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Philip Hasterok
Midterm Exam ACC 505 Module 4
July 27, 2011
ACC505
Midterm Exam
Short Answer/Essay portion
150 points
Question 1. (12 points)
A Tooele School District employee has been charged with theft and forgery for allegedly stealing
approximately $32,000 in district funds.
Mary Blauser, 51, was charged in 3rd District Court Wednesday with one count of second-degree
felony theft and five counts of third-degree felony forgery. She is scheduled to make an initial court
appearance December 16, before 3rd District Court Judge David Young.
She is the second school district employee to be formally charged with stealing from the district. Both
individuals were charged in separate and apparently unrelated cases.
Blauser, who was the districts payroll clerk, allegedly arranged electronic direct deposits of funds for
nonexistent employees; the funds then went to her, according to Tooele Police detective Todd Hewitt.
"Over the course of the last 15 months, she was able to allegedly siphon funds out of their [the
districts] account into her account, and she allegedly set up fictitious employees." Hewitt said. "We
were able to confirm 31 counts of forgery and second-degree theft."
Hewitt said school district officials became suspicious when they had trouble balancing the districts
account. After an internal audit, school officials came across payroll listings for workers that did not
have any matching Social Security numbers.
District officials then turned to police for help. Tooele School Superintendent Larry Schumway said
Blauser has been released from her job for malfeasance.
Another school district employee, Cindy Heap, who formerly worked as an elementary school
secretary, earlier was charged with one count of second-degree felony theft and 11 counts of forgery in
a different case, according to Gary Searle, deputy county attorney. Heap allegedly took just under
$80,000 in district funds, Searle said.
Heap, 32, who resigned from her job, is scheduled for a court appearance on December 9, before
JudgeYoung.
A.

What factors do you think allowed these frauds to occur?

There was a lack of controls to keep from the fraud occurring. Controls such as
segregation of duties and a lack of internal audit helped allow the employees to
perpetrate fraud.

B.

What do you think the school district should do to prevent fraud from occurring in the
future?

The school district needs to establish clear controls for their employees one such
control would be for secretaries and principals. The principals should be required to
reconcile accounts either monthly or quarterly to insure proper control procedures,
which could have lead to discovery of the fraud early on.
C.

What do you think the school district did right in these situations?
The school district once discovering the issues contacted the police for a full
investigation, and their prosecuting of the perpetrators should send a message to others
thinking of committing fraud that punishment would be sever.

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Question 2.

(12 points)

In recent years, identity theft has been a common fraud against consumers. Identify and explain three
methods fraudsters use to convert personal information to financial gain, as part of identity theft
schemes.

Identity theft is a troubling thought and it has become worse with the ability to get
information over the internet. Identity theft has become common through e-mail scams,
mainly in an attempt to get information from unsuspecting victims. With this
information the thief can sell the persons information to others for a profit, they can
open lines of credit, or simply they can create an alternate you with your information by
selling others your identity. Again, this information can be used in job applications,
applying for lines of credit, and committing of theft or other criminal acts while using
your information to escape capture.

Question 3.

(12 points)

During the past year, Jim Hunt, CEO of KMP Corporation, read about several different frauds
occurring in his industry. Jim would like to know if fraud is present in his company. He has asked you,
his new assistant, to help him determine whether or not fraud is occurring. In preparation for the
investigation, Jim has asked you to create a list of fraud symptoms and discuss how they can help
determine where fraud may be taking place.

Fraud can be divided into six categories:

1. Accounting Anomalies This can be seen by looking for sudden changes in account
balances, any significant differences could arise from faulty journal entries or
inaccuracies in the ledgers.
2. Internal Control Weaknesses To identify areas of where there is weak or no controls
present an analysis should be performed, since weak controls are easy to override
when there is an external pressure to commit fraud.
3. Analytical Anomalies Some accounts may have transactions that would reveal fraud
by either too large or too small for certain accounts.
4. Extravagant Lifestyles We all like to live large, yet our lifestyles are dictated by our
income, so managers should analyze the lifestyles of their employees for unexpected or
unexplained changes in their lifestyle. This can help pinpoint those committing fraud,
though sometimes there are extenuating circumstances that can explain these actions
so a close analysis is required.
5. Unusual Behaviors A manager should take note of employees emotions and any
changes in the employee most often stress and fear are a good indicator that an
employee may be committing fraud.
6. Tips and Complaints Probably the best way to catch those committing fraud, any
complaints or tips made by employees may provide clues to a fraud being committed.

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Question 4.

(12 points)

List three opportunities to commit fraud that have arisen from the boom in e-commerce.
E-mail scams to gain a victims information, false charges by capturing and using consumer
information to make purchases, and transferring funds from an individuals bank by setting up
a fake site for them to input their true information into.

Question 5.

(12 points)

Jim was just hired at Beehive credit union. Beehive was known for its impeccable controls and
friendly employees. Jim was hired on as a teller and assumed his new job would help him receive a
mortgage loan to buy a house, even though he had poor credit. Without the loan, Jim would not be able
to purchase the house, and he, his wife, and their six children would be forced to stay in the two
bedroom apartment that had become the constant argument of his marriage. Besides his marriage being
on the line, Jim was sick and tired of hearing the childrens nightly fight about which three had to sleep
on the floor and which three got the bed. Jim was determined to keep his marriage and kids together.
Jim had quit his job in construction and accepted a lower-paying job as a teller, expecting to receive
the much-needed loan. However, after reviewing the paperwork for Jims loan, the impeccable controls
were implemented, and Jims loan was not approved by all the loan committee. Everything was falling
apart, and Jim did not know what to do.
Two weeks into his job, Jim found that two elderly ladies came around to collect and account for the
cash every Thursday night. The rest of the week two younger gentlemen made the rounds. He knew
the pairs made the collections together; nevertheless, he decided to test a simple plan to "approve his
loan." He figured the ladies would not accurately count the money, and if they did, he could easily
cover for that day. On the following Thursday, before Jim closed his till, he took out around $200.
Although they were gathering and counting together, the elderly ladies did not discover the shortage.
He was right: the old grannies were unable to accurately count the funds and he could easily obtain his
loan. Slowly but surely, Jim started taking more money. At first, he decided he would take just
enough to purchase the house, and then he would start saving to repay the bank. Later, he figured if the
bank is stupid enough to hire two elderly ladies to do their work, then they deserved to lose the money.
A. Are all of the elements of the fraud triangle present in the case? Which elements of the triangle
are present and how are they present?
All elements of the fraud triangle are present: Perceived Pressure, Opportunity, and
Rationalization. Perceived Pressure is found within Jims marriage, the kids arguing,
and poor credit. This pressure lead Jim to believe the purchase of a house would save his
marriage and family so he quits one job to take another believing it will help him get a
loan. Once this plan falls through there is more pressure on Jim to find a way to get the
house. The Opportunity is presented to Jim through his new job when the two older
ladies do not notice or count the funds correctly; this lead to greater opportunity and
bigger chances. Jim was able to Rationalize the theft of the money by telling himself that
he is approving his loan and that if the bank was going to hire two old women that could
not properly count the money then they deserved to lose the money.
B. What could the bank have done to prevent the fraud?
The bank should have been more proactive when hiring Jim, by asking questions such as
why he wants to quit a job that pays more for one that pays less. The purchase of a
house for which he was denied a loan should also raise some questions, since he is living
outside of his means. The bank should also screen and randomly check their employees
information that does the counts to insure accuracy.

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Question 6.

(21 points)

Justin Richards was just hired as the store manager for Super Electronics, a small chain of electronics
stores located in the western United States. Richards recently moved to Fremont, California and was
excited to start a new career in the Bay Area. He knew little about the situation that he was hired into,
except that he had been told there appeared to be a lot of theft in his store. Richards had been hired
through a headhunter friend of his, who mentioned that he had helped hire him due to his experience
cleaning up fraud at his last company.
Richards went somewhat hesitantly into his first day of work. He was told by his new boss that he
needed to clean up the theft that was going on. This made Richards very suspicious of everyone that he
met and as he toured the store and was introduced to his employees, he felt like he was trying to read
everyones soul to determine if they were part of the problem.
Richards boss gave him little information as to what was going on, so Richards began his own
investigation. He had to balance that effort with his normal job functions, and he felt that he could not
always spend the time he would like to, trying to catch the perpetrators. However, after months of
investigation and study of business practices, he felt he had a pretty good grasp of the situation.
It surprised Richards to find out that the items that were being stolen were not small items, such as
portable CD and cassette players, as he initially suspected. Rather, it was large items, such as
televisions and stereos. As far as he could determine, the store was losing over $5,000 a week from the
theft of these large items.
As Richards was researching the situation, a few things jumped out at him and pointed him in the right
direction. He noticed that his warehouse employees tended to be high school students and that they had
complained a lot in the past about how little they made. Their personnel files indicated that they had
regularly asked for raises and advances. During the time that Richards had been there, he had heard
nothing about needing more money from any of them. He also noticed that these employees seemed to
dress very well and had nice cars, for high school students. He got the feeling that they were living
beyond their means.
As he began watching these warehouse employees more closely, he noticed that they tended to hang
out with the employees that worked in the television and stereo department. This made him even more
curious.
After a few months of investigation, Richards felt he had determined what was going on. As customers
made decisions to purchase items from the television and stereo departments, an employee would fill
out a requisition form for the item. The employee would take the form and have it approved by his
superior. The employee would then walk the form over to the warehouse, which was located in a
separate building on the other side of the parking lot. As the employee walked over to the warehouse,
he would alter the form. The employee would typically erase the portion that indicated the quantity.
For example, he would erase the quantity of one television, and change it two televisions on the
requisition. On his way to the warehouse, he would also call up one of his friends and tell them to
come and get the other television.
After he picked up the items from the warehouse, he would load the customers item in their car.
Before returning to work, the employee would then take the stolen television out to his friends car.
The warehouse employees would help arrange this fraud, making it harder to detect through their own
paper work.

As Richards looked deeper into the matter, he was able to determine that the fraud was only
perpetrated when a particular group of high school students was working at the same time. He was not
sure how long the fraud had been going on, but he did notice that about six months before he began
working at Super Electronics, these individuals stopped complaining about their pay or asking for
advances. As far as Richards could tell, they had stolen approximately $120,000 worth of merchandise.
When Richards looked into the background of these individuals, he found that the salespeople he
suspected had been hired on the recommendation of the warehouse employees. He also learned that all
of the suspects had been caught shoplifting together a few times in the past.
1. How could this fraud have been detected?
Strong internal controls would help to prevent and detect such fraud. All orders should
be input into a computer system which does not allow for the quantity to be changed
unless overridden by a manager. Cameras recording the warehouse and surrounding
areas would help to deter fraud by letting employees know that the cameras will catch
them in the act. Also a proper background check on employees would have shown
records on employees for shoplifting.
2. What internal controls are missing at Super Electronics?
As previously stated, orders should be input into a system which will not allow the
quantity to be changed unless overridden by a manager, when an employee is able to
walk-over the slip they can easily change the quantity. Again a strong deterrent to
commit crime is the knowledge that one will get caught and one way this can happen is
through a good camera system that is observing employee actions. A proper background
check will show any past crimes committed by possible employees. As Richards also saw
an employee living beyond their means should be a good indicator of fraud.

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Question 7.

(12 points)

A friend you have not seen for years has just contacted you concerning a possible fraud in his
company. Your friend remembers you taking a fraud examination course during college and he would
like your help. Your friend suspects that the controller is skimming some of the cash that is coming in
from customer payments. Since your friends company is quite small, there are few controls requiring
segregation of duties. Although your friend has a very positive relationship with this controller, your
friend would like to know the best possible pattern of techniques to help see if this controller is in fact
stealing the cash. Prepare a "target" diagram showing the list of steps your friend should follow.
Install video
surveillance
where cash is
received.
Managers
presence at areas
where cash
transactions occur.
Rotate employees
so that no one
person is opening
cash payments
alone.

The friend should setup video surveillance in areas where cash is received; they should
also make sure there is a managerial presence to reduce possibility of fraud. Also,
rotating the employees that open customer payments but making sure there is a
minimum of two employees reduces the likelihood of fraud being perpetrated.

Question 8.

(21 points)

Kristynn Graham, a woman from Trashcan City, Alabama, was a shopping addict and had run up
considerable debt on excessive purchases of jewelry and clothes. She would also slap down plastic at
the grocery store, to take her kids to miniature golf, and go bowling with her husband. Christmas
purchases were a little bigger, with gifts like $100 remote-control cars for her sons. She made $11 an
hour at Durban, and her husband earned a little bit more as a machinist at an aircraft company. Family
finances were a constant balancing act. Now she needed a way to avoid telling her husband about the
addiction.
Kristynn turned to her employer, Durban Consulting. She raised money to pay down her obligations by
repeatedly padding the companys expense accounts. She took reimbursements for trips and
conferences she did not attend. In her three years of work, she had collected a total of $240,000 from
her employer. It got to the point where she did not feel like she was doing anything wrong. When
Durban found out, Graham admitted the fraud and pled guilty to one count of fraud and said that she
was planning to pay it back.
Requirements
a. What type of fraud did Kristynn Graham commit?
Kristynn is running a Fictitious Expense Reimbursement Scheme; however it also could
be considered a Mischaracterized Expense Reimbursement. A fictitious expense
reimbursement scheme is the act of being reimbursed for items or events that never
existed in this case the conferences and trips. Whereas a mischaracterized expense
reimbursement is the use of an expense reimbursement to pay for something personal in
this case her debt, which she reclassified into reimbursable expenses.
b. What is the other name for this type of fraud?
Fictitious Expense Reimbursement is also considered Occupational Fraud or
Mischaracterized Expense Reimbursement.
c. List any four factors/weaknesses that could have resulted in this type of fraud.
If this organization allowed for supervisors from outside of the requestors department to
approve the expense reports, since the supervisor would not be familiar with the
individuals work schedule. They should have run a comparison of expenses against
previous years to determine if there were any extreme differences. They should have also
compared expense reports against others in the company to determine if any one
individual in this case Kristynn was expensing a higher amount than others. Also, the
information required for the expense report to be approved should be original receipts
and a report as to what the expense was for that must be signed by that employee.
d. What could be done to avoid or reduce this kind of fraud in a company? What segregation of
duties could have been in place to prevent Kristynn from committing this fraud? (List four
effective ways.)

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Detailed accounting of expense reimbursement, Comparing the employees expense
report with their work schedule, Comparing expense report with previous reports, and
by using red flags such as high dollar expenses paid in cash and receipts ending in 0 or
5. They should also compare expenses in general for all employees to see if any one or
more employees consistently have higher expenses than other employees and then they
must determine why by reviewing the reports for accuracy.

e. It is said that this kind of fraud does not result in as much loss as fraud committed by
management or top executives. Why do you think this is so?
Management and Top Executives are more likely to commit fraud through financial
statements either overstating a companys receivables or under reporting the debt. This
type of fraud effects all the employees and even stockholders if the company is traded
publicly. This type of fraud can lead to a companys stock price being overvalued, it is
also estimated that even though this fraud is more rare than other types it on average
will cost about $4 million per incident.
f.

Name the three components of the fraud triangle and describe how each one existed in the
scenario.
The fraud triangle consists of three components these are Pressure, Opportunity, and
Rationalization. In this instance Kristynn was under economic pressures to commit the
fraud so that she could pay off her debts without creating tension in her family by having
to admit her problem of overspending. The Opportunity was present by the lack of
controls setup, which allowed her to submit fraudulent expense reports that were
approved without investigation. She was able to Rationalize the act of fraud by the most
common belief that she sold herself into thinking she was going to pay it back, but as is
stated she reached a point where she didnt feel like she was doing anything wrong.