Professor Paula King teaches accounting at South Central Coastal Idaho Polytechnic. In her lecture this morning, she passes out sheets containing facts about Consolidated Industries. From those fact sheets, she identifies four signs that could indicate financial fraud: Executives have personally guaranteed some of the firm’s debt. The company’s organizational chart is complex. The company’s monopoly status allows it to charge any price it desires. Turnover is high in the information-technology department. After presenting those observations, King concludes that because of the four characteristics, executives at Consolidated have a greater opportunity than most to commit fraud. Student Mukesh Ghari believes one of King’s examples does not help her argument. Which of the four facts is least compelling in support of King’s argument? A) Executives have personally guaranteed some of the firm’s debt. B) The company’s monopoly status allows it to charge any price it desires. C) Turnover is high in the information-technology department.
B
B.
B
Correct Answer is A – Executives have personally guaranteed some of the firm’s debt. Executive guarantees of debt represent an incentive to commit fraud, but not necessarily an enhanced opportunity to do so. Both remaining examples are each legitimate risk factors related to opportunities that can lead to fraudulent accounting. Computers are important to financial reporting, and high turnover in that department could be sign of disorganization or dissatisfaction with technical systems. Outdated or badly designed computer systems make it easier to commit fraud. In addition, the company’s pricing power would make it much easier to conduct transactions that are not at arm’s length.
That is a really tricky question / answer…
my answer is A … but different reasoning “Executive guarantees of debt represent an incentive to commit fraud” anyone can explain this to me please?
It looks like the explanation given references a different distractor - computer systems was never mentioned in the initial question. I wouldn’t have thought having a monopoly gives an incentive to commit fraud. May need to review this section further.