Question

The CEO and CFO of an automation company were both aware that the company's controller was reporting fraudulent revenues. Upper level executives are paid very large bonuses when the company meets the earnings goals established in the company's budget. While the CEO had pushed the CFO and controllers to "make the numbers"he had not told them to "make up the numbers". Besides, he could plead ignorance if the fraud was ever discovered. The CFO knew he should prohibit fraudulent reportings but also knew how importance of making the numbers established in the budget. He told himself that it just wasn't just for his bonus but for the stockholders as well. If the actual earnings were below the budgeted target numbers , the stock price would drop, and the shareholders would suffer. Besides, he believed that the actual revenues would increase dramatically in the near future and they could cover the fraudulent revenue by underreporting theses future revenues. He concluded that no one would get hurt and everything would be straigthtened out in the near future.

a. explain why the internal control practice of separation of duties failed to prevent the fraudulent reporting.

b. identify and discuss the elements of the fraudulent triangle that motivated the fraud.

Answer 1

ANSWER:

A misrepresentation triangle is by and large has three phases which makes up a triangle size and most likely that is the reason it is known as an extortion triangle, the three phases are 1)Pressure .2) Opportunity and 3) Rationalization - Hence here the main leg of triangle that is pressure is to show up/reach at planned numbers the subsequent leg is opportunity and here right now opportunity is the fat reward sum and estimation of stocks - so on the off chance that they report the numbers lessor than planned they would free reward and estimation of offers will likewise fall. the last phase of triangle is defense that is only avocation, here the individual might want to give the support about the misrepresentation submitted and the legitimization here given by CFO is that creation up numbers is essential since it will prompt overwhelming disintegration of offer costs and furthermore organization is anticipating an immense development in coming years so once that is there then this made up numbers can be fortify.