CFE Exam Quiz 25

It is to be noted that in the Albrecht study, the study’s methodology involved obtaining demographic and background information on the frauds through the use of extensive questionnaires. The participants in the survey were internal auditors of companies that had experienced frauds. These variables fell into two principal categories: perpetrator characteristics and organizational environment. Moreover, the purpose of the study was to determine which of the red flags were most important to the commission.

Under the Albrecht study, the perpetrators involved in smaller frauds were more likely to be the ones who had there pay inadequate. On the other hand, the perpetrators who committed larger frauds were the ones who had unrealistic goals, lack of segregation of responsibilities. The ones involved in beating the system were also said to commit larger crimes.

the ACFE discharged the principal Report to the Nations on Occupational Fraud and Abuse, which was proposed to reveal insight on immense and largely undefined costs that occupational fraud imposes on organizations. The expressed objectives of the principal report were to:
I: Summarize the opinions of experts on the percentage and amount of organizational revenue lost to all forms of occupational fraud and abuse.
II: Examine the characteristics of the employees who commit occupational fraud and abuse.
III: Determine what kinds of organizations are victims of occupational fraud and abuse.
IV: Categorize how serious fraud and abuse occurs.

As a major aspect of our progressing investigation into the techniques used to submit extortion, the ACFE has built up the Occupational Fraud and Abuse Classification System, otherwise called the Fraud Tree. As reflected in the Fraud Tree, there are three primary categories of occupational fraud:
I: Asset misappropriation
II: Corruption
III: Financial statement fraud
On the contrary, rationalization is one of the major components of the Fraud Triangle as discussed in Cressey’s Study. Significantly, rationalization is a necessary component of the crime before it takes place; in fact, it is a part of the motivation for the crime.

Sir Adrian Cadbury, chairman of the committee that developed the foundational corporate governance guidance The Cadbury Report, stated that the purpose of corporate governance is to empower the productive utilization of assets and similarly to require responsibility for the stewardship of those assets. The aim is to align as nearly as possible the interests of individuals, corporations, and society.

It is to be noted that the board that is headed by the chairperson and composed of non-executive directors who are elected by the shareholders come under the category of supervisory board. On the other hand, the board that is headed by the company CEO and composed of company executives oversees the business day to day operations is the executive board. Moreover, independent/outside directors might be completely independent of the organization aside from their role on the board.

It is found that the one-tier board system is in which the independent and non-independent directors form a single board, the board of directors. In such structures, the board is responsible for all organizational oversight, including strategy and policy formation, management supervision, regulatory compliance, and alignment of shareholder and organizational interests.

This system features two separate boards—an executive/management board and a supervisory board—with no common membership permitted between the two. The executive/management board comprises company executives and other non-independent directors; this board is responsible for day-to-day business operations. In contrast, the supervisory board, which consists solely of independent directors, performs the monitoring function; it oversees management’s performance and execution of company policy. The two boards often work together to determine organizational strategy.

Ideally, two qualified individuals (the CEO and the Board Chairman) with knowledge of the organization’s industry should serve in these roles independently. The advantages of separating these roles include:
I: Better alignment with corporate governance best practices
II: Improvement of the CEO’s accountability
III: Reduction in the CEO’s potential conflicts of interest
IV: More effective board oversight

To aid in oversight of specific issues, the board might delegate members to focused subcommittees. It is considered a best practice for public companies to form at least the following three board committees:
I: Audit committee
II: Compensation committee
III: Nominating committee
The ad hoc committee is a type of committee that is formed for a limited period to address specific issues.

It is to be noted that the responsibilities of the audit committee include, but are not limited to:
I: Appointing, compensating, and overseeing external auditors
II: Reviewing financial reports • Overseeing the effectiveness of both the design and operation of the company’s internal control structure
III: Reviewing management’s and auditors’ reports on internal controls over financial reporting
IV: Overseeing the company’s whistleblower policy and being available to receive tips from potential whistleblowers etc.
The committee responsible for determining the compensation and benefits of directors and executives is the compensation committee.

It is noticeable that the nominating committee is responsible for identifying, evaluating, and nominating new directors to the board. It also facilitates the election of the new directors by shareholders. Although management nominates board members as well, an effective nominating committee will take charge of selecting new members to ensure independence.

Responsibilities of the nominating committee include, but are not limited to:
I: Reviewing current directors’ performance
II: Assessing the need for new directors
III: Having an objective nominating process for qualified candidates to the board
IV: Communicating any issues regarding board candidates with shareholders

An organization’s management team leads the organization and its employees. Management is responsible for making the day-to-day decisions that affect company performance and, ultimately, shareholder wealth.
Management’s roles in corporate governance include:
I: Establishing strategic goals and operating objectives under the board’s oversight.
II: Directing employees to carry out business activities and managing their performance of those tasks.
III: Determining the use and allocation of company resources and assets.
IV: Evaluating the organization’s successes or failures and recalibrating the strategic approach accordingly.

Shareholders are the owners of corporations; they can be individual investors or institutional investors, such as pension funds, mutual fund groups, investment trusts, or insurance companies.
To that end, shareholders have a responsibility to be actively involved in the corporate governance process. Some of them are described below:
I: Electing capable individuals to serve as board directors
II: Holding the board of directors accountable for proper governance and oversight
III: Appointing or ratifying the audit committee’s appointment of the organization’s independent auditors
IV: Voting on other significant issues, such as specific changes relating to business operations, the company’s corporate governance framework, and the rights and responsibilities of the board of directors and executive manage
On the contrary, Holding responsibility for the design and operation of the organization’s internal controls is the responsibility of the management of the company.

Effectively fighting fraud requires dedicated, deliberate focus and consideration, including a formal process for oversight by directors and active participation by other stakeholders. The importance of active and committed board participation in the fraud-risk management process cannot be overstated. Dedicated and observable fraud risk oversight activities by the board not only set the stage for an internal anti-fraud culture, but they also serve to increase confidence among various stakeholders and to enhance the organization’s ethical reputation.

The ownership and reporting structures within an organization set the stage for the involved parties’ accountability. In most corporations, the owners (i.e., shareholders) are separate from the decision-makers (i.e., management) and overseers (i.e., board of directors). To make sure that the organization operates effectively and efficiently, there must be mechanisms in place to ensure that management is accountable to the board and that the board is accountable to the shareholders.

Sound corporate governance practices ensure that all stakeholders (e.g., shareholders, creditors, employees, management, and others) are treated equitably and given just and appropriate consideration. In a system where the owners of the company are separate from those employing the owners’ investments to conduct business operations, there is an inherently lopsided balance of power. Consequently, corporate governance processes work to eliminate any resulting bias toward any party. For example, minority shareholders, including those owning just a single share of stock, must receive the same rights—including equal protection of those rights, and equal remedies for violations of those rights—as majority shareholders, such as institutional investors.

Responsibility, as it pertains to corporate governance, applies both to the duty of internal parties (e.g., employees, managers, directors, and owners) to act in the best interest of the organization and to the duty of the organization as a whole to act in society’s best interest. Both of these considerations include acting within legal, regulatory, and ethical bounds. Responsible corporate governance is reflected in the concepts of corporate ethics and corporate citizenship.

The OECD Principles of Corporate Governance is regarded as one of the hallmark sources of guidance for corporate governance practices for organizations throughout the world. According to the OECD, the Principles “are intended to help policymakers evaluate and improve the legal, regulatory, and institutional framework for corporate governance intending to supporting economic efficiency, sustainable growth, and financial stability.” Indeed, policy makers in many countries have used these Principles as a basis for legislative and regulatory corporate governance initiatives

The corporate governance framework should promote transparent and fair markets and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.
I: The corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity, and the incentives it creates for market participants and the promotion of transparent and well-functioning markets.
II: The legal and regulatory requirements that affect corporate governance practices should be consistent with the rule of law, transparent, and enforceable.
III: The division of responsibilities among different authorities should be clearly articulated and designed to serve the public interest.
IV: Stock market regulation should support effective corporate governance.

The corporate governance framework’s legislative and regulatory elements can usefully be complemented by soft law elements based on the “comply or explain” principle, such as corporate governance codes, to allow for flexibility and address specificities of individual companies.

It should be noted that a welcome bonus is not a right that every shareholder would get as it varies from company to company vis-à-vis policies.

It should be noted that shareholders should be able to vote in person or absentia, and votes cast in person or absentia should have equal effect.

It should be noted that the equity share also entitles the shareholder to share in the corporation’s income, with liability restricted to the investment amount. Additionally, ownership of an equity share includes a right to information about the company and a right to control the corporation, mainly by involvement in and voting at general shareholder meetings.

It should be noted that institutional investors acting as trustees must report how they handle material conflicts of interest that may influence the exercise of crucial ownership rights with respect to their investments

It is to be noted that the corporate governance structure must recognize stakeholder rights established by law or through mutual agreements and promote effective cooperation between companies and shareholders in creating wealth, employment, and financially sound business sustainability.
It should include,
I: The rights of stakeholders that are established by law or through mutual agreements are to be respected.
II: Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.
III: Mechanisms for employee participation should be permitted to develop.
IV: Where stakeholders are involved in the process of corporate governance, they should have timely and regular access to appropriate, adequate, and reliable information.

It is found that the structure for corporate governance must ensure timely and accurate reporting of all relevant matters relating to the corporation, including the financial situation, results, ownership, and management of the corporation.
Disclosure should include, but not be limited to, material information on:
I: The financial and operating results of the company.
II: Company objectives and nonfinancial information.
III: Major share ownership, including beneficial owners, and voting rights.
IV: Information about board members, including their qualifications, the selection process, other company directorships, and whether they are regarded as independent by the board.

It is found that The structure for corporate governance will ensure the company’s strategic strategy, effective management oversight by the board, and transparency to the company and investors by the board.
I: Members of the board must behave in good faith, with due diligence and consideration, and in the best interests of the company and investors, on a fully informed basis.
II: Where decisions of the board may affect different groups of shareholders, the board should treat all shareholders fairly
III: The board should apply high ethical standards. It should take into account the interests of stakeholders.
IV: Monitoring the effectiveness of the company’s governance practices and making changes as needed.

It is to be found that the board should be able to exercise objective independent judgment on corporate affairs. 1. Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest
2. Board members should be able to commit themselves effectively to their responsibilities.
3. Boards should regularly carry out evaluations to appraise their performance and assess whether they possess the right mix of background and competences