Hannah Rose S.
Navaja BSMA-2 ACCTG 401(3049) 04/23/25
TAKE HOME EXERCISE
1. Why was Charles Ponzi so successful with his fraud scheme?
● Promised High Returns: Ponzi lured people in with the promise of astonishing returns—50% in just 45 days. This was
incredibly tempting, especially in the aftermath of World War I when many were on the lookout for lucrative
investment opportunities.
● Appealing and Simple Concept: He claimed to make money through arbitrage in international postal reply coupons, a
complicated concept that sounded credible to most folks, making it tough for anyone to challenge his assertions.
● Building Trust: Ponzi had a knack for portraying himself as a successful and self-assured businessman, which helped
him win over investors and the public alike. His charm was a key factor in persuading people to part with their money.
● The “Paying Investors” Tactic: To create a façade of success, Ponzi used funds from new investors to pay returns to
earlier ones, giving the illusion that his business was thriving when, in reality, it was just a pyramid scheme.
● Lack of Financial Regulation: Back then, financial regulations were practically non-existent, allowing Ponzi to operate
without drawing immediate scrutiny from authorities or investors.
● Word of Mouth and Publicity: As early investors received the returns they were promised, they began to spread the
word, attracting even more people and causing the scheme to grow rapidly. Positive reviews from these initial
investors only fueled further interest.
● Exploitation of Investor Greed: Ponzi cleverly exploited the human inclination towards "get rich quick" schemes,
tapping into people's desire for easy money with high returns.
2. How does fraud affect individuals, consumers, and organizations?
● When it comes to individuals, they might find themselves losing their personal savings or retirement funds. This
can lead to emotional distress and a significant loss of trust in financial systems.
● For consumers, the situation isn't any better. They could face higher prices as businesses attempt to recover their
losses, and there's also the risk of identity theft or damage to their credit.
● Organizations, on the other hand, can suffer from financial losses and a tarnished reputation. This often results
in lower employee morale and a dip in investor confidence, not to mention the potential for legal costs and
regulatory penalties.
3. Why are accurate fraud statistics hard to find?
● It's unfortunate, but many cases of fraud go unreported. Victims often feel embarrassed, worry about their
reputation, or believe that reporting it won’t make a difference.
● Sometimes, organizations choose to conceal fraud to safeguard their image or dodge potential legal issues.
● Detecting fraud can be quite challenging, especially when it happens internally or stretches over a long time.
● Plus, since definitions of fraud can vary widely, it complicates efforts to track and compare data consistently.
4. Describe the relationship between fraud, net income, profit margin, and the revenue required to make up for fraud
losses.
● Fraud and Net Income:
➔ Fraud has a direct impact on a company’s net income, which is essentially the total profit left after all
expenses are accounted for.
➔ When fraud occurs, the losses are deducted from net income, leading to a drop in overall profitability.
● Profit Margin Impact:
➔ Profit margin refers to the percentage of revenue that translates into profit.
➔ When fraud takes place, it diminishes net income, which in turn reduces the effective profit margin.
Hannah Rose S. Navaja BSMA-2 ACCTG 401(3049) 04/23/25
➔ A tighter profit margin means the company has to pull in more revenue just to recover from the same
amount of fraud loss.
● Revenue Needed to Recover Losses:
➔ To offset losses from fraud, a company needs to generate significantly more revenue than the amount lost,
thanks to the profit margin.
➔ For instance, with a 10% profit margin, if a company faces a $10,000 fraud loss, it would need to bring in an
additional $100,000 in revenue to make up for it.
➔ This really underscores how even minor fraud losses can necessitate a substantial boost in sales to balance
things out.
● Pressure on Business Operations:
➔ In order to recover from fraud losses, a company might have to cut costs, increase prices, or ramp up
efforts to attract new business, which can be quite challenging in competitive markets.
➔ The pressure to generate more revenue to counteract fraud losses can add extra strain on the organization’s
operations and overall strategy.
5. Why does it usually require trust for someone to be able to commit a fraud?
● Access to Resources: Trust gives fraudsters the access needed to valuable resources, such as financial systems,
sensitive information, or company funds. Without trust, they would not be able to obtain or misuse these assets.
● Lack of Scrutiny: When people trust someone, they are less likely to scrutinize their actions closely. This lack of
oversight allows the fraudster to manipulate situations or bypass controls undetected.
● Manipulation of Relationships: Fraudsters often exploit their trusted relationships with others (e.g., co-workers,
managers, or clients) to deceive or manipulate them into enabling fraudulent actions.
● Internal Fraud: In organizations, internal fraud often occurs when employees or trusted members use their
access and position to commit fraud, taking advantage of the trust placed in them by management and
colleagues.
● Overlooking Red Flags: Trust can cause individuals or organizations to ignore warning signs or inconsistencies
that might otherwise signal fraudulent activity.
● Credibility and Influence: Fraudsters often hold positions of authority or influence within an organization, which
they use to gain the trust of others, making it easier for them to commit fraud without raising suspicion.
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