ACFE CFE-Fraud-Schemes-and-Financial-Crimes - Certified Fraud Examiner -Fraud Schemes and Financial Crimes

Detailed Explanation:

Rationale for Correct Answer: Shrinkage refers to discrepancies between physical inventory counts and perpetual inventory records. Causes include theft, errors, waste, or fraud. It is one of the most common indicators of asset misappropriation.

Analysis of Incorrect Options:

A. Altered inventory – Not a recognized accounting term.

B. Account receivable – Unrelated to inventory.

D. Write-offs – A corrective accounting entry, not the variance itself.

Key Concept: Inventory shrinkage as a red flag for fraud.

The correct answer is A. Oona’s conduct is a multiple expense reimbursement scheme because she is attempting to obtain reimbursement for an expense that the company has already paid through the company credit card. In expense reimbursement fraud, multiple reimbursement schemes occur when an employee submits the same expense more than once, or submits an expense paid through one channel as though it was paid personally. This differs from a mischaracterized expense, where a personal cost is falsely described as business-related. It also differs from an overstated expense, where the amount is inflated, and from a fictitious expense, where no expense occurred. The key issue is duplicate recovery of the same lunch expense.

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The correct answer is D. Liquidation bankruptcy involves identifying the debtor’s assets, selling nonexempt assets, and using the proceeds to pay creditors. After the liquidation process, the debtor may receive a discharge of eligible debts, depending on the applicable jurisdiction and the nature of the obligations. The facts state that XYZ Company must sell its properties and inventory and apply the proceeds to creditors, which is the defining feature of liquidation. Reorganization bankruptcy allows a debtor to continue operating while restructuring debts under an approved plan. Receivership is a court-supervised arrangement involving a receiver, but it is not the filing type described. “Debt forgiveness bankruptcy” is not the proper ACFE classification.

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Detailed Explanation:

Rationale for Correct Answer: Bid manipulation schemes occur in the procurement process and involve altering the bidding environment (e.g., extending deadlines, prematurely opening competitor bids, or changing submitted bids). Using low-quality materials is a post-award performance fraud , not bid manipulation.

Analysis of Incorrect Options:

A, C, D – All are recognized bid manipulation tactics.

Key Concept: Procurement fraud schemes – bid manipulation vs. contract performance fraud.

Detailed Explanation:

Rationale for Correct Answer: The SEC’s Staff Accounting Bulletin (SAB) 104 outlines four criteria for revenue recognition:

Persuasive evidence of an arrangement exists.

Delivery has occurred or services have been rendered.

The seller’s price is fixed or determinable.

Collectability is reasonably assured.

“ Timings have been met ” is not one of the recognized criteria, making C the correct answer.

Analysis of Incorrect Options:

A, B, D – All are required conditions.

C – Not part of SAB 104.

Key Concept: Revenue recognition criteria under SAB 104.

Comprehensive and Detailed Explanation (Based on the ACFE Fraud Examiners Manual – Financial Transactions and Fraud Schemes)

In the Identity Theft chapter of the Financial Transactions and Fraud Schemes section, the ACFE Manual explains that there are two primary methods of committing identity theft :

Traditional identity theft

Synthetic identity theft

These are listed under “Methods of Committing Identity Theft” (1.803) , immediately followed by “Types of Identity Theft Schemes” (1.804) such as financial identity theft and criminal identity theft.

1. Why the correct answer is Traditional identity theft (Option B)

In traditional identity theft , the perpetrator uses the real, complete identity of another person—such as their name, government identification number, and birthdate —to impersonate that person for fraudulent purposes. This is exactly what is happening in the question:

The fraudster uses a real victim’s name, government identification number, and birthdate to open a credit card account in the victim’s name.

This matches the Manual’s categorization where traditional identity theft involves misuse of actual personal identifying information (PII) belonging to a real individual, rather than fabricating an identity. The Manual then explains that this stolen identity is often used in financial schemes , such as obtaining credit cards, loans, or other financial benefits, which falls under financial identity theft as a type of identity theft scheme.

So, in ACFE terms, the method is traditional identity theft , and the scheme type is financial identity theft (using another person’s identity to obtain credit or other financial benefits).

2. Why the other options are incorrect

Option A – New account identity theft

“New account identity theft” is a descriptive phrase sometimes used in practice to describe opening new credit accounts in another person’s name, but the ACFE Manual’s formal categorization focuses on:

Methods of committing identity theft:

Traditional identity theft

Synthetic identity theft

Types of identity theft schemes:

Financial identity theft

Criminal identity theft

Medical identity theft

Insurance identity theft

Tax identity theft

Employment identity theft

Business identity theft

“New account identity theft” is not one of the defined method categories in the Manual; the described conduct is captured under traditional identity theft (method) and financial identity theft (scheme type). Therefore, this option does not align with the ACFE’s terminology tested on the CFE exam.

Option C – Synthetic identity theft

The Manual distinguishes synthetic identity theft as a different method. Under “Methods of Committing Identity Theft” (1.803) , it explains that synthetic identity theft involves combining real elements of identity (for example, a genuine government identification number) with fabricated or unrelated information (such as a made-up name, date of birth, or address) to create a partly fictitious identity .

In the question, the fraudster is not creating a hybrid or composite identity. They are using all of the real victim’s identifying information (name, government ID number, birthdate) and posing directly as that person. That is traditional , not synthetic.

Option D – Criminal identity theft

Under “Types of Identity Theft Schemes” (1.804–1.805) , the Manual describes criminal identity theft as a scheme where a fraudster gives someone else’s identifying information to law enforcement or in criminal justice contexts , so that the victim’s identity is attached to the criminal record or charges .

Typical examples include:

Giving another person’s name and identification details when stopped or arrested

Causing warrants or criminal records to be issued in the victim’s name

In the question scenario, the fraudster is not interacting with law enforcement or shifting criminal records to the victim. Instead, they are opening a credit card account , which is a financial use of the stolen identity. Therefore, it fits financial identity theft as a scheme type, but traditional identity theft as the method.

The ACFE Fraud Examiners Manual addresses Expense Reimbursement Schemes under Asset Misappropriation: Fraudulent Disbursements and separates the discussion into:

Detection of Expense Reimbursement Schemes

Prevention of Expense Reimbursement Schemes

The Manual specifically identifies “Detailed Expense Reports: Submission and Review” as the prevention approach for expense reimbursement fraud.

Why A is correct

Requiring all employees to submit receipts electronically is not, by itself, a preventive control recognized by the Manual. The ACFE’s prevention focus is on requiring detailed expense reports , adequate supporting documentation, and careful review—not merely changing the format of submission from paper to electronic. In fact, because expense reimbursement fraud often involves altered receipts , fictitious receipts , and other manipulated support, simply requiring electronic submission does not meaningfully prevent the scheme. The Manual lists schemes such as altered receipts and producing fictitious receipts , showing that the problem is the authenticity and review of documentation, not whether the receipt is submitted electronically.

Why the other options are helpful

B. Comparing current expenses to budgeted expense amounts

This is helpful because the Manual includes review and analysis of expense accounts as part of detecting these schemes. Comparing reported expenses to expected or budgeted levels can reveal unusual spikes or anomalies that may indicate fraud.

C. Requiring employees to explain the specific business purpose of each expense

This is clearly helpful and consistent with the Manual’s prevention emphasis on detailed expense reports and proper documentation. Requiring a specific business purpose makes it harder to submit personal, inflated, or fictitious expenses.

D. Comparing current expenses to historical expenditure amounts

This is also helpful because the Manual’s review and analysis of expense accounts supports analytical comparisons to identify irregularities, trends, or unexplained increases in reimbursements. Historical comparison is a classic way to spot padded or abnormal expense claims.

Conclusion

Under the ACFE Manual, prevention of expense reimbursement schemes depends on detailed reporting, documentation, and review . Merely requiring receipts to be submitted electronically does not address whether the receipts are false, altered, duplicated, or unsupported. Therefore, the choice that would NOT be helpful in preventing expense reimbursement schemes is:

A. Requiring all employees to submit receipts electronically

References

ACFE Fraud Examiners Manual, 2020 International Edition

Expense Reimbursement Schemes

Detection of Expense Reimbursement Schemes / Review and Analysis of Expense Accounts

Prevention of Expense Reimbursement Schemes / Detailed Expense Reports: Submission and Review

Altered Receipts / Producing Fictitious Receipts

Detailed Explanation:

Rationale for Correct Answer: A false balance occurs when incorrect totals are intentionally carried forward from the journal to the ledger or from the ledger to the financial statements. This is often used as a concealment technique in fraud to make the books appear balanced while hiding irregularities.

Analysis of Incorrect Options:

A. Forced Balance – Involves adding fictitious entries to force accounts into balance.

B. Out-of-balance – Results when entries don’t match, but not specifically from carried totals.

D. None of all – Incorrect since “false balance” is the precise term.

Key Concept: False balance entries as concealment techniques in fraudulent bookkeeping.

Option A constitutes intellectual property theft because the corporate agent improperly accesses a competitor’s computer network and obtains confidential files about future pricing strategy. Proprietary business information, trade secrets, pricing plans, research, customer lists, and strategic documents can constitute valuable intangible assets. The ACFE material distinguishes lawful competitive intelligence from corporate espionage and theft of proprietary information. Option C describes open-source research, which is generally lawful if the information is publicly available. Option B is a false billing or fraudulent disbursement-type scheme, not intellectual property theft. Option D involves recruiting an employee and does not show improper acquisition or misuse of confidential information. The defining feature in option A is unauthorized access to confidential competitor information for business advantage.

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Detailed Explanation:

Rationale for Correct Answer: This statement is True . Asset misappropriations reduce the organization’s assets. In double-entry accounting, a decrease in assets without a corresponding decrease in liabilities results in a reduction of owner’s equity. Therefore, fraud not only depletes assets but also indirectly reduces equity.

Analysis of Incorrect Options:

B. False – Incorrect because asset theft clearly reduces net assets and thereby equity.

Key Concept: Impact of Asset Misappropriation on the accounting equation: Assets = Liabilities + Equity.