PSY 405 Week 3 Discussion Questions

Do you agree or disagree with Abraham Maslow’s belief that all people everywhere are motivated by the same basic needs? Why?

What is self-actualization?

Do you know (or know of) someone who is self-actualized? Who? (Approach this from Carl Roger’s point of view)

Do you think there is an element of risk on the path to self-actualization?

Do you agree or disagree with Rollo May’s belief that much of human behavior is motivated by an underlying sense of anxiety and dread? Why?

Watch this video of Carl Rogers doing a counseling session with Gloria. https://www.youtube.com/watch?v=24d-FEptYj8 Give a summary of what you took from the video.
I completely agree with both you and Nancy Etcoff. This is one of my favorite videos. When we put someone else in charge of our happiness we are in for disappointment. In our society it’s accepted to say, “He (or she) makes me happy.” Say, “I make me happy” and people think you are narcissistic and that’s too bad. However, I think making yourself happy is a sign of maturity and even that self-actualization Maslow and Rogers talk about.

What are some benefits of making yourself happy?

What are some of the benefits of a positive focus?

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Write an exciting and engaging story!

Write an exciting and engaging story! Have a imaginative HERO in the narrative, with supporting characters. Write in the third person, with a plot line of beginning, middle, and end. Draw in the reader (me) into the world you’ve created. Make the reader care about and empathize with the characters! Lead them to a compelling finale of the story! This is free form writing with any structure you choose, as long as the story arc makes sense and builds to a climax. Include conversation of character in “quotation” for example: “I’m so scared!” said mary with a fearful voice. Use your unlimited imagination and have fun. (5 pages minimum – typed / double spaced) 6 Genres to choose from : Horror – Comedy – Drama/Romance – Action/Adventure – Mystery/Thriller – Fantasy/Science Fiction

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Focus on Case Studies in Neurology

Focus on Case Studies in Neurology For this assignment you will respond to three case studies. What is a Case Study? A case study is a narrative used to help you practice real-life analysis and communication skills. It is a learning tool that provides readers with enough detailto understand the nature and scope of the problem, andserve as a springboard for discussion and learning (ORourke, 2007, p. 391). Use your textbook and academic resources from the Kaplan Library to support your responses. Access the Kaplan Library directly from Course Home for this class, or through the student portal. Be sure to cite and reference all your sources. The Kaplan Library has a feature that allows you to automatically create an APA formatted reference. Your completed case study should be between 7501000 words, and all sources must be properly cited using APA format. Amy is cooking dinner for her family. She moves to pull a pot off the stove and accidently touches the burner. She reflexively pulls her finger away from the stove and immediately feels the pain. Which receptor neuron is responsible for sending information from her finger to her peripheral nervous system? Is this receptor neuron, an afferent or efferent neuron? Explain where the information from the receptor neuron is sent and how does it result in Amy moving her finger away from the stove. How many neurons are typically involved in this response? What are the names of these neurons? Evolutionarily, why do you think the human body has this system in place? What might happen if we did not have this response? Glen, who is 45 years old, begins to notice that his hands shake (tremors) when he is performing everyday tasks such as signing his signature. His family members have noticed that he also has muffled speech and tends to shuffle when he walks. He is diagnosed with Early Onset Parkinsons disease. What is Early Onset Parkinsons disease? What specific cell type is affected in Parkinsons disease? What is dopamine? What effects does dopamine have on the body? Explain the structure of a synapse and why Glens neurologist would prescribe him a dopamine agonist? Glen has genetic testing performed and it is determined that he does carry an autosomal dominant mutation in the SNCA gene associated with Early Onset Parkinsons disease. Glen has three children. Would you advise his children to have genetic testing performed to determine if they also carry the disease mutation? Why or why not? Patricia, who is 37 years old, discusses with her physician recent symptoms that she has experienced including blurred vision, numbness in her fingers and face, dizziness, fatigue and weakness. The physician performs multiple neurological tests and she is diagnosed with multiple sclerosis (MS). What is MS? Is MS a disease of the central or peripheral nervous system? What is the main cell structure affected in MS? How is the action potential of a neuron affected in MS? The origins of MS are not clear. What do scientists hypothesize to be the causes of MS? Your assignment should be written in an essay format. The assignment requires you to include details from research including the course materials and sources you locate on your own. Remember to use APA format to cite your sources of information, both within parenthetical citations and also within a reference page at the end of the project. For support writing your case study responses, review the following link in the Kaplan Writing Center: Kaplan Writing Center. (2013). Case Study Analysis. Retrieved from https://kucampus.kaplan.edu/MyStudies/AcademicSupportCenter/WritingCenter/WritingReferenceLibrary/GraduateStudentWritingResource/CaseStudyAnalysis.aspx Please note, you must be logged into the student portal for this link to be active. Basic Writing Requirements: Between 7501000 words not counting the title or reference pages. Include a title page, double space, font size 10 or 12. Include a well-developed introduction and conclusion Provide exceptional content. Demonstrate superior organization: use logic. Free of grammar and spelling errors. No evidence of plagiarism. Use the APA style for all citations. Submitting Your Assignment Save your copy of the assignment in a location and with a name that you will remember. Be sure to use the “Save As” option to include your first and last name in the title of the document. For example, your assignment might be called Shawn_Edwards_Assignment6.doc. When you are ready to submit it, click on the Dropbox and complete the steps below: Click the link that says Submit an Assignment. In the “Submit to Basket” menu, select Unit 6: Assignment In the “Comments” field, include at least the title of your paper. Click the Add Attachments button. Follow the steps listed to attach your Microsoft Word document. To view your graded work, come back to the Dropbox or go to the Gradebook after your instructor has evaluated it. Click the Dropbox to access it. Make sure that you save a copy of your submitted assignment. Reference ORourke, James S. (2007). Management communication: A case-analysis approach. Upper Saddle River, NJ: Pearson/Prentice Hall. ID: SC235-06-08-A

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Bill’s Lawn Care Module 2 Mini Practice Problem

Bill has asked you to prepare financial statements for his first month of operation. The following information relates to the month of May, 2014. (Round all calculations to the nearest whole dollar)
On May 2, Bill signed a 1 year, 6% note for $3,500 associated with the purchase of a used truck for the business. The interest will be due with the principle of the note.

On May 2, Bill purchased a used truck for $7,000 to use for the lawn care business. He estimates a trade-in value of $500 at the end of the estimated five-year life of the truck.

On May 5, Bill purchased a lawn mower for $300 and an aerator for $500. He estimates $0 salvage value for both pieces of equipment and an estimated two-year life for both.

On May 6, Bill writes a $600 check for a six month insurance policy that expires October 31, 2014.
Instructions:

Using the chart of accounts provided, and the Excel template provided with this assignment,record the adjustments in the Worksheet, calculate the adjusted trial balance and complete the worksheet.
Prepare the Income Statement, Statement of Owner’s Capital and Balance Sheet for Bill’s Lawn Care for May, 2014
Prepare journal entries, in good form, to record the May adjusting entries. Explanations are optional. Start with Page 3 of the General Journal for the adjusting entries.
Post the journal entries to general ledger accounts. There are already transactions in the ledger for the month, you are adding to those transactions.
Prepare and post the closing entries for May, 2014. Start with Page 4 of the General Journal for the closing entries
Prepare a post-closing trial balance as of May 31, 2014, for Bill’s Lawn Care.

Bill’s Lawn Care

Chart of Accounts

Classification Account Number Account Name
ASSETS 101 Cash
110 Accounts Receivable
120 Supplies
130 Prepaid Insurance
150 Equipment
155 Accumulated Depreciation – Equipment
LIABILITIES 201 Accounts Payable
220 Notes Payable
225 Interest Payable
OWNER’S EQUITY 301 Owner’s Capital
305 Owner’s Drawings
310 Income Summary
REVENUES 401 Lawn Service Revenue
EXPENSES 620 Supplies Expense
630 Fuel Expense
640 Repair and Maintenance Expense
650 Advertising Expense
660 Insurance Expense
670 Depreciation Expense
680 Interest Expense

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Accounting Information Systems by James A

Answer the following questions from the textbook, Accounting Information Systems by James A. Hall (9th Edition), in your own words (if you include quotes, follow-up with your own words) and provide a unique example to support your response:

Chapter 8 Discussion Questions: 2, 4, 19

Note: When responding to the Discussion Questions:

1. Include a 2-3 sentence answer for each question.

2. Hit enter twice and type “EXAMPLE:”

3. Provide an example from your place of business, home life, the news, or an example you found on the internet.

Question 2

Discuss the various sources of data for the Financial Reporting System (FRS) output and how these data are processed into output and how these data are processed into information (output) for the different external users.

Question 4

Ultimately, is the purpose of an audit trail to follow a transaction from its input through its processing and finally to the financial statements, or vice versa? Explain your answer.

Question 19

Comment on the following statement: “More information is always preferred to less; you can never have too much information.”

1 page

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Access the 2012 Annual Report for Google and answer the following questions

Access the 2012 Annual Report for Google and answer the following questions. You can access the annual report at http://www.google.com.

a. Using information from the company’s Income Statement and Income Taxes footnote, what was the company’s effective tax rate for 2012? Show how the rate is calculated.

b. Using information from the Statement of Cash Flows, calculate the company’s cash tax rate.

c. What does the company’s Income Taxes note tell you about where the company earns its international income? Why does earning income in these countries cause the effective tax rate to decrease?

d. What item creates the company’s largest deferred tax asset? Explain why this item creates a deductible temporary difference.

e. What item creates the company’s largest deferred tax liability? Explain why this item creates a taxable temporary difference.

f. How does the company classify its unrecognized tax benefits on the balance sheet?

g. How does the company treat interest and penalties related to its unrecognized tax benefits?

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ACFI2003 Major Assignment

1)Job costing

Singapore Consulting is an engineering consulting firm. It employs 40 professional engineers, and 10 administrative and support staff. The firm regards each customer as a job. It keeps track of all salaries, overhead costs and travel expenses incurred by its employees.

Employees are required to complete a weekly time-sheet showing the amount of time they spent on each customer’s account, and the expenses that they incurred. The time-sheets also show how much time was spent on what the firm calls “non-chargeable costs” such as general administration and idle time between jobs. The hourly cost of employee time is based on the annual salary, and a 2000-hour working year.

The firm applied overhead at the predetermined overhead rate of 60% of direct (actual) salary cost.

The firm’s CEO had produced the following estimates for 2017:
Salaries of professional staff
$1,188,000
Salaries of support personnel
121,000
Rent, utilities and other costs not directly billable to customers (or jobs)
565,000

In the first week of Jan 2017, three employees worked on a job for Samsung Electric. Their time and expenses are listed below:

Employee Hrs on Customer’s business Expenses
Peter Young

36 $360
Carolyn Leung

29 185
Bobo Choi

22 0

As a junior engineer, Peter Young earned $23,500 per year. Carolyn Leung earned $38,200 as a senior engineer, whilst Bobo Choi earned $47,300 as a supervisor. Peter’s and Carolyn’s “expenses” referred to travel undertaken on the Samsung Electric job.

Singapore Consulting invoices its customers for actual (traceable) expenses (like travel), and charges customers twice the hourly salary cost of employees’ work. The CEO expected20% of the salaries of the professional staff, and 50% of the administrative and support staff to be “non-chargeable”. He considered non-chargeable time as part of overhead. (Note the estimated overhead cost of $565,000 for 2015 does not include this salary cost. It is included in the salary figures for each category of employee.)

Required:

1.1) Compute the cost of work done for Samsung Electric in the first week of 2017.

(4 marks)

1.2) For this part, assume that the actual overhead cost incurred by the firm is the same as the budgeted overhead cost for 2017. Also, assume that the budgeted salaries for professional staff and support personnel given in the case-facts, are the same as the actual costs in 2017.

i) Calculate the difference between the actual o/h costs incurred, and the amount of overhead applied to all jobs by the firm in the year 2017.
(3.5 marks)

(Hint: only details of one job (i.e. Samsung Electric) have been given in the case facts. However, the case-facts have provided the overhead rate which should enable you to calculate the overhead that the firm would apply to all jobs undertaken in 2017).

ii) Based on (i) above, state whether the firm is employing an actual or normal cost-management system. Explain reasons for your choice.
(2.5 marks)

iii) Explain why the difference that you calculated in (i) above occurred. Your explanation should be in the context of the firm’s cost-management system (identified in (ii) above).

(4 marks)

1.3) Is the actual or normal cost-management system a better system? Why? Explain in full.

(6 marks)

Total 20 marks
2) Weighted Average

The Tizer Drink Company manufactures a product (a drink cordial) that passes through three processing-departments: Mixing, Cooking and Bottling.

In the Cooking department, materials are added at the end of the process. Conversion costs are incurred uniformly throughout the process. During the month of June, the Cooking department received 30,000 units from the Mixing department. The transferred-in cost of the 30,000 units was $139,800.

Costs added by Cooking during June included the following:

Direct materials $70,400
Direct labour $112,000
Overhead $51,200
On June 1, the Cooking department had 5,000 units in inventory that were 30% complete with respect to conversion costs. On June 30, 6,000 units were in inventory, one-third complete with respect to conversion costs. The costs associated with the 5,000 units in beginning inventory were as follows:

Transferred-in $23,300
Direct labour $17,500
Overhead $8,000

Required:

a) Use the weighted average method to calculate the cost of production for units completed goods and ending WIP in the Cooking department as at June 30.
(8.5 marks)

b) The job costing system specifically traces and allocates product costs to each job. Why is this approach not used in process costing? Explain.
(5 marks)

c) Why is the concept of equivalent units used in process costing? Explain.
(1.5 marks)

(Total: 15 marks)

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The name of the class is “Legal Elements of Fraud”

Assignment:

Purpose

To discuss the legal issues and factors in a fraud investigation.

Action Items

1. Review the assigned readings for Week 1 (All the assigned readings are attached).

2. For each statementbelow, determine if you agree or disagree with the statement, and justify your decision by writing a 2-3 paragraph response. (Note: Each statement requires a 2-3 paragraph justification.)

a. “Most frauds are not prosecuted because they are immaterial in amount.”
b. “Inadequate internal controls provide the reason why most fraud is committed.”
c. “Keep your fraud investigations internal because bringing in anyone external to the organization might tip off the suspect that they’re being investigated.”
d. “Once you believe you’ve found the fraud perpetrator, the best thing to do is to fire the person to prevent him/her from continuing the fraudulent activities.”
e. “It doesn’t matter if the company or the attorney hires a CPA or a professional investigator for a suspected fraud investigation. The attorney-client privilege applies in either case.”
Basic Legal Concepts.
Authors:

Lawrence, G. Michael1,2 mike@mikelawrence.net
Wells, Joseph T.3 joe@cfenet.com

Source:

Journal of Accountancy. Oct2004, Vol. 198 Issue 4, p33-35. 3p.

Document Type:

Article

Subject Terms:

*Fraud
*Commercial crimes
*Accountants
Common law
Criminal procedure

NAICS/Industry Codes:

541211 Offices of Certified Public Accountants
541212 Offices of accountants
541219 Other Accounting Services

Abstract

This article summarizes the basic common-law concepts of fraud. Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages. For certified public accountants (CPA) materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. The motive for fraud is a strong circumstantial element. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. Circumstantial evidence rarely can be sufficient without the statements of witnesses. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. The final legal element of fraud concerns damages–usually in terms of money. There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations.

Author Affiliations:

1Principal of G. Michael Lawrence, PC, Austin, Texas
2Advisory member, Association of Certified Fraud Examiners’ Board of Regents
3Founder and chairman, Association of Certified Fraud Examiners

Full

Basis Legal Concepts

Contents

WHAT CONSTITUTES FRAUD
Definition of Fraud
Criminal Prosecution of Fraud
RESOURCES
AICPA Resources
Books
CPE
Antifraud initiatives
Section:

THE FRAUD BEAT

Beware insufficient knowledge of the law.

A CPA was hired to be an expert witness in a civil fraud case. On cross-examination the opposing attorney asked the expert a seemingly simple question: “Would you please define ‘fraud’ for the jury?” The CPA replied, “Do you want to know the legal definition or my definition?” The attorney countered, “You mean there is a difference?”

The expert’s answer provoked a snicker from the judge and jury, and the CPA’s credibility went downhill from there. Before the cross-examination was over, the expert was made to look like an idiot. The truth is, the CPA knew a lot about accounting and he was well-versed in the facts of the case, but he knew little about the legal aspects of fraud–a crucial element for an antifraud witness. As a result, the case was lost. This article will summarize the basic common-law concepts of fraud, beginning with the requisite: The purpose of this article is to familiarize you with the law, not to provide legal advice. For that, check with your attorney.

Appeals courts direct trial judges to closely examine the qualifications of purported experts before allowing them to testify. Failure to answer the basic question above could mean the “expert” might not be allowed to testify. Imagine the implications if the case had been lost because the time for naming new experts had passed.

To qualify as experts, CPAs have to give proof of knowledge, education and/or experience to convince the judge they have reliable and valuable information for the jury. (See “So You Want to Be an Expert Witness,” page 23.) Qualification is on a case-by-case basis; despite public misinformation by some groups, a blanket qualification-even for CPAs–does not exist in any court system.

Criminal and civil frauds differ in the level of proof required. For civil cases that burden is a “preponderance of evidence” In criminal fraud the standard is “beyond a reasonable doubt”

WHAT CONSTITUTES FRAUD

Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages.

A material false statement. Let’s assume an attorney hires you to examine the financial statements of ABC Corp. The attorney represents shareholders who have filed a lawsuit against ABC claiming the financial statements are fraudulent. Your job is to help the attorney determine whether the claim constitutes fraud. You begin by seeking to find out whether the financial statements contain false statements, and if so, whether they are “material.”

For CPAs, materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. The good news for CPAs is that this element of proof typically involves familiar ground: determining the real numbers. But CPAs inexperienced in fraud cases might stop there. In reality, they should just be getting started; the real work comes when proving intent.

There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include

Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts’ expectations. Or, if managements’ compensation is tied largely to earnings performance, documenting that would help establish motive.

Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. To prove this element the lawyers would call witnesses from ABC to testify and introduce documents relating to job descriptions. The CPA usually would help identify the specific control weaknesses or overrides that allowed the fraud to occur.

Repetitive acts. Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error. Or if an employee steals once, he or she may be able to explain that away. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. For example, assume that someone at ABC Corp. decided to inflate last year’s earnings by falsely debiting accounts receivable and crediting sales. Since one single large entry might draw attention, it is more likely there would be numerous false entries of smaller amounts. This fact makes it more difficult for the ABC fraudster to claim it was an error.

Witness statements. Circumstantial evidence rarely can be sufficient without the statements of witnesses. In a typical financial statement fraud case, management directs underlings to make the fraudulent entries. The CPA typically would identify the potential witnesses, such as bookkeepers or other accounting personnel, who may have made the fraudulent entries.

Concealment. Honest people rarely have the motive to conceal their acts. Therefore, if, for example, the CEO ordered the destruction of key ABC documents prior to an audit, this could be powerful circumstantial evidence of intent.

Victim reliance. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. That usually is proven by having the ABC shareholders testify they would not have invested had they known the true financial condition of the company. It may be even more challenging to prove reliance by banks extending loans, especially in cases involving self-employed borrowers who default on an obligation. In many such cases, the bank would have secured the loan with lots of hard collateral, or it may have done its own due diligence, thus making it difficult to prove it actually had been relying on the financial statements when credit was approved.

Damages. The final legal element of fraud concerns damages–usually in terms of money. In some federal criminal cases–for example, bank frauds–an actual loss is not required. But normally, even when there is a material false statement, intent and victim reliance, there is no fraud if the victim is not damaged. For example, the shareholders of ABC hardly would be filing suit if the price of the stock went up as a result of the other elements’ being uncovered.

There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations. In ABC’s alleged fraud, the CPA might be required to restate the shareholders’ equity in light of the fraudulent financial statements. Alternatively, if the stock price has suffered as a result of publicity about the fraud, the CPA typically would determine the amounts involved. The attorney would argue that whichever method produced the largest amount should be allowed as financial damages. The applicable measure of damages–for example, benefit of the bargain, out of pocket–can vary from state to state and case to case. The attorney will determine which measure applies. The CPA can be an invaluable resource in performing the calculation and proving the amounts.

The criminal prosecution of fraud (see exhibit, at left), as well as civil frauds, share a common thread: They both contain the legal elements of fraud. So if you get into fraud work of any kind, know these elements. And know them well. That way, your definition of fraud and the legal definition are one and the same.

Definition of Fraud

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Source: Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.

Criminal Prosecution of Fraud

Although federal securities laws address financial statement fraud, prosecutors often also will charge criminal violations under one or more of the below categories, depending on the exact circumstances of the case.

Misrepresentation of material facts.
Concealment of material facts.
Bribery.
Illegal gratuities.
Conflicts of interest.
Embezzlement.
Theft of trade secrets.
Mail fraud.
Wire fraud.
Interstate transportation of stolen property.
Racketeer Influenced and Corrupt Organizations (RICO).
False claims and statements.
Conspiracy.
Foreign Corrupt Practices Act.
Bankruptcy fraud.
Financial institution fraud.
Health care fraud.
Identity theft.
Telemarketing fraud.
Computer fraud.
Economic espionage.
Money laundering.

RESOURCES

AICPA Resources

Books

CPA Handbook of Fraud and Commercial Crime Prevention (# 56504JA).
Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879JA).
Fraud Detection in a GAAS Audit (# 006615JA).
CPE

Introduction to Fraud Examination and Criminal Behavior (# 730275JA).
Identifying Fraudulent Financial Transactions (# 730244JA).
Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).
For more information, to register or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

Antifraud initiatives

Antifraud and Corporate Responsibility Resource Center, www.aicpa.org/antifraud.

SAS no. 99 information.
Management Antifraud Programs and Controls (SAS no. 99 exhibit).
Fraud Specialist Competency Model.
Free corporate fraud prevention training and CPE.
Academia outreach and assistance.
Other antifraud activities.
~~~~~~~~

By G. Michael Lawrence and Joseph T. Wells

MICHAEL LAWRENCE, JD, CFE, is principal of G. Michael Lawrence, PC, Austin, Texas, and an advisory member of the Association of Certified Fraud Examiners’ Board of Regents. His e-mail address is mike@mikelawrence.net.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners. Mr. Wells has twice won the Lawler Award for the best article in the Journal of Accountancy and has been inducted into the Journal of Accountancy Hall of Fame.

The name of the class is “Legal Elements of Fraud”

Assignment:

Purpose

To discuss the legal issues and factors in a fraud investigation.

Action Items

1. Review the assigned readings for Week 1 (All the assigned readings are attached).

2. For each statementbelow, determine if you agree or disagree with the statement, and justify your decision by writing a 2-3 paragraph response. (Note: Each statement requires a 2-3 paragraph justification.)

a. “Most frauds are not prosecuted because they are immaterial in amount.”
b. “Inadequate internal controls provide the reason why most fraud is committed.”
c. “Keep your fraud investigations internal because bringing in anyone external to the organization might tip off the suspect that they’re being investigated.”
d. “Once you believe you’ve found the fraud perpetrator, the best thing to do is to fire the person to prevent him/her from continuing the fraudulent activities.”
e. “It doesn’t matter if the company or the attorney hires a CPA or a professional investigator for a suspected fraud investigation. The attorney-client privilege applies in either case.”
Basic Legal Concepts.
Authors:

Lawrence, G. Michael1,2 mike@mikelawrence.net
Wells, Joseph T.3 joe@cfenet.com

Source:

Journal of Accountancy. Oct2004, Vol. 198 Issue 4, p33-35. 3p.

Document Type:

Article

Subject Terms:

*Fraud
*Commercial crimes
*Accountants
Common law
Criminal procedure

NAICS/Industry Codes:

541211 Offices of Certified Public Accountants
541212 Offices of accountants
541219 Other Accounting Services

Abstract

This article summarizes the basic common-law concepts of fraud. Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages. For certified public accountants (CPA) materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. The motive for fraud is a strong circumstantial element. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. Circumstantial evidence rarely can be sufficient without the statements of witnesses. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. The final legal element of fraud concerns damages–usually in terms of money. There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations.

Author Affiliations:

1Principal of G. Michael Lawrence, PC, Austin, Texas
2Advisory member, Association of Certified Fraud Examiners’ Board of Regents
3Founder and chairman, Association of Certified Fraud Examiners

Full

Basis Legal Concepts

Contents

WHAT CONSTITUTES FRAUD
Definition of Fraud
Criminal Prosecution of Fraud
RESOURCES
AICPA Resources
Books
CPE
Antifraud initiatives
Section:

THE FRAUD BEAT

Beware insufficient knowledge of the law.

A CPA was hired to be an expert witness in a civil fraud case. On cross-examination the opposing attorney asked the expert a seemingly simple question: “Would you please define ‘fraud’ for the jury?” The CPA replied, “Do you want to know the legal definition or my definition?” The attorney countered, “You mean there is a difference?”

The expert’s answer provoked a snicker from the judge and jury, and the CPA’s credibility went downhill from there. Before the cross-examination was over, the expert was made to look like an idiot. The truth is, the CPA knew a lot about accounting and he was well-versed in the facts of the case, but he knew little about the legal aspects of fraud–a crucial element for an antifraud witness. As a result, the case was lost. This article will summarize the basic common-law concepts of fraud, beginning with the requisite: The purpose of this article is to familiarize you with the law, not to provide legal advice. For that, check with your attorney.

Appeals courts direct trial judges to closely examine the qualifications of purported experts before allowing them to testify. Failure to answer the basic question above could mean the “expert” might not be allowed to testify. Imagine the implications if the case had been lost because the time for naming new experts had passed.

To qualify as experts, CPAs have to give proof of knowledge, education and/or experience to convince the judge they have reliable and valuable information for the jury. (See “So You Want to Be an Expert Witness,” page 23.) Qualification is on a case-by-case basis; despite public misinformation by some groups, a blanket qualification-even for CPAs–does not exist in any court system.

Criminal and civil frauds differ in the level of proof required. For civil cases that burden is a “preponderance of evidence” In criminal fraud the standard is “beyond a reasonable doubt”

WHAT CONSTITUTES FRAUD

Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages.

A material false statement. Let’s assume an attorney hires you to examine the financial statements of ABC Corp. The attorney represents shareholders who have filed a lawsuit against ABC claiming the financial statements are fraudulent. Your job is to help the attorney determine whether the claim constitutes fraud. You begin by seeking to find out whether the financial statements contain false statements, and if so, whether they are “material.”

For CPAs, materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. The good news for CPAs is that this element of proof typically involves familiar ground: determining the real numbers. But CPAs inexperienced in fraud cases might stop there. In reality, they should just be getting started; the real work comes when proving intent.

There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include

Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts’ expectations. Or, if managements’ compensation is tied largely to earnings performance, documenting that would help establish motive.

Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. To prove this element the lawyers would call witnesses from ABC to testify and introduce documents relating to job descriptions. The CPA usually would help identify the specific control weaknesses or overrides that allowed the fraud to occur.

Repetitive acts. Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error. Or if an employee steals once, he or she may be able to explain that away. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. For example, assume that someone at ABC Corp. decided to inflate last year’s earnings by falsely debiting accounts receivable and crediting sales. Since one single large entry might draw attention, it is more likely there would be numerous false entries of smaller amounts. This fact makes it more difficult for the ABC fraudster to claim it was an error.

Witness statements. Circumstantial evidence rarely can be sufficient without the statements of witnesses. In a typical financial statement fraud case, management directs underlings to make the fraudulent entries. The CPA typically would identify the potential witnesses, such as bookkeepers or other accounting personnel, who may have made the fraudulent entries.

Concealment. Honest people rarely have the motive to conceal their acts. Therefore, if, for example, the CEO ordered the destruction of key ABC documents prior to an audit, this could be powerful circumstantial evidence of intent.

Victim reliance. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. That usually is proven by having the ABC shareholders testify they would not have invested had they known the true financial condition of the company. It may be even more challenging to prove reliance by banks extending loans, especially in cases involving self-employed borrowers who default on an obligation. In many such cases, the bank would have secured the loan with lots of hard collateral, or it may have done its own due diligence, thus making it difficult to prove it actually had been relying on the financial statements when credit was approved.

Damages. The final legal element of fraud concerns damages–usually in terms of money. In some federal criminal cases–for example, bank frauds–an actual loss is not required. But normally, even when there is a material false statement, intent and victim reliance, there is no fraud if the victim is not damaged. For example, the shareholders of ABC hardly would be filing suit if the price of the stock went up as a result of the other elements’ being uncovered.

There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations. In ABC’s alleged fraud, the CPA might be required to restate the shareholders’ equity in light of the fraudulent financial statements. Alternatively, if the stock price has suffered as a result of publicity about the fraud, the CPA typically would determine the amounts involved. The attorney would argue that whichever method produced the largest amount should be allowed as financial damages. The applicable measure of damages–for example, benefit of the bargain, out of pocket–can vary from state to state and case to case. The attorney will determine which measure applies. The CPA can be an invaluable resource in performing the calculation and proving the amounts.

The criminal prosecution of fraud (see exhibit, at left), as well as civil frauds, share a common thread: They both contain the legal elements of fraud. So if you get into fraud work of any kind, know these elements. And know them well. That way, your definition of fraud and the legal definition are one and the same.

Definition of Fraud

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Source: Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.

Criminal Prosecution of Fraud

Although federal securities laws address financial statement fraud, prosecutors often also will charge criminal violations under one or more of the below categories, depending on the exact circumstances of the case.

Misrepresentation of material facts.
Concealment of material facts.
Bribery.
Illegal gratuities.
Conflicts of interest.
Embezzlement.
Theft of trade secrets.
Mail fraud.
Wire fraud.
Interstate transportation of stolen property.
Racketeer Influenced and Corrupt Organizations (RICO).
False claims and statements.
Conspiracy.
Foreign Corrupt Practices Act.
Bankruptcy fraud.
Financial institution fraud.
Health care fraud.
Identity theft.
Telemarketing fraud.
Computer fraud.
Economic espionage.
Money laundering.

RESOURCES

AICPA Resources

Books

CPA Handbook of Fraud and Commercial Crime Prevention (# 56504JA).
Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879JA).
Fraud Detection in a GAAS Audit (# 006615JA).
CPE

Introduction to Fraud Examination and Criminal Behavior (# 730275JA).
Identifying Fraudulent Financial Transactions (# 730244JA).
Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).
For more information, to register or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

Antifraud initiatives

Antifraud and Corporate Responsibility Resource Center, www.aicpa.org/antifraud.

SAS no. 99 information.
Management Antifraud Programs and Controls (SAS no. 99 exhibit).
Fraud Specialist Competency Model.
Free corporate fraud prevention training and CPE.
Academia outreach and assistance.
Other antifraud activities.
~~~~~~~~

By G. Michael Lawrence and Joseph T. Wells

MICHAEL LAWRENCE, JD, CFE, is principal of G. Michael Lawrence, PC, Austin, Texas, and an advisory member of the Association of Certified Fraud Examiners’ Board of Regents. His e-mail address is mike@mikelawrence.net.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners. Mr. Wells has twice won the Lawler Award for the best article in the Journal of Accountancy and has been inducted into the Journal of Accountancy Hall of Fame.

The name of the class is “Legal Elements of Fraud”

Assignment:

Purpose

To discuss the legal issues and factors in a fraud investigation.

Action Items

1. Review the assigned readings for Week 1 (All the assigned readings are attached).

2. For each statementbelow, determine if you agree or disagree with the statement, and justify your decision by writing a 2-3 paragraph response. (Note: Each statement requires a 2-3 paragraph justification.)

a. “Most frauds are not prosecuted because they are immaterial in amount.”
b. “Inadequate internal controls provide the reason why most fraud is committed.”
c. “Keep your fraud investigations internal because bringing in anyone external to the organization might tip off the suspect that they’re being investigated.”
d. “Once you believe you’ve found the fraud perpetrator, the best thing to do is to fire the person to prevent him/her from continuing the fraudulent activities.”
e. “It doesn’t matter if the company or the attorney hires a CPA or a professional investigator for a suspected fraud investigation. The attorney-client privilege applies in either case.”
Basic Legal Concepts.
Authors:

Lawrence, G. Michael1,2 mike@mikelawrence.net
Wells, Joseph T.3 joe@cfenet.com

Source:

Journal of Accountancy. Oct2004, Vol. 198 Issue 4, p33-35. 3p.

Document Type:

Article

Subject Terms:

*Fraud
*Commercial crimes
*Accountants
Common law
Criminal procedure

NAICS/Industry Codes:

541211 Offices of Certified Public Accountants
541212 Offices of accountants
541219 Other Accounting Services

Abstract

This article summarizes the basic common-law concepts of fraud. Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages. For certified public accountants (CPA) materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. The motive for fraud is a strong circumstantial element. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. Circumstantial evidence rarely can be sufficient without the statements of witnesses. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. The final legal element of fraud concerns damages–usually in terms of money. There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations.

Author Affiliations:

1Principal of G. Michael Lawrence, PC, Austin, Texas
2Advisory member, Association of Certified Fraud Examiners’ Board of Regents
3Founder and chairman, Association of Certified Fraud Examiners

Full

Basis Legal Concepts

Contents

WHAT CONSTITUTES FRAUD
Definition of Fraud
Criminal Prosecution of Fraud
RESOURCES
AICPA Resources
Books
CPE
Antifraud initiatives
Section:

THE FRAUD BEAT

Beware insufficient knowledge of the law.

A CPA was hired to be an expert witness in a civil fraud case. On cross-examination the opposing attorney asked the expert a seemingly simple question: “Would you please define ‘fraud’ for the jury?” The CPA replied, “Do you want to know the legal definition or my definition?” The attorney countered, “You mean there is a difference?”

The expert’s answer provoked a snicker from the judge and jury, and the CPA’s credibility went downhill from there. Before the cross-examination was over, the expert was made to look like an idiot. The truth is, the CPA knew a lot about accounting and he was well-versed in the facts of the case, but he knew little about the legal aspects of fraud–a crucial element for an antifraud witness. As a result, the case was lost. This article will summarize the basic common-law concepts of fraud, beginning with the requisite: The purpose of this article is to familiarize you with the law, not to provide legal advice. For that, check with your attorney.

Appeals courts direct trial judges to closely examine the qualifications of purported experts before allowing them to testify. Failure to answer the basic question above could mean the “expert” might not be allowed to testify. Imagine the implications if the case had been lost because the time for naming new experts had passed.

To qualify as experts, CPAs have to give proof of knowledge, education and/or experience to convince the judge they have reliable and valuable information for the jury. (See “So You Want to Be an Expert Witness,” page 23.) Qualification is on a case-by-case basis; despite public misinformation by some groups, a blanket qualification-even for CPAs–does not exist in any court system.

Criminal and civil frauds differ in the level of proof required. For civil cases that burden is a “preponderance of evidence” In criminal fraud the standard is “beyond a reasonable doubt”

WHAT CONSTITUTES FRAUD

Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages.

A material false statement. Let’s assume an attorney hires you to examine the financial statements of ABC Corp. The attorney represents shareholders who have filed a lawsuit against ABC claiming the financial statements are fraudulent. Your job is to help the attorney determine whether the claim constitutes fraud. You begin by seeking to find out whether the financial statements contain false statements, and if so, whether they are “material.”

For CPAs, materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. The good news for CPAs is that this element of proof typically involves familiar ground: determining the real numbers. But CPAs inexperienced in fraud cases might stop there. In reality, they should just be getting started; the real work comes when proving intent.

There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include

Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts’ expectations. Or, if managements’ compensation is tied largely to earnings performance, documenting that would help establish motive.

Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. To prove this element the lawyers would call witnesses from ABC to testify and introduce documents relating to job descriptions. The CPA usually would help identify the specific control weaknesses or overrides that allowed the fraud to occur.

Repetitive acts. Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error. Or if an employee steals once, he or she may be able to explain that away. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. For example, assume that someone at ABC Corp. decided to inflate last year’s earnings by falsely debiting accounts receivable and crediting sales. Since one single large entry might draw attention, it is more likely there would be numerous false entries of smaller amounts. This fact makes it more difficult for the ABC fraudster to claim it was an error.

Witness statements. Circumstantial evidence rarely can be sufficient without the statements of witnesses. In a typical financial statement fraud case, management directs underlings to make the fraudulent entries. The CPA typically would identify the potential witnesses, such as bookkeepers or other accounting personnel, who may have made the fraudulent entries.

Concealment. Honest people rarely have the motive to conceal their acts. Therefore, if, for example, the CEO ordered the destruction of key ABC documents prior to an audit, this could be powerful circumstantial evidence of intent.

Victim reliance. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. That usually is proven by having the ABC shareholders testify they would not have invested had they known the true financial condition of the company. It may be even more challenging to prove reliance by banks extending loans, especially in cases involving self-employed borrowers who default on an obligation. In many such cases, the bank would have secured the loan with lots of hard collateral, or it may have done its own due diligence, thus making it difficult to prove it actually had been relying on the financial statements when credit was approved.

Damages. The final legal element of fraud concerns damages–usually in terms of money. In some federal criminal cases–for example, bank frauds–an actual loss is not required. But normally, even when there is a material false statement, intent and victim reliance, there is no fraud if the victim is not damaged. For example, the shareholders of ABC hardly would be filing suit if the price of the stock went up as a result of the other elements’ being uncovered.

There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations. In ABC’s alleged fraud, the CPA might be required to restate the shareholders’ equity in light of the fraudulent financial statements. Alternatively, if the stock price has suffered as a result of publicity about the fraud, the CPA typically would determine the amounts involved. The attorney would argue that whichever method produced the largest amount should be allowed as financial damages. The applicable measure of damages–for example, benefit of the bargain, out of pocket–can vary from state to state and case to case. The attorney will determine which measure applies. The CPA can be an invaluable resource in performing the calculation and proving the amounts.

The criminal prosecution of fraud (see exhibit, at left), as well as civil frauds, share a common thread: They both contain the legal elements of fraud. So if you get into fraud work of any kind, know these elements. And know them well. That way, your definition of fraud and the legal definition are one and the same.

Definition of Fraud

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Source: Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.

Criminal Prosecution of Fraud

Although federal securities laws address financial statement fraud, prosecutors often also will charge criminal violations under one or more of the below categories, depending on the exact circumstances of the case.

Misrepresentation of material facts.
Concealment of material facts.
Bribery.
Illegal gratuities.
Conflicts of interest.
Embezzlement.
Theft of trade secrets.
Mail fraud.
Wire fraud.
Interstate transportation of stolen property.
Racketeer Influenced and Corrupt Organizations (RICO).
False claims and statements.
Conspiracy.
Foreign Corrupt Practices Act.
Bankruptcy fraud.
Financial institution fraud.
Health care fraud.
Identity theft.
Telemarketing fraud.
Computer fraud.
Economic espionage.
Money laundering.

RESOURCES

AICPA Resources

Books

CPA Handbook of Fraud and Commercial Crime Prevention (# 56504JA).
Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879JA).
Fraud Detection in a GAAS Audit (# 006615JA).
CPE

Introduction to Fraud Examination and Criminal Behavior (# 730275JA).
Identifying Fraudulent Financial Transactions (# 730244JA).
Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).
For more information, to register or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

Antifraud initiatives

Antifraud and Corporate Responsibility Resource Center, www.aicpa.org/antifraud.

SAS no. 99 information.
Management Antifraud Programs and Controls (SAS no. 99 exhibit).
Fraud Specialist Competency Model.
Free corporate fraud prevention training and CPE.
Academia outreach and assistance.
Other antifraud activities.
~~~~~~~~

By G. Michael Lawrence and Joseph T. Wells

MICHAEL LAWRENCE, JD, CFE, is principal of G. Michael Lawrence, PC, Austin, Texas, and an advisory member of the Association of Certified Fraud Examiners’ Board of Regents. His e-mail address is mike@mikelawrence.net.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners. Mr. Wells has twice won the Lawler Award for the best article in the Journal of Accountancy and has been inducted into the Journal of Accountancy Hall of Fame.

The name of the class is “Legal Elements of Fraud”

Assignment:

Purpose

To discuss the legal issues and factors in a fraud investigation.

Action Items

1. Review the assigned readings for Week 1 (All the assigned readings are attached).

2. For each statementbelow, determine if you agree or disagree with the statement, and justify your decision by writing a 2-3 paragraph response. (Note: Each statement requires a 2-3 paragraph justification.)

a. “Most frauds are not prosecuted because they are immaterial in amount.”
b. “Inadequate internal controls provide the reason why most fraud is committed.”
c. “Keep your fraud investigations internal because bringing in anyone external to the organization might tip off the suspect that they’re being investigated.”
d. “Once you believe you’ve found the fraud perpetrator, the best thing to do is to fire the person to prevent him/her from continuing the fraudulent activities.”
e. “It doesn’t matter if the company or the attorney hires a CPA or a professional investigator for a suspected fraud investigation. The attorney-client privilege applies in either case.”
Basic Legal Concepts.
Authors:

Lawrence, G. Michael1,2 mike@mikelawrence.net
Wells, Joseph T.3 joe@cfenet.com

Source:

Journal of Accountancy. Oct2004, Vol. 198 Issue 4, p33-35. 3p.

Document Type:

Article

Subject Terms:

*Fraud
*Commercial crimes
*Accountants
Common law
Criminal procedure

NAICS/Industry Codes:

541211 Offices of Certified Public Accountants
541212 Offices of accountants
541219 Other Accounting Services

Abstract

This article summarizes the basic common-law concepts of fraud. Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages. For certified public accountants (CPA) materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. The motive for fraud is a strong circumstantial element. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. Circumstantial evidence rarely can be sufficient without the statements of witnesses. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. The final legal element of fraud concerns damages–usually in terms of money. There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations.

Author Affiliations:

1Principal of G. Michael Lawrence, PC, Austin, Texas
2Advisory member, Association of Certified Fraud Examiners’ Board of Regents
3Founder and chairman, Association of Certified Fraud Examiners

Full

Basis Legal Concepts

Contents

WHAT CONSTITUTES FRAUD
Definition of Fraud
Criminal Prosecution of Fraud
RESOURCES
AICPA Resources
Books
CPE
Antifraud initiatives
Section:

THE FRAUD BEAT

Beware insufficient knowledge of the law.

A CPA was hired to be an expert witness in a civil fraud case. On cross-examination the opposing attorney asked the expert a seemingly simple question: “Would you please define ‘fraud’ for the jury?” The CPA replied, “Do you want to know the legal definition or my definition?” The attorney countered, “You mean there is a difference?”

The expert’s answer provoked a snicker from the judge and jury, and the CPA’s credibility went downhill from there. Before the cross-examination was over, the expert was made to look like an idiot. The truth is, the CPA knew a lot about accounting and he was well-versed in the facts of the case, but he knew little about the legal aspects of fraud–a crucial element for an antifraud witness. As a result, the case was lost. This article will summarize the basic common-law concepts of fraud, beginning with the requisite: The purpose of this article is to familiarize you with the law, not to provide legal advice. For that, check with your attorney.

Appeals courts direct trial judges to closely examine the qualifications of purported experts before allowing them to testify. Failure to answer the basic question above could mean the “expert” might not be allowed to testify. Imagine the implications if the case had been lost because the time for naming new experts had passed.

To qualify as experts, CPAs have to give proof of knowledge, education and/or experience to convince the judge they have reliable and valuable information for the jury. (See “So You Want to Be an Expert Witness,” page 23.) Qualification is on a case-by-case basis; despite public misinformation by some groups, a blanket qualification-even for CPAs–does not exist in any court system.

Criminal and civil frauds differ in the level of proof required. For civil cases that burden is a “preponderance of evidence” In criminal fraud the standard is “beyond a reasonable doubt”

WHAT CONSTITUTES FRAUD

Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages.

A material false statement. Let’s assume an attorney hires you to examine the financial statements of ABC Corp. The attorney represents shareholders who have filed a lawsuit against ABC claiming the financial statements are fraudulent. Your job is to help the attorney determine whether the claim constitutes fraud. You begin by seeking to find out whether the financial statements contain false statements, and if so, whether they are “material.”

For CPAs, materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. The good news for CPAs is that this element of proof typically involves familiar ground: determining the real numbers. But CPAs inexperienced in fraud cases might stop there. In reality, they should just be getting started; the real work comes when proving intent.

There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include

Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts’ expectations. Or, if managements’ compensation is tied largely to earnings performance, documenting that would help establish motive.

Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. To prove this element the lawyers would call witnesses from ABC to testify and introduce documents relating to job descriptions. The CPA usually would help identify the specific control weaknesses or overrides that allowed the fraud to occur.

Repetitive acts. Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error. Or if an employee steals once, he or she may be able to explain that away. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. For example, assume that someone at ABC Corp. decided to inflate last year’s earnings by falsely debiting accounts receivable and crediting sales. Since one single large entry might draw attention, it is more likely there would be numerous false entries of smaller amounts. This fact makes it more difficult for the ABC fraudster to claim it was an error.

Witness statements. Circumstantial evidence rarely can be sufficient without the statements of witnesses. In a typical financial statement fraud case, management directs underlings to make the fraudulent entries. The CPA typically would identify the potential witnesses, such as bookkeepers or other accounting personnel, who may have made the fraudulent entries.

Concealment. Honest people rarely have the motive to conceal their acts. Therefore, if, for example, the CEO ordered the destruction of key ABC documents prior to an audit, this could be powerful circumstantial evidence of intent.

Victim reliance. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. That usually is proven by having the ABC shareholders testify they would not have invested had they known the true financial condition of the company. It may be even more challenging to prove reliance by banks extending loans, especially in cases involving self-employed borrowers who default on an obligation. In many such cases, the bank would have secured the loan with lots of hard collateral, or it may have done its own due diligence, thus making it difficult to prove it actually had been relying on the financial statements when credit was approved.

Damages. The final legal element of fraud concerns damages–usually in terms of money. In some federal criminal cases–for example, bank frauds–an actual loss is not required. But normally, even when there is a material false statement, intent and victim reliance, there is no fraud if the victim is not damaged. For example, the shareholders of ABC hardly would be filing suit if the price of the stock went up as a result of the other elements’ being uncovered.

There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations. In ABC’s alleged fraud, the CPA might be required to restate the shareholders’ equity in light of the fraudulent financial statements. Alternatively, if the stock price has suffered as a result of publicity about the fraud, the CPA typically would determine the amounts involved. The attorney would argue that whichever method produced the largest amount should be allowed as financial damages. The applicable measure of damages–for example, benefit of the bargain, out of pocket–can vary from state to state and case to case. The attorney will determine which measure applies. The CPA can be an invaluable resource in performing the calculation and proving the amounts.

The criminal prosecution of fraud (see exhibit, at left), as well as civil frauds, share a common thread: They both contain the legal elements of fraud. So if you get into fraud work of any kind, know these elements. And know them well. That way, your definition of fraud and the legal definition are one and the same.

Definition of Fraud

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Source: Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.

Criminal Prosecution of Fraud

Although federal securities laws address financial statement fraud, prosecutors often also will charge criminal violations under one or more of the below categories, depending on the exact circumstances of the case.

Misrepresentation of material facts.
Concealment of material facts.
Bribery.
Illegal gratuities.
Conflicts of interest.
Embezzlement.
Theft of trade secrets.
Mail fraud.
Wire fraud.
Interstate transportation of stolen property.
Racketeer Influenced and Corrupt Organizations (RICO).
False claims and statements.
Conspiracy.
Foreign Corrupt Practices Act.
Bankruptcy fraud.
Financial institution fraud.
Health care fraud.
Identity theft.
Telemarketing fraud.
Computer fraud.
Economic espionage.
Money laundering.

RESOURCES

AICPA Resources

Books

CPA Handbook of Fraud and Commercial Crime Prevention (# 56504JA).
Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879JA).
Fraud Detection in a GAAS Audit (# 006615JA).
CPE

Introduction to Fraud Examination and Criminal Behavior (# 730275JA).
Identifying Fraudulent Financial Transactions (# 730244JA).
Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).
For more information, to register or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

Antifraud initiatives

Antifraud and Corporate Responsibility Resource Center, www.aicpa.org/antifraud.

SAS no. 99 information.
Management Antifraud Programs and Controls (SAS no. 99 exhibit).
Fraud Specialist Competency Model.
Free corporate fraud prevention training and CPE.
Academia outreach and assistance.
Other antifraud activities.
~~~~~~~~

By G. Michael Lawrence and Joseph T. Wells

MICHAEL LAWRENCE, JD, CFE, is principal of G. Michael Lawrence, PC, Austin, Texas, and an advisory member of the Association of Certified Fraud Examiners’ Board of Regents. His e-mail address is mike@mikelawrence.net.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners. Mr. Wells has twice won the Lawler Award for the best article in the Journal of Accountancy and has been inducted into the Journal of Accountancy Hall of Fame.

The name of the class is “Legal Elements of Fraud”

Assignment:

Purpose

To discuss the legal issues and factors in a fraud investigation.

Action Items

1. Review the assigned readings for Week 1 (All the assigned readings are attached).

2. For each statementbelow, determine if you agree or disagree with the statement, and justify your decision by writing a 2-3 paragraph response. (Note: Each statement requires a 2-3 paragraph justification.)

a. “Most frauds are not prosecuted because they are immaterial in amount.”
b. “Inadequate internal controls provide the reason why most fraud is committed.”
c. “Keep your fraud investigations internal because bringing in anyone external to the organization might tip off the suspect that they’re being investigated.”
d. “Once you believe you’ve found the fraud perpetrator, the best thing to do is to fire the person to prevent him/her from continuing the fraudulent activities.”
e. “It doesn’t matter if the company or the attorney hires a CPA or a professional investigator for a suspected fraud investigation. The attorney-client privilege applies in either case.”
Basic Legal Concepts.
Authors:

Lawrence, G. Michael1,2 mike@mikelawrence.net
Wells, Joseph T.3 joe@cfenet.com

Source:

Journal of Accountancy. Oct2004, Vol. 198 Issue 4, p33-35. 3p.

Document Type:

Article

Subject Terms:

*Fraud
*Commercial crimes
*Accountants
Common law
Criminal procedure

NAICS/Industry Codes:

541211 Offices of Certified Public Accountants
541212 Offices of accountants
541219 Other Accounting Services

Abstract

This article summarizes the basic common-law concepts of fraud. Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages. For certified public accountants (CPA) materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. The motive for fraud is a strong circumstantial element. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. Circumstantial evidence rarely can be sufficient without the statements of witnesses. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. The final legal element of fraud concerns damages–usually in terms of money. There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations.

Author Affiliations:

1Principal of G. Michael Lawrence, PC, Austin, Texas
2Advisory member, Association of Certified Fraud Examiners’ Board of Regents
3Founder and chairman, Association of Certified Fraud Examiners

Full

Basis Legal Concepts

Contents

WHAT CONSTITUTES FRAUD
Definition of Fraud
Criminal Prosecution of Fraud
RESOURCES
AICPA Resources
Books
CPE
Antifraud initiatives
Section:

THE FRAUD BEAT

Beware insufficient knowledge of the law.

A CPA was hired to be an expert witness in a civil fraud case. On cross-examination the opposing attorney asked the expert a seemingly simple question: “Would you please define ‘fraud’ for the jury?” The CPA replied, “Do you want to know the legal definition or my definition?” The attorney countered, “You mean there is a difference?”

The expert’s answer provoked a snicker from the judge and jury, and the CPA’s credibility went downhill from there. Before the cross-examination was over, the expert was made to look like an idiot. The truth is, the CPA knew a lot about accounting and he was well-versed in the facts of the case, but he knew little about the legal aspects of fraud–a crucial element for an antifraud witness. As a result, the case was lost. This article will summarize the basic common-law concepts of fraud, beginning with the requisite: The purpose of this article is to familiarize you with the law, not to provide legal advice. For that, check with your attorney.

Appeals courts direct trial judges to closely examine the qualifications of purported experts before allowing them to testify. Failure to answer the basic question above could mean the “expert” might not be allowed to testify. Imagine the implications if the case had been lost because the time for naming new experts had passed.

To qualify as experts, CPAs have to give proof of knowledge, education and/or experience to convince the judge they have reliable and valuable information for the jury. (See “So You Want to Be an Expert Witness,” page 23.) Qualification is on a case-by-case basis; despite public misinformation by some groups, a blanket qualification-even for CPAs–does not exist in any court system.

Criminal and civil frauds differ in the level of proof required. For civil cases that burden is a “preponderance of evidence” In criminal fraud the standard is “beyond a reasonable doubt”

WHAT CONSTITUTES FRAUD

Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages.

A material false statement. Let’s assume an attorney hires you to examine the financial statements of ABC Corp. The attorney represents shareholders who have filed a lawsuit against ABC claiming the financial statements are fraudulent. Your job is to help the attorney determine whether the claim constitutes fraud. You begin by seeking to find out whether the financial statements contain false statements, and if so, whether they are “material.”

For CPAs, materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. The good news for CPAs is that this element of proof typically involves familiar ground: determining the real numbers. But CPAs inexperienced in fraud cases might stop there. In reality, they should just be getting started; the real work comes when proving intent.

There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include

Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts’ expectations. Or, if managements’ compensation is tied largely to earnings performance, documenting that would help establish motive.

Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. To prove this element the lawyers would call witnesses from ABC to testify and introduce documents relating to job descriptions. The CPA usually would help identify the specific control weaknesses or overrides that allowed the fraud to occur.

Repetitive acts. Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error. Or if an employee steals once, he or she may be able to explain that away. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. For example, assume that someone at ABC Corp. decided to inflate last year’s earnings by falsely debiting accounts receivable and crediting sales. Since one single large entry might draw attention, it is more likely there would be numerous false entries of smaller amounts. This fact makes it more difficult for the ABC fraudster to claim it was an error.

Witness statements. Circumstantial evidence rarely can be sufficient without the statements of witnesses. In a typical financial statement fraud case, management directs underlings to make the fraudulent entries. The CPA typically would identify the potential witnesses, such as bookkeepers or other accounting personnel, who may have made the fraudulent entries.

Concealment. Honest people rarely have the motive to conceal their acts. Therefore, if, for example, the CEO ordered the destruction of key ABC documents prior to an audit, this could be powerful circumstantial evidence of intent.

Victim reliance. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. That usually is proven by having the ABC shareholders testify they would not have invested had they known the true financial condition of the company. It may be even more challenging to prove reliance by banks extending loans, especially in cases involving self-employed borrowers who default on an obligation. In many such cases, the bank would have secured the loan with lots of hard collateral, or it may have done its own due diligence, thus making it difficult to prove it actually had been relying on the financial statements when credit was approved.

Damages. The final legal element of fraud concerns damages–usually in terms of money. In some federal criminal cases–for example, bank frauds–an actual loss is not required. But normally, even when there is a material false statement, intent and victim reliance, there is no fraud if the victim is not damaged. For example, the shareholders of ABC hardly would be filing suit if the price of the stock went up as a result of the other elements’ being uncovered.

There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations. In ABC’s alleged fraud, the CPA might be required to restate the shareholders’ equity in light of the fraudulent financial statements. Alternatively, if the stock price has suffered as a result of publicity about the fraud, the CPA typically would determine the amounts involved. The attorney would argue that whichever method produced the largest amount should be allowed as financial damages. The applicable measure of damages–for example, benefit of the bargain, out of pocket–can vary from state to state and case to case. The attorney will determine which measure applies. The CPA can be an invaluable resource in performing the calculation and proving the amounts.

The criminal prosecution of fraud (see exhibit, at left), as well as civil frauds, share a common thread: They both contain the legal elements of fraud. So if you get into fraud work of any kind, know these elements. And know them well. That way, your definition of fraud and the legal definition are one and the same.

Definition of Fraud

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Source: Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.

Criminal Prosecution of Fraud

Although federal securities laws address financial statement fraud, prosecutors often also will charge criminal violations under one or more of the below categories, depending on the exact circumstances of the case.

Misrepresentation of material facts.
Concealment of material facts.
Bribery.
Illegal gratuities.
Conflicts of interest.
Embezzlement.
Theft of trade secrets.
Mail fraud.
Wire fraud.
Interstate transportation of stolen property.
Racketeer Influenced and Corrupt Organizations (RICO).
False claims and statements.
Conspiracy.
Foreign Corrupt Practices Act.
Bankruptcy fraud.
Financial institution fraud.
Health care fraud.
Identity theft.
Telemarketing fraud.
Computer fraud.
Economic espionage.
Money laundering.

RESOURCES

AICPA Resources

Books

CPA Handbook of Fraud and Commercial Crime Prevention (# 56504JA).
Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879JA).
Fraud Detection in a GAAS Audit (# 006615JA).
CPE

Introduction to Fraud Examination and Criminal Behavior (# 730275JA).
Identifying Fraudulent Financial Transactions (# 730244JA).
Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).
For more information, to register or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

Antifraud initiatives

Antifraud and Corporate Responsibility Resource Center, www.aicpa.org/antifraud.

SAS no. 99 information.
Management Antifraud Programs and Controls (SAS no. 99 exhibit).
Fraud Specialist Competency Model.
Free corporate fraud prevention training and CPE.
Academia outreach and assistance.
Other antifraud activities.
~~~~~~~~

By G. Michael Lawrence and Joseph T. Wells

MICHAEL LAWRENCE, JD, CFE, is principal of G. Michael Lawrence, PC, Austin, Texas, and an advisory member of the Association of Certified Fraud Examiners’ Board of Regents. His e-mail address is mike@mikelawrence.net.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners. Mr. Wells has twice won the Lawler Award for the best article in the Journal of Accountancy and has been inducted into the Journal of Accountancy Hall of Fame.

The name of the class is “Legal Elements of Fraud”

Assignment:

Purpose

To discuss the legal issues and factors in a fraud investigation.

Action Items

1. Review the assigned readings for Week 1 (All the assigned readings are attached).

2. For each statementbelow, determine if you agree or disagree with the statement, and justify your decision by writing a 2-3 paragraph response. (Note: Each statement requires a 2-3 paragraph justification.)

a. “Most frauds are not prosecuted because they are immaterial in amount.”
b. “Inadequate internal controls provide the reason why most fraud is committed.”
c. “Keep your fraud investigations internal because bringing in anyone external to the organization might tip off the suspect that they’re being investigated.”
d. “Once you believe you’ve found the fraud perpetrator, the best thing to do is to fire the person to prevent him/her from continuing the fraudulent activities.”
e. “It doesn’t matter if the company or the attorney hires a CPA or a professional investigator for a suspected fraud investigation. The attorney-client privilege applies in either case.”
Basic Legal Concepts.
Authors:

Lawrence, G. Michael1,2 mike@mikelawrence.net
Wells, Joseph T.3 joe@cfenet.com

Source:

Journal of Accountancy. Oct2004, Vol. 198 Issue 4, p33-35. 3p.

Document Type:

Article

Subject Terms:

*Fraud
*Commercial crimes
*Accountants
Common law
Criminal procedure

NAICS/Industry Codes:

541211 Offices of Certified Public Accountants
541212 Offices of accountants
541219 Other Accounting Services

Abstract

This article summarizes the basic common-law concepts of fraud. Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages. For certified public accountants (CPA) materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. The motive for fraud is a strong circumstantial element. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. Circumstantial evidence rarely can be sufficient without the statements of witnesses. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. The final legal element of fraud concerns damages–usually in terms of money. There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations.

Author Affiliations:

1Principal of G. Michael Lawrence, PC, Austin, Texas
2Advisory member, Association of Certified Fraud Examiners’ Board of Regents
3Founder and chairman, Association of Certified Fraud Examiners

Full

Basis Legal Concepts

Contents

WHAT CONSTITUTES FRAUD
Definition of Fraud
Criminal Prosecution of Fraud
RESOURCES
AICPA Resources
Books
CPE
Antifraud initiatives
Section:

THE FRAUD BEAT

Beware insufficient knowledge of the law.

A CPA was hired to be an expert witness in a civil fraud case. On cross-examination the opposing attorney asked the expert a seemingly simple question: “Would you please define ‘fraud’ for the jury?” The CPA replied, “Do you want to know the legal definition or my definition?” The attorney countered, “You mean there is a difference?”

The expert’s answer provoked a snicker from the judge and jury, and the CPA’s credibility went downhill from there. Before the cross-examination was over, the expert was made to look like an idiot. The truth is, the CPA knew a lot about accounting and he was well-versed in the facts of the case, but he knew little about the legal aspects of fraud–a crucial element for an antifraud witness. As a result, the case was lost. This article will summarize the basic common-law concepts of fraud, beginning with the requisite: The purpose of this article is to familiarize you with the law, not to provide legal advice. For that, check with your attorney.

Appeals courts direct trial judges to closely examine the qualifications of purported experts before allowing them to testify. Failure to answer the basic question above could mean the “expert” might not be allowed to testify. Imagine the implications if the case had been lost because the time for naming new experts had passed.

To qualify as experts, CPAs have to give proof of knowledge, education and/or experience to convince the judge they have reliable and valuable information for the jury. (See “So You Want to Be an Expert Witness,” page 23.) Qualification is on a case-by-case basis; despite public misinformation by some groups, a blanket qualification-even for CPAs–does not exist in any court system.

Criminal and civil frauds differ in the level of proof required. For civil cases that burden is a “preponderance of evidence” In criminal fraud the standard is “beyond a reasonable doubt”

WHAT CONSTITUTES FRAUD

Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages.

A material false statement. Let’s assume an attorney hires you to examine the financial statements of ABC Corp. The attorney represents shareholders who have filed a lawsuit against ABC claiming the financial statements are fraudulent. Your job is to help the attorney determine whether the claim constitutes fraud. You begin by seeking to find out whether the financial statements contain false statements, and if so, whether they are “material.”

For CPAs, materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. The good news for CPAs is that this element of proof typically involves familiar ground: determining the real numbers. But CPAs inexperienced in fraud cases might stop there. In reality, they should just be getting started; the real work comes when proving intent.

There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include

Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts’ expectations. Or, if managements’ compensation is tied largely to earnings performance, documenting that would help establish motive.

Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. To prove this element the lawyers would call witnesses from ABC to testify and introduce documents relating to job descriptions. The CPA usually would help identify the specific control weaknesses or overrides that allowed the fraud to occur.

Repetitive acts. Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error. Or if an employee steals once, he or she may be able to explain that away. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. For example, assume that someone at ABC Corp. decided to inflate last year’s earnings by falsely debiting accounts receivable and crediting sales. Since one single large entry might draw attention, it is more likely there would be numerous false entries of smaller amounts. This fact makes it more difficult for the ABC fraudster to claim it was an error.

Witness statements. Circumstantial evidence rarely can be sufficient without the statements of witnesses. In a typical financial statement fraud case, management directs underlings to make the fraudulent entries. The CPA typically would identify the potential witnesses, such as bookkeepers or other accounting personnel, who may have made the fraudulent entries.

Concealment. Honest people rarely have the motive to conceal their acts. Therefore, if, for example, the CEO ordered the destruction of key ABC documents prior to an audit, this could be powerful circumstantial evidence of intent.

Victim reliance. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. That usually is proven by having the ABC shareholders testify they would not have invested had they known the true financial condition of the company. It may be even more challenging to prove reliance by banks extending loans, especially in cases involving self-employed borrowers who default on an obligation. In many such cases, the bank would have secured the loan with lots of hard collateral, or it may have done its own due diligence, thus making it difficult to prove it actually had been relying on the financial statements when credit was approved.

Damages. The final legal element of fraud concerns damages–usually in terms of money. In some federal criminal cases–for example, bank frauds–an actual loss is not required. But normally, even when there is a material false statement, intent and victim reliance, there is no fraud if the victim is not damaged. For example, the shareholders of ABC hardly would be filing suit if the price of the stock went up as a result of the other elements’ being uncovered.

There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations. In ABC’s alleged fraud, the CPA might be required to restate the shareholders’ equity in light of the fraudulent financial statements. Alternatively, if the stock price has suffered as a result of publicity about the fraud, the CPA typically would determine the amounts involved. The attorney would argue that whichever method produced the largest amount should be allowed as financial damages. The applicable measure of damages–for example, benefit of the bargain, out of pocket–can vary from state to state and case to case. The attorney will determine which measure applies. The CPA can be an invaluable resource in performing the calculation and proving the amounts.

The criminal prosecution of fraud (see exhibit, at left), as well as civil frauds, share a common thread: They both contain the legal elements of fraud. So if you get into fraud work of any kind, know these elements. And know them well. That way, your definition of fraud and the legal definition are one and the same.

Definition of Fraud

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Source: Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.

Criminal Prosecution of Fraud

Although federal securities laws address financial statement fraud, prosecutors often also will charge criminal violations under one or more of the below categories, depending on the exact circumstances of the case.

Misrepresentation of material facts.
Concealment of material facts.
Bribery.
Illegal gratuities.
Conflicts of interest.
Embezzlement.
Theft of trade secrets.
Mail fraud.
Wire fraud.
Interstate transportation of stolen property.
Racketeer Influenced and Corrupt Organizations (RICO).
False claims and statements.
Conspiracy.
Foreign Corrupt Practices Act.
Bankruptcy fraud.
Financial institution fraud.
Health care fraud.
Identity theft.
Telemarketing fraud.
Computer fraud.
Economic espionage.
Money laundering.

RESOURCES

AICPA Resources

Books

CPA Handbook of Fraud and Commercial Crime Prevention (# 56504JA).
Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879JA).
Fraud Detection in a GAAS Audit (# 006615JA).
CPE

Introduction to Fraud Examination and Criminal Behavior (# 730275JA).
Identifying Fraudulent Financial Transactions (# 730244JA).
Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).
For more information, to register or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

Antifraud initiatives

Antifraud and Corporate Responsibility Resource Center, www.aicpa.org/antifraud.

SAS no. 99 information.
Management Antifraud Programs and Controls (SAS no. 99 exhibit).
Fraud Specialist Competency Model.
Free corporate fraud prevention training and CPE.
Academia outreach and assistance.
Other antifraud activities.
~~~~~~~~

By G. Michael Lawrence and Joseph T. Wells

MICHAEL LAWRENCE, JD, CFE, is principal of G. Michael Lawrence, PC, Austin, Texas, and an advisory member of the Association of Certified Fraud Examiners’ Board of Regents. His e-mail address is mike@mikelawrence.net.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners. Mr. Wells has twice won the Lawler Award for the best article in the Journal of Accountancy and has been inducted into the Journal of Accountancy Hall of Fame.

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Legal Elements of Fraud

The name of the class is “Legal Elements of Fraud”

Assignment:

Purpose

To discuss the legal issues and factors in a fraud investigation.

Action Items

1. Review the assigned readings for Week 1 (All the assigned readings are attached).

2. For each statementbelow, determine if you agree or disagree with the statement, and justify your decision by writing a 2-3 paragraph response. (Note: Each statement requires a 2-3 paragraph justification.)

a. “Most frauds are not prosecuted because they are immaterial in amount.”
b. “Inadequate internal controls provide the reason why most fraud is committed.”
c. “Keep your fraud investigations internal because bringing in anyone external to the organization might tip off the suspect that they’re being investigated.”
d. “Once you believe you’ve found the fraud perpetrator, the best thing to do is to fire the person to prevent him/her from continuing the fraudulent activities.”
e. “It doesn’t matter if the company or the attorney hires a CPA or a professional investigator for a suspected fraud investigation. The attorney-client privilege applies in either case.”
Basic Legal Concepts.
Authors:

Lawrence, G. Michael1,2 mike@mikelawrence.net
Wells, Joseph T.3 joe@cfenet.com

Source:

Journal of Accountancy. Oct2004, Vol. 198 Issue 4, p33-35. 3p.

Document Type:

Article

Subject Terms:

*Fraud
*Commercial crimes
*Accountants
Common law
Criminal procedure

NAICS/Industry Codes:

541211 Offices of Certified Public Accountants
541212 Offices of accountants
541219 Other Accounting Services

Abstract

This article summarizes the basic common-law concepts of fraud. Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages. For certified public accountants (CPA) materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. The motive for fraud is a strong circumstantial element. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. Circumstantial evidence rarely can be sufficient without the statements of witnesses. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. The final legal element of fraud concerns damages–usually in terms of money. There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations.

Author Affiliations:

1Principal of G. Michael Lawrence, PC, Austin, Texas
2Advisory member, Association of Certified Fraud Examiners’ Board of Regents
3Founder and chairman, Association of Certified Fraud Examiners

Full

Basis Legal Concepts

Contents

WHAT CONSTITUTES FRAUD
Definition of Fraud
Criminal Prosecution of Fraud
RESOURCES
AICPA Resources
Books
CPE
Antifraud initiatives
Section:

THE FRAUD BEAT

Beware insufficient knowledge of the law.

A CPA was hired to be an expert witness in a civil fraud case. On cross-examination the opposing attorney asked the expert a seemingly simple question: “Would you please define ‘fraud’ for the jury?” The CPA replied, “Do you want to know the legal definition or my definition?” The attorney countered, “You mean there is a difference?”

The expert’s answer provoked a snicker from the judge and jury, and the CPA’s credibility went downhill from there. Before the cross-examination was over, the expert was made to look like an idiot. The truth is, the CPA knew a lot about accounting and he was well-versed in the facts of the case, but he knew little about the legal aspects of fraud–a crucial element for an antifraud witness. As a result, the case was lost. This article will summarize the basic common-law concepts of fraud, beginning with the requisite: The purpose of this article is to familiarize you with the law, not to provide legal advice. For that, check with your attorney.

Appeals courts direct trial judges to closely examine the qualifications of purported experts before allowing them to testify. Failure to answer the basic question above could mean the “expert” might not be allowed to testify. Imagine the implications if the case had been lost because the time for naming new experts had passed.

To qualify as experts, CPAs have to give proof of knowledge, education and/or experience to convince the judge they have reliable and valuable information for the jury. (See “So You Want to Be an Expert Witness,” page 23.) Qualification is on a case-by-case basis; despite public misinformation by some groups, a blanket qualification-even for CPAs–does not exist in any court system.

Criminal and civil frauds differ in the level of proof required. For civil cases that burden is a “preponderance of evidence” In criminal fraud the standard is “beyond a reasonable doubt”

WHAT CONSTITUTES FRAUD

Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages.

A material false statement. Let’s assume an attorney hires you to examine the financial statements of ABC Corp. The attorney represents shareholders who have filed a lawsuit against ABC claiming the financial statements are fraudulent. Your job is to help the attorney determine whether the claim constitutes fraud. You begin by seeking to find out whether the financial statements contain false statements, and if so, whether they are “material.”

For CPAs, materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor’s decision to part with money. The good news for CPAs is that this element of proof typically involves familiar ground: determining the real numbers. But CPAs inexperienced in fraud cases might stop there. In reality, they should just be getting started; the real work comes when proving intent.

There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include

Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts’ expectations. Or, if managements’ compensation is tied largely to earnings performance, documenting that would help establish motive.

Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. To prove this element the lawyers would call witnesses from ABC to testify and introduce documents relating to job descriptions. The CPA usually would help identify the specific control weaknesses or overrides that allowed the fraud to occur.

Repetitive acts. Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error. Or if an employee steals once, he or she may be able to explain that away. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. For example, assume that someone at ABC Corp. decided to inflate last year’s earnings by falsely debiting accounts receivable and crediting sales. Since one single large entry might draw attention, it is more likely there would be numerous false entries of smaller amounts. This fact makes it more difficult for the ABC fraudster to claim it was an error.

Witness statements. Circumstantial evidence rarely can be sufficient without the statements of witnesses. In a typical financial statement fraud case, management directs underlings to make the fraudulent entries. The CPA typically would identify the potential witnesses, such as bookkeepers or other accounting personnel, who may have made the fraudulent entries.

Concealment. Honest people rarely have the motive to conceal their acts. Therefore, if, for example, the CEO ordered the destruction of key ABC documents prior to an audit, this could be powerful circumstantial evidence of intent.

Victim reliance. Even when there is a material false statement and the intention to deceive can be proved, it does not meet the legal test for fraud unless there is a victim who relied on the false statement. That usually is proven by having the ABC shareholders testify they would not have invested had they known the true financial condition of the company. It may be even more challenging to prove reliance by banks extending loans, especially in cases involving self-employed borrowers who default on an obligation. In many such cases, the bank would have secured the loan with lots of hard collateral, or it may have done its own due diligence, thus making it difficult to prove it actually had been relying on the financial statements when credit was approved.

Damages. The final legal element of fraud concerns damages–usually in terms of money. In some federal criminal cases–for example, bank frauds–an actual loss is not required. But normally, even when there is a material false statement, intent and victim reliance, there is no fraud if the victim is not damaged. For example, the shareholders of ABC hardly would be filing suit if the price of the stock went up as a result of the other elements’ being uncovered.

There are two major types of damages: actual and punitive. The CPA will assist the attorney in determining actual damages; the judge and jury will assess other damages, subject to statutory limitations. In ABC’s alleged fraud, the CPA might be required to restate the shareholders’ equity in light of the fraudulent financial statements. Alternatively, if the stock price has suffered as a result of publicity about the fraud, the CPA typically would determine the amounts involved. The attorney would argue that whichever method produced the largest amount should be allowed as financial damages. The applicable measure of damages–for example, benefit of the bargain, out of pocket–can vary from state to state and case to case. The attorney will determine which measure applies. The CPA can be an invaluable resource in performing the calculation and proving the amounts.

The criminal prosecution of fraud (see exhibit, at left), as well as civil frauds, share a common thread: They both contain the legal elements of fraud. So if you get into fraud work of any kind, know these elements. And know them well. That way, your definition of fraud and the legal definition are one and the same.

Definition of Fraud

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Source: Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.

Criminal Prosecution of Fraud

Although federal securities laws address financial statement fraud, prosecutors often also will charge criminal violations under one or more of the below categories, depending on the exact circumstances of the case.

Misrepresentation of material facts.
Concealment of material facts.
Bribery.
Illegal gratuities.
Conflicts of interest.
Embezzlement.
Theft of trade secrets.
Mail fraud.
Wire fraud.
Interstate transportation of stolen property.
Racketeer Influenced and Corrupt Organizations (RICO).
False claims and statements.
Conspiracy.
Foreign Corrupt Practices Act.
Bankruptcy fraud.
Financial institution fraud.
Health care fraud.
Identity theft.
Telemarketing fraud.
Computer fraud.
Economic espionage.
Money laundering.

RESOURCES

AICPA Resources

Books

CPA Handbook of Fraud and Commercial Crime Prevention (# 56504JA).
Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879JA).
Fraud Detection in a GAAS Audit (# 006615JA).
CPE

Introduction to Fraud Examination and Criminal Behavior (# 730275JA).
Identifying Fraudulent Financial Transactions (# 730244JA).
Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).
For more information, to register or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

Antifraud initiatives

Antifraud and Corporate Responsibility Resource Center, www.aicpa.org/antifraud.

SAS no. 99 information.
Management Antifraud Programs and Controls (SAS no. 99 exhibit).
Fraud Specialist Competency Model.
Free corporate fraud prevention training and CPE.
Academia outreach and assistance.
Other antifraud activities.
~~~~~~~~

By G. Michael Lawrence and Joseph T. Wells

MICHAEL LAWRENCE, JD, CFE, is principal of G. Michael Lawrence, PC, Austin, Texas, and an advisory member of the Association of Certified Fraud Examiners’ Board of Regents. His e-mail address is mike@mikelawrence.net.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners. Mr. Wells has twice won the Lawler Award for the best article in the Journal of Accountancy and has been inducted into the Journal of Accountancy Hall of Fame.

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XentroMall Leisure Centre

Introduction

The XentroMall leisure centre was opened in 2007 with a leisure pool, sports hall, 4 squash courts and changing rooms. PJ Primer is the new and very ambitious manager.

Squash courts 1 and 2 have been recently refurbished and are fully booked most of the day. The other two squash courts next to the fitness room are now in urgent need of repair and are rarely booked.

The fitness room is too small. It is clear that the leisure centre is losing members because the fitness room is too busy. Other leisure centres locally are reporting a big increase in membership of their fitness rooms.

Primer believes it is important to increase the size of the fitness room by incorporating one or both of the squash courts that are rarely booked.

Laura is the management accountant for the leisure centre and she has been asked to evaluate the alternative proposals.

Proposals

(i) Alternative 1- Incorporate squash court No. 4

Increase the size of the fitness room by incorporating squash court 4. This would increase the size of the fitness room from 2,200 sq. ft to 2,700 sq. ft.

Squash court 3 would remain and it would be refurbished immediately.

(ii) Alternative 2 – Incorporate squash courts 3 and 4

Increase the size of the fitness room by incorporating squash courts 3 and 4. This would increase the size of the fitness room from 2,200 sq. ft to 3,200 sq. ft.

Capital costs

The capital costs of the alternatives include building works, services, equipment, and professional fees. Estimates are given below:

Building works

Alternative 1 Alternative 2
Doors 10,100 10,100
Remove existing walls 20,200 30,600
New ceilings 10,900 30,200
Fire exit 30,300 30,600
Decoration 70,100 100,600
Total 141,600 202,100
Services

Alternative 1 Alternative 2
Electrical 40,000 50,700
Lighting 20,000 30,200
Air conditioning 140,000 120,000
Total 200,000 200,900
Equipment

Alternative 1 Alternative 2
Cardio-vascular machines
(bikes, rowers)

380,000 780,000
Cardio theatre 70,000 70,800
Drinking fountain 10,100 10,100
Total 460,100 860,900
A residual figure at the end of 6 years was estimated at 60,000 for alternative 1 and 90,000 for alternative 2.

Professional fees and charges

Professional fees and charges have been estimated at 60,000. (This cost will be incurred as soon as a decision is made)

Annual costs

The management wants to appoint only one permanent member of staff and then increase the number of casual staff at peak times. A nominal estimate for utilities and cleaning costs has been included in the costings as these costs are not expected to change significantly. The maintenance and repair contracts are for the first year only and the suppliers will not commit themselves to providing estimates after the first year. An estimate for the costs is given below:

Alternative 1 Alternative 2
Permanent staff 190,000 190,000
Casual staff 80,000 120,000
Utilities 10,400 10,800
Maintenance contracts 80,200 120,200
Cleaning and other 20,100 20,100
The cost of advertising the new facilities at the leisure centre is estimated at 150,000 in the first year. Primer believed an aggressive advertising policy was essential to ensure the project was a success. No estimate for advertising was considered for later years.

Estimating additional annual revenue for fitness room (two different approaches are to be considered)

Primer

She has suggested that additional revenue should be estimated by dividing the current income of 1,800,000 by 2,200 sq. ft to determine income per sq. ft. The income per sq. ft. is assumed to remain constant as the size of the fitness room is increased. Basing income on square footage is seen as a simple but accurate way of estimating future income.

Laura

Laura suggested a different approach. She suggested that managers should use a probability distribution based on the judgement of all the senior managers to estimate the totalrevenue for the fitness room. After much discussion Laura was able to suggest the following probability distribution:

Alternative 1
State of World Total annual revenue for the fitness room. Probability %
I – The fitness room will be an initial success but too few new members will be attracted. Usage will vary throughout the year. 2,100,000 20%
II – The fitness room will be very successful initially but then membership will slowly fall. Usage will be seasonal. 2,250,000 50%
III – The fitness room will be very successful. A lot of new members will be attracted and as existing members become more health conscious they will use the room throughout the year. 2,500,000 30%
Alternative 2
State of World Total annual revenue for the fitness room. Probability %
I – The fitness room will be an initial success but too few new members will be attracted. Usage will vary throughout the year. 2,400,000 50%
II – The fitness room will be very successful initially but then membership will slowly fall. Usage will be seasonal. 2,500,000 40%
III – The fitness room will be very successful. A lot of new members will be attracted and as existing members become more health conscious they will use the room throughout the year. 2,700,000 10%
(The additional revenue equals the total revenue calculated above less the existing revenue of 1,800,000).

Cost of capital

Laura suggests that it is appropriate to use a cost of capital of 7% for this project.

Other related information from Laura

Laura wants the following information to be considered.

(1) Both squash courts 3 and 4 are in urgent need of refurbishment. It has been agreed that if one court is going to be used in the future it will be refurbished immediately at a cost of 100,000.

If both courts are going to be used in the future they will be refurbished immediately at a cost of 250,500.

(2) If one court is closed the total income from the squash courts will fall by 100,000 per annum.

If two courts are closed the total income from the squash courts will fall by 150,000 per annum.

(These estimates are based on last year’s booking information)

(3) The restaurant manager expects to see more customers if the fitness room is increased in size.

If the fitness room is increased in size by closing one court the restaurant manager estimates his profits will increase by 170,000 per annum.

If the fitness room is increased in size by closing two courts the restaurant manager estimates his profits will increase by 230,800 per annum.

Life of project

The life of the project was discussed at some length by the senior management. Primer wanted to assume that the equipment had a life of 6 years but a more conservative estimate of 5 years was proposed by Jeremy Pring who had experience of a similar project at a different leisure centre. Laura suggested that a project life of 4 years should also be considered but this was quickly dismissed by Primer. There was no agreement over what was a suitable life for the project and it was agreed that given the technological advance within the industry more information was required.

Question 1

(i) Evaluate the sensitivity of the investments and make a clear recommendation on financial grounds to accept or reject the investments.

Question 2

(ii) Identify and evaluate any additional information that is not included in this case study.

Question 3

(iii) Evaluate the different approaches described by June and Laura to forecasting income for the investments.

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