How does a company's large market presence lead to fraud?

CFA Level I FRA
#1

I read that oppurtunities for fraud arise when a company’s strength (market penetration) grants them power to dictate terms with vendors.

Let’s pretend that Legg Mason buys tons of ink toner, paper, and pens from Staples. If Legg Mason starts bullying them around, how is that fraudulent?

#2

Perhaps if they’re powerful enough that the bullying spills over into extortion.

#3

I guess it is possible if you are a sufficiently strong company, you can theoretically oblige your vendors to delay the order date, make some off-balance sheet transactions or something that can potentially manipulate the actual financial position of the company?

#4

The question was “which of these scenarios leads to oppurtunities for fraud?”

The answer I chose was something along the lines of “the company does 30% of its sales by selling to its subsidiaries” or something like that

Quite frankly, the question just seemed poorly written or at least ambiguous enough that it would be thrown out in practice.

#5

Your answer is reasonable: if you sell to subsidiaries you can easily manipulate the price you charge.

#6

Exactly - that’s what my logic was.

S2000, are you an employee for Schweser? If I PM you the question #, can you give them feedback so they’ll stop confusing us candidates?

#7

I’ve done some work for Schweser, including teaching some classes, but I’m not an employee.

I’ll be happy to forward your feedback.