CFE- Fraud-Schemes-and-Financial-Crimes Questions Bank

Detailed Explanation:

Rationale for Correct Answer: Hollinger and Clark’s research emphasized that management policy should focus on: (1) developing a clear understanding of theft behavior and its causes, and (2) enforcing sanctions consistently. Both are necessary to reduce employee deviance and occupational fraud. Thus, C. Both A & B is correct.

Key Concept: Hollinger-Clark Study — policy implications for managing employee theft.

The ACFE Fraud Examiners Manual includes a specific subsection titled “Departures from Generally Accepted Accounting Principles” within Accounting Concepts .

Under the Manual’s discussion of GAAP, the focus is on proper financial reporting so that transactions are recorded in their appropriate classifications and reported fairly in the financial statements. The Manual explains that GAAP are the standardized financial reporting practices used to ensure accurate and reliable reporting.

Based on this framework, a departure from GAAP can be justified only in limited circumstances, such as when strict compliance would make the financial statements misleading or when a different treatment is necessary to better reflect the substance of the transaction rather than only its form. Likewise, avoiding the overstatement of assets or income is consistent with fair presentation and conservative reporting principles. These are accounting-based justifications tied to faithful financial reporting.

By contrast, cost is not a valid reason to depart from GAAP. The fact that reporting a transaction in a GAAP-compliant manner would be more expensive does not justify noncompliance. Financial statements must be prepared in accordance with the applicable standards, not according to whichever treatment is cheaper or easier for management. Therefore, this option is the one that is NOT justifiable.

Why the other options are not the correct choice

A. To avoid overstating assets and/or income

This is consistent with fair presentation. The Manual’s discussion of GAAP is aimed at proper classification and reporting of transactions so that financial statements are not distorted.

C. To better reflect the substance of a transaction

This is a recognized accounting rationale. Financial reporting should reflect the economic reality of a transaction, not merely its legal form. This is consistent with the Manual’s discussion of proper reporting under GAAP.

D. Following GAAP would produce misleading results on financial statements

This is one of the classic reasons a departure can be justified, because the objective of financial reporting is fair presentation rather than mechanical compliance that misleads users.

References

ACFE Fraud Examiners Manual, 2020 International Edition

Accounting Concepts — Generally Accepted Accounting Principles

Accounting Concepts — Departures from Generally Accepted Accounting Principles (1.122)

Detailed Explanation:

Rationale for Correct Answer: This is a false sale scheme , in which an employee processes fictitious transactions (such as false refunds, voids, or no-sales) to conceal theft of merchandise. Here, Brenda pretends to conduct a sale but records no payment.

Analysis of Incorrect Options:

A. Register disbursement scheme – Involves fraudulent refunds or disbursements of cash, not merchandise theft.

C. Purchasing and receiving scheme – Refers to inventory fraud during procurement, not point-of-sale theft.

D. Skimming scheme – Involves theft of cash before it enters accounting records, not merchandise theft.

Key Concept: Cash receipts and register manipulation schemes.

The correct answer is D. A fraudulent conveyance occurs when a debtor transfers property to another party, often an insider or related party, for little or no consideration before or during insolvency to place assets beyond the reach of creditors. Brad’s transfer of valuable marble slabs to his son’s construction business at no charge shortly before bankruptcy is a strong indicator of such a scheme. Option A, concealed transfer, is less precise because the key issue is not merely hiding a transfer but transferring assets for inadequate value to impair creditors. Option B is overly broad and does not identify the scheme type. Option C, planned bustout, usually involves obtaining goods or credit with the intent to dispose of assets and then file bankruptcy.

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