives to identify ethical
situations (ethical dilemmas) that require
more in-depth
evaluation. Once the ethical problems have been identified, the
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evaluation process begins and professionals can use their own

framework
for ethical problem solving, including using personal rules and
processes for
decision making. The fraud and forensic
professional is not alone and should
solicit the input and
opinions of other practicing professionals. In some cases,
guidance and advice from professional organizations and associations
can assist
the individual in making the best decision. After careful
consideration of the
alternative outcomes and the decision is
made, the professional can then move
forward to implement
that decision. This process will help to ensure that the
anticipated goals are realized while also attempting to mitigate any
negative
consequences.
Essentially, if Enron had a chance at redemption, it would be a
good idea to:
1.
Strengthen board oversight
2.
Avoiding perverse financial incentives for executives
3.
Instill ethical discipline throughout the business organization

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