Question 1

What is known as dilution?

Accepted Answer

Dilution in the context of mutual funds refers to the harm caused by the transfer of wealth from long-term investors to market timers. This occurs when market timers engage in frequent trading, exploiting short-term fluctuations in the value of the fund's assets, which can lead to increased transaction costs and tax liabilities for the fund, ultimately reducing the value for long-term investors.

Question 2

Orders placed for buying shares of a mutual fund any time up to 4:00 p.m. are priced at that day's net asset value (NAV), and orders placed after 4:01 p.m. are priced at the next day's NAV. What is this practice known as?

Accepted Answer

This practice is known as forward pricing. It ensures that all investors receive the same price for the mutual fund shares based on the net asset value calculated at the end of the trading day. This eliminates any potential for market timing or price arbitrage. Late trading, price arbitrage, and price dealing are all illegal practices in the mutual fund industry.

Question 3

The primary victim of a workers' compensation fraud is the .

Accepted Answer

The primary victim of workers' compensation fraud is the insurance carrier. This is because they are the ones who pay out the fraudulent claims and ultimately bear the financial burden of the fraud. The government may also be impacted if they are providing some form of funding or oversight for the workers' compensation program, but the insurance carrier is the main entity directly affected by the fraud. Employers and vendors may also be impacted by fraudulent claims, but they are not the primary victims in this scenario.

Question 4

What is the term that describes allowing selected investors to purchase mutual funds after 4:00 p.m., using that day's net asset value (NAV), rather than the next day's NAV, as required under the law?

Accepted Answer

This is known as late trading, which is illegal and unfair to other investors who have to purchase mutual funds based on the next day's NAV. Forward pricing is the standard practice of using next day's NAV for all investors, while backdating and circular trading refer to other types of illegal activities.

Question 5

What has been verified as the most significant impact for companies who have antifraud controls in place?

Accepted Answer

The most significant impact of having antifraud controls in place is that victim organizations have lower losses. This is because antifraud controls can help prevent and detect fraudulent activities, leading to less financial damage for the affected company. While having antifraud controls may also help prevent employee and management fraud, as well as increase consumer loyalty, these are not the primary benefits.

Question 6

Commercial bribery is similar to the traditional definition of bribery except that in commercial bribery:

Accepted Answer

In commercial bribery, something of value is offered to influence a business decision. This could be offering a bribe to a purchasing manager to select a particular supplier or offering a kickback to a distributor to prioritize your products. The key difference with traditional bribery is that the transaction is solely for business purposes and not related to government officials.

Question 7

Which of the following is the most likely reason fraud within a company is detected?

Accepted Answer

Employees reporting suspicions about possible fraud is often the most common way fraud is detected within companies. This is because employees are on the front lines and may notice irregularities or unethical behavior firsthand. Internal audits, external auditors, and sophisticated internal controls are important, but the immediate reporting by observant employees tends to be a more direct and timely way to uncover fraudulent activities.

Question 8

What is the point of difference between illegal gratuity and bribery schemes?

Accepted Answer

The point of difference between illegal gratuity and bribery schemes is that illegal gratuities do not necessarily involve an intent to influence a business decision but rather to reward someone for making a favorable decision. Bribery schemes involve an intent to influence a business decision through the offering or giving of something of value.

Quiz 14: Fraud Against Organizations