CFE Exam Quiz 26

It is to be noted that Organizations can also be criminogenic because they encourage loyalty. According to Diane Vaughan, the reasons are that:
The organization tends to recruit and attract similar individuals.
Rewards are given out to those who display characteristics of the “company man.”
Long-term loyalty is encouraged through company retirement and benefits.
Loyalty is encouraged through social interaction, such as company parties and social functions.
Specialized job skills can discourage personnel from seeking employment elsewhere.

When the structural pressure to commit fraud exists, a firm often cannot unite its agents in such activities. At least three factors prevent such unity.
First, the pressure to commit fraud might not affect departments in a company equally.
Second, even in high-pressure departments, some employees will not know the difficulty of obtaining needed resources.
In other words, an employee usually needs a high degree of responsibility for a company’s success, as well as the ability to bring about those goals, before a chance to engage in misbehavior can occur.

Criminologist Charles McCaghy says profit pressure is “the single most compelling factor behind deviance by industry, whether it be price-fixing, the destruction of competition, or the misrepresentation of a product,”26 such as making a poor-quality product that will wear out and need to be replaced.

It is to be noted that many of the ethical and legal problems of a corporation result from the corporate structure that separates ownership from management.

Typical large corporations are administered by a group of salaried managers, with the board of directors exercising little direct power other than hiring or firing the managers; thus, corporate managers have great autonomy over decisions regarding production, investment, pricing, and marketing.

Criminal fines and civil and administrative penalties against corporations are forms of monetary penalties. For completion, criminal cases average about one year from indictment to conviction.

It is noticeable that there are some actions taken by the businesses to rationalize conducts (Silk and Vogel)
I: Government regulations are unjustified because the additional costs of regulations and bureaucratic procedures cut heavily into profits.
II: Although some corporate violations involve large sums of money, the damage is so diffused among a large number of consumers that, individually, there is little loss.
III: Violations are caused by economic necessity; they aim to protect the value of the stock, to ensure an adequate return for stockholders, and to protect the job security of employees by ensuring the financial stability of the corporation.
IV: Regulation is unnecessary because the matters being regulated are unimportant.

It is to be noted that among the efforts to control corporate crime follow three approaches: voluntary change in corporate attitudes and structure. In the voluntary change, the following actions must be taken development of stronger business ethics and certain corporate organizational reforms; government controls might involve corporate chartering, deconcentration and divestiture, larger and more effective enforcement staffs, stiffer penalties, wider use of publicity as a sanction, and possibly the nationalization of corporations.

It is found that Clinard and Yeager suggest that a wide, comprehensive industrial code of ethics, which many businesspersons favor, would be of great help if a businessperson refused an unethical request. This would help more clearly define the limits of acceptable or ethical conduct, improve the ethical climate of the industry, and serve to reduce deceitful practices where competition is intense.

Clinard and Yeager found that mass-media publicity about law violations probably represents the most feared consequence of sanctions imposed on a corporation. Publicity can also inform the public about the operation of regulatory controls and can enable people to understand the purposes of the controls. Informal publicity is ordinarily carried as news items from the media, while formal publicity is a requirement that a corporation must, as part of an enforcement action, publish an advertisement or some other statement acknowledging a violation and that corrective measures are being taken.

Some of the criteria considered when deciding to bring a criminal action against a corporation are the degree of loss to the public, the duration of the violation, the level of complicity by high corporate managers, the frequency of the violation, evidence of intent to violate, etc.

There are many theories about enforcement, sanctions, and punishments that are a part of controlling white-collar crime.
Enforcement strategies include two main theories: compliance and deterrence.
Compliance is designed to achieve conformity to the law without having to detect, process, or penalize violators. Compliance systems provide economic incentives for voluntary compliance with the laws and use administrative efforts to control violations before they occur. In a compliance system, an offense is often called a “technical violation.”

It is to be noted that the completion of civil penalties against the corporations take about two years.

As a strategy to control crime, deterrence is designed to detect law violations, determine who is responsible, and penalize offenders to deter future violations. Deterrence systems try to control the immediate behavior of individuals, not the long-term behaviors targeted by compliance systems.
Deterrence theory assumes that humans are rational in their behavior patterns. It assumes that an individual’s propensity toward lawbreaking is in inverse proportion to the perceived probability of negative consequences.

It is to be noted that, largely individuals or small groups of individuals in connection with their occupation commit occupational fraud.
 Green further delineates occupational crime into four categories:
I: Crimes for the benefit of an employing organization (organizational occupational crime)
II: Crimes by officials through exercise of their government-based authority (government authority occupational crime)
III: Crimes by professionals in their capacity as professionals (professional occupational crime)
IV: Crimes by individuals as individuals.

It is found that administrative penalties take about four years of completion.

In Cressey’s view, there were two components of the perceived opportunity to commit a trust violation: general information and technical skill.
General information is simply the knowledge that the employee’s position of trust could be violated. This knowledge might come from hearing of other embezzlements, from seeing dishonest behavior by other employees, or just from generally being aware of the fact that the employee is in a position where he could take advantage of his employer’s faith in him. On the contrary, technical skill refers to the abilities needed to commit the violation

It is to be noted that in accordance with the Fraud Triangle Model, the presence of non-shareable financial problem alone will not lead an employee to commit fraud

It is noticeable that, if a person has committed any kind of harmful, illegal or immoral act (perpetrator), his job/occupation will define that which kind of fraud he is committing or already has committed.

The third and final factor in the Fraud Triangle is the rationalization. Cressey pointed out that rationalization is not an ex post facto means of justifying a theft that has already occurred. 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. The rationalization is necessary so that the perpetrator can make his illegal behavior intelligible to himself and maintain his concept of himself as a trusted person.

The independent businesspersons in Cressey’s study were people who were in business for themselves and who converted “deposits” that had been entrusted to them. Perpetrators in this category tended to use one of two common excuses: (1) they were “borrowing” the money they converted or (2) the funds entrusted to them were theirs—you cannot steal from yourself.

Cressey defined long-term violators as individuals who converted their employer’s funds, or funds belonging to their employer’s clients, by taking relatively small amounts over a period of time. Similar to independent businesspersons, the long-term violators generally preferred the “borrowing” rationalization. Whereas, the people who were in business for themselves and who converted “deposits” that had been entrusted to them are the independent businesspersons.

It is to be noted that there were other rationalizations of long-term violators were described, too, but they almost always were used in connection with the “borrowing” theme:
I: They were embezzling to keep their families from shame, disgrace, or poverty;
II: theirs was a case of “necessity”; their employers were cheating them financially, and
III: their employers were dishonest toward others and deserved to be defrauded. .Some even pointed out that it was more difficult to return the funds than to steal them in the first place.

Without the rationalization that they were borrowing, long-term offenders in the study found it difficult to reconcile converting money, while at the same time seeing themselves as honest and trustworthy. In this situation, they have two options: (1) they can readopt the attitudes of the (law-abiding) social group with which they identified before the thefts began, or (2) they can adopt the attitudes of the new category of persons (criminals) with whom they now identify.

The third group of offenders Cressey discussed was absconders—people who take the money and run. Cressey found that the non-shareable problems for absconders usually resulted from physical isolation. He observed that these people, “usually are unmarried or separated from their spouses, live in hotels or rooming houses, have few primary group associations of any sort, and own little property. Only one of the absconders interviewed had held a higher status position of trust, such as an accountant, business executive, or bookkeeper.” He also found that the absconders tended to have lower occupational and socioeconomic status than the members of the other two categories did.

The most important conclusion to be drawn from the Cressey study was that it took all three elements—perceived non-shareable financial problem, perceived opportunity, and the ability to rationalize—for the trust violation to occur. The three events make up the conditions under which trust violation occurs and the term cause may be applied to their conjuncture since trust violation is dependent on that conjuncture. Whenever the conjuncture of events occurs, trust violation results, and if the conjuncture does not take place there is no trust violation.

Cressey found that the embezzlers he studied generally rationalized their crimes by viewing them as
Essentially non-criminal, (2) justified, or (3) part of a general irresponsibility for which they were not completely accountable. He also found that the rationalizations used by trust violators tended to be linked to their positions and to how they committed their violations.

The fraud triangle as three legs. One leg of the triangle represents a perceived non-shareable financial need. The second leg represents perceived opportunity, and the final leg stands for rationalization. On the contrary, general information is the further category that lies under the component of the second leg i.e. Perceived Opportunity.

It is to be noted that Cressey’s classic Fraud Triangle helps explain the nature of many—but not all—occupational offenders. For example, although academicians have tested his model, it has still not fully found its way into practice in terms of developing fraud prevention programs.

For example, a person who embezzles in order to get revenge on his employer for perceived unfair treatment uses financial means to solve what is essentially a nonfinancial problem.