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Management and Organizational Studies
Management and Organizational Studies 1023A/B
Maria Ferraro

Pages 102-55 Accounting: Information for Decision-Making The Four-Step Framework For Decision-Making Step 1: Specify the Design Problem, Including The Decision Maker’s Goals  Decisions help us accomplish goals  When determining goals, people often differ in the factors they consider and the importance they attach to these factors  Have to clearly identify goal because making a decision  Understanding the factors that influence the decision maker’s goals and their relative importance is the first step in making effective decisions Step 2: Identify Options  For most businesses, identifying the set of options is one of the most important tasks of management  Managers often distinguish themselves by their ability to identify the best option Step 3: Measure Benefits (Advantages) and Costs (Disadvantages) to Determine the Value (Benefits Reaped Less Costs Incurred) of Each Option  Every option presents a unique trade-off between benefits and costs  The value of an option is its benefits minus its costs  We measure value relative to the status quo, which is not doing anything at all  Opportunity Cost o Whenever we make a decision and choose an option, we give something up o Opportunity cost is the value of what you give up by making your decision o The opportunity cost of any decision option is the value to the decision maker of the next best option  The value of the chosen decision option should exceed its opportunity cost Step 4: Make the Decision, Choosing the Option with the Highest Value  The best choice is the option with the highest value to the decision maker – also the only option whose value exceeds its opportunity cost Decision-Making In Organizations  The 4-step decision-making framework is for individuals and organizations  Two major differences: o Unlike individuals, whose goals might have several factors, organizations tend to have focused goals  Profit is the dominant goal of commercial organizations o Because an organization is a collection of individuals, individual goals relate to organizational goals – organizations don’t make decisions; the people who make up the organizations do so individual goals might differ from organizational goals, leading to actions that are not in the firm’s best interests Organizational Goals  An organization is a group of individuals engaged in a collectively beneficial mission o Form for many reasons  A for-profit business usually specifies organizational goals according to ownership  The goal for a publicly held business, collectively owned by shareholders, is to maximize shareholder value – to maximize the returns (stream of profits or stream of cash flows) to shareholders investing in the company  Aligning Individual Goals With Organizational Goals To influence employees to achieving organizational goals, firms use the following methods:  Policies and procedures to define acceptable behaviour  Monitoring to enforce policies and procedures  Incentive schemas and performance evaluation to motivate employees to consider organizational goals The Planning and Control Cycle  Planning decisions relate to choices about acquiring and using resources to deliver products and services to customers o Includes deciding which products and services to offer, their prices, and the resources needed  A plan is like a blueprint that specifies the actions required to achieve a goal  Control decisions – relate to motivating, monitoring, and evaluating performance o Involve examining past performance, with the purpose of improving subsequent plans  PIER: o Plan – products and services, customers and prices, resources o Implement – use resources to make products and deliver services, set performance targets, motivate employees o Evaluate – actual results, achievement of performance targets, reasons for deviations o Revise (beliefs about) – best mix of products and services, resources necessary, performance targets  The planning and control cycle can happen in moments or can take months Accounting and Decision-Making  Marketing concepts help managers understand consumers’ goals and preferences, helping them to sell products more successfully  Management theories help in selecting, training, organizing, and motivating employees  Accounting plays a big role in step 3 – the primary role of accounting is to help measure the costs and benefits of decision options  Decision makers outside the firm who rely on financial accounting information, and decision makers outside the firm who use managerial accounting information rely on accounting information  Characteristics of Financial Accounting Information  Financial accounting – aims to satisfy the information needs of decision makers outside the firm  Firms typically satisfy the information needs of external decision makers by issuing a comprehensive set of financial statements at regular intervals that relate to the firm as a whole  Investors need to be able to compare the financial prospects of different firms using a common frame of reference  In Canada, firms follow generally accepted accounting principles (GAAP) defined by Accounting Standards Board (AcSB) of Canadian Institute of Chartered Accountants (CICA), the current private-sector body responsible for setting accounting standards that firms must follow when preparing their financial statements  Many countries, including Canada, have adoptedthe standards issued by the International Accounting Standards Board  These standards reflect the compromises that consider the views of the many uses for financial accounting information  Does not provide enough detail to address most decision needs within the firm  Characteristics of Managerial Accounting Information  Managerial accounting – aims to satisfy the information needs of decision makers inside the firm  An organization’s employees use managerial accounting data to determine which products and services to offer, the prices of products and services, what equipment to purchase, and whom to hire and how to pay them o Useful for both planning and control decisions  Employees need the most detailed and relevant data to make the best decisions on behalf of the organization  Managerial accounting information supports decisions related to the acquisition and use of organizational resources as well as decisions related to motivating, monitoring, and evaluating performance Ethics and Decision-Making  The issue of ethics goes beyond ensuring that decision makers do not choose an option based solely on monetary costs and benefits  We could view an organization’s goal as not just one of profit maximization, but profit maximization in an ethical manner  Ethics could stop decision makers from including questionable options in their choice set  Organizations and societies play a significant role in shaping goals and motivating decision makers to act ethically  Through laws, rules, and regulations, organizations and governments specify the behaviours that cross ethical boundaries and the resulting penalties for engaging in unethical behaviour  The U.S. – the law of Sarbanes-Oxley Act of 2002 (SOX) – this law mandates that senior executives of publicly traded companies take individual responsibility for the accuracy and completeness of financial reports  Individual company policies provide additional guidance regarding ethical standards  The Code of Ethics established by the Society of Management Accountants of Canada stipulates that accountants should not engage in any business that is incompatible with the professional ethics of a management accountant o Also has expected behaviours  Organizations use monitoring mechanisms to encourage desired behaviours The Professional Accounting Environment Key Financial Players An organization chart shows the hierarchical relations among positions in an organization  Board of directions, representing shareholders, is ultimately responsible for overseeing the firm’s operations. The board usually delegates most decisions to a chief executive officer (CEO), the highest-ranking executive in an organization  The chief financial officer (CFO) reports to the CEO and is responsible for all accounting and finance functions. The CFO often hires a controller to direct the accounting function and a treasurer to oversee the finance function  Many firms also have a chief internal auditor (CIA) who manages the internal audit function. Internal auditors frequently report directly to the audit committee of the board of directors, which helps to maintain the auditor’s objectivity in presenting a full and fair picture of the firm’s operations  The controller manages the day-to-day accounting for the firm and oversees corporate accounting policies. The controller’s staff assists in planning the firm’s operations, designing and operating information systems, and fostering effective decision-making. Controller is important for ensuring the firm has appropriate monitoring, performance evaluation, and incentive systems in place to motivate employees to achieve organizational goals  The treasurer manages the firm’s cash flow and serves as the contact point for banks, bondholders, and other creditors of the firm. Ensures that firm raises the required capital at the lowest cost and uses the capital wisely to maximize shareholder returns. Usually employs many finance professionals  Division managers direct the day-to-day operations of product lines and markets. Appoint their own functional managers and a divisional controller  Divisional controllers must implement the corporate accounting guidelines at the divisional level  The modern accountant helps divisions and corporate managers understand the financial and nonfinancial costs and benefits of decision options = helps improve the quality of its decisions Professional Accounting Bodies 3 prominent organizations in Canada dedicated to improving the practice of accountancy:  Canadian Institute of Chartered Accountants (CICA) – members can earn the CA designation, focuses on external audit and financial accounting  Certified General Accountants Association of Canada – grants CGA designation. Students can specialize in different areas  Society of Management Accountants of Canada – sponsors the CMA designation – puts an emphasis on management accounting Cost Flows and Cost Terminology Product and Period Costs  Product costs – the costs associated with getting products and services ready for sale. Always appear above the line for gross margin which is revenues less product costs  Period costs – all costs that are not product costs (can include office rent, advertising, customer service, and sales force compensation) o Subtract period costs from the gross margin to arrive at profit before taxes Cost Flows in Service Organizations  The products that service firms offer are not tangible or storable  Make their facilities available to members for a fee  Financial accounting statements provide limited information about opportunity costs  Can be vital to modify accounting reports and use nonfinancial data to estimate the controllable costs and benefits of a decision option  Financial accounting income statements combine controllable costs with noncontrollable costs and fixed costs with variable costs o Ex. Cost of providing service includes depreciation on exercise equipment as well as the cost of supplies (variable) which will increase if yoga class attracts new members o Ex. Offering yoga will change administrative expenses but not the salary paid to office staff Cost Flows in Merchandising Organizations  Merchandising firms buy goods from suppliers and resell substantially the same products to customers  Inventory Equation  Firms expense the cost of items when they sell the items, not purchase them  Inventory equation: o Cost of beginning inventory + cost of goods purchased during the period − cost of ending inventory = cost of goods sold (COGS) during the period  We use FIFO (first in, first out) whenever we require an inventory cost flow assumption  Income Statement  Two main cost categories are the costs incurred to obtain and prepare the goods for sale (product costs) and the costs associated with sales and administration (period costs)  The major item in the first group is the cost of purchasing goods from suppliers. This item includes the amount paid to suppliers and the cost of transportation and the cost of preparing the goods for sale o Ex. Adds the cost of all purchases to its inventory account. As it sells items from its inventory, removes the associated costs from the inventory account and expenses them in the income statement  Period costs appear below the line for gross margin Cost Flows in Manufacturing Organizations Manufacturing firms use labour and equipment to transform inputs into outputs  Cost Terminology  Typical inputs in manufacturing firms include materials and labour. These represent variable manufacturing costs, as expenditures on these items vary proportionally with production volume.  They are direct costs – refer to them sometimes as direct materials and direct labour  Manufacturers use other inputs as well to make their product. The costs of these resources represent indirect costs because many products share these resources so we cannot trace these costs to specific product  Overhead (or sometimes manufacturing overhead) – the total of all these indirect manufacturing inputs – can be fixed overhead or variable overhead  Direct materials, direct labour, and overhead are all product costs because they are connected with getting the product ready for sale  Some refer to product costs as inventoriable costs because these are the costs that firms attach to inventories of work in process and finished goods  Selling and administration costs – administration costs associated with managing the organization itself (these are period costs and firms expense these costs in the income statement during the period in which they are incurred)  Prime costs – primary inputs into the manufacturing process  Capacity costs – the sum of their variable and fixed overhead – these indirect costs provide the firm with the ability to make its products  Conversion costs – the sum of labour and overhead – these expenditures are required to convert its raw material to finished goods  Typical Production Process  First, examine the physical flow of resources in a manufacturing firm (useful because accounting flows mirror this physical flow)  When firms purchase raw materials, they add the cost to the materials inventory account.  Firms accumulate labour and overhead costs incurred during a given accounting period in temporary control accounts, which are cleared out at the end of each accounting period  As production begins, firms assign the cost of materials, labour, and overhead from the respective inventory and control accounting to a work-in-process (WIP) account  The sum of materials, labour, and overhead costs added to the WIP account during the period are the total manufacturing costs charged to the production  Applying overhead – having to estimate how much overhead relates to each product since it is an indirect cost  Materials are a direct cost meaning we can add the exact cost to WIP  At every step, add the costs of materials, labour, and overhead consumed in that step to the WIP account to build the cost of the work performed on a specific product  Once the production process is done, firms transfer finished work physically from WIP inventory to finished goods inventory  Transfer the cost of goods manufactured from the WIP inventory account the finished goods inventory account  When firms sell finished goods, they physically transfer the goods to buyers and at the same time remove the associated cost from the FG inventory account and transfer it to the cost of goods sold (COGS) account.  COGS appears as a deduction from revenues in the income statement, with gross margin equaling the difference between revenues and GOGS  Income Statement  Cost of beginning work-in-process inventory + cost of materials used + direct labour + manufacturing overhead − cost of ending work-in-process inventory = cost of goods manufactured/total manufacturing costs charged to production o Added to the WIP account o Applied the inventory equation to the WIP account to obtain cost of materials used  Cost of beginning finished goods inventory + cost of goods manufactured − cost of ending finished goods inventory = cost of goods sold  Income statement includes: revenues, cost of goods sold, gross margin, selling and administration, profit before taxes  Merchandising firms has one inventory account: merchandise inventory  A manufacturing firm has 3 inventory accounts: raw materials, work in process, and finished goods  The income statement looks the same for service, merchandising, and manufacturing firms Cost Allocations  A company with more than one product will have multiple work-in-process and finished goods accounts, one for each product  Can directly assign the costs of materials and labour to each WIP and FG account because can trace these costs to each product  Can’t assign manufacturing overhead to individual work-in-process accounts because overhead costs are indirect and are not directly traceable to a specific account. Firms with one product do not face this issue because it has one WIP and one FG account related to its one product. Firms with multiple products resolve this issue by allocating overhead costs to products on some justifiable basis  Cost allocation – a procedure that allocates, or distributes, a common cost  Example: Patel family and Wilson family share $60 deal. Patel has three people, Wilson was two  Start by considering 4 elements that are in every cost allocation: o Cost pool – the total costs to allocate (the $60) o Cost objects – the items or entities to which we allocate the costs in the cost pool (the Patel family and the Wilson family) o Cost driver (allocation basis) – attributes that we can measure for each cost object. We often choose attributes that have a causal relation between the attribute and the costs incurred. (Patel family has 3 units of the cost driver, Wilson has 2) o Allocation volume (denominator volume) – the sum of the cost driver amounts across all cost objects (5 people)  After these elements, allocation procedure has 2 steps: o Calculate the allocation rate (overhead rate): calculate the allocation rate/overhead rate by dividing the amount in the cost pool by the denominator volume ($60÷5 people = $12 per person) o Allocate the cost: multiply the number of cost driver units contained in each cost object by the allocation rate (Patel family: 3×12=$36, Wilson family: 2×12=$24)  The proportion of cost allocated to a cost object equals the proportion of driver units in that cost object  The allocated cost would flow through each product’s WIP account. When the products are finished, these costs would flow through to the FG accounts and become part of the COGS when sold  Firms often allocate supervisory costs using direct labour cost and materials handling costs using materials cost  Allocated Costs and Decision-Making  Allocating overhead costs can make noncontrollable fixed costs appear to be controllable and variable  The report combines variable costs (direct materials, direct labour, variable overhead, and variable selling and administration) and fixed costs (fixed overhead, fixed selling, and administration)  Only the revenues and variable costs would be controllable in the short term  For internal decisions, many firms prepare reports that regroup costs by their variability Performance Evaluation in Decentralized Organizations Decentralization – the practice of delegating decisions to lower-level managers Decentralization of Decision-Making Benefits and Costs of Decentralization:  Benefits of Decentralization  Permits timely decisions with the best available information: Employees at lower levels in an organization typically have access to more detailed and timely information than those at a higher level  Tailors managerial skills and specializations to job requirements: Delegating decision-making to individuals with appropriate functional experiences enhances decision quality  Empowers employees and increases job satisfaction  Trains future managers  Costs of Decentralization  Leads to decisions that emphasize local goods over global goals  Required costly coordination of decisions: Having proper internal information systems, such as networked computers, and other formal coordination mechanisms, such as weekly meetings, is important to ensure that all managers work toward the same organizational goals  Triggers improper decisions because of the divergence between individual and organizational goals  May lead to an increase in total costs: Ex. Each division may have its own accounting staff and procurement department Responsibility Centres  Cost Centres  Cost centre managers exercise control over costs, but not revenues and investments  Their charge is to minimize the cost of producing a specified level of output or the cost of delivering a specified level of service  Objective is to improve the efficiency of operations by finding ways to cut costs and minimize waste  Examples: plant maintenance, human resources, data processing, production, general administration  Revenue Centres  Revenue centre managers exercise control over revenues  Responsible for expenses associated with selling (sales commissions, advertising, travel)  Examples: sales divisions and fundraising departments in charitable organizations Profit Centres  Profit centre managers focus on profit  Their goal is to both minimize costs and maximize revenues Investment Centres  Investment centre managers make decisions that influence costs, revenues, and investments  Their mandate is to maximize the returns from invested capital, or to put the capital investment by owners and shareholders of their organizations to the most profitable use Principles of Performance Measurement  A controllable performance measure reflects the consequences of the actions taken by the decision maker  Marketing managers have the authority to change prices and offer promotions that affect actual sales, which determine the required production  Production managers have little control over the volume of production  Informativeness principle – a performance measure is informative if it provides information about a manager’s effort, even if the manager does not have control over it  Relative performance evaluation – evaluating a firm relative to other firms in the industry o Is useful even though the firm’s managers may have little control over how other firms do  Characteristics of Effective Performance Measures  An ideal performance measures: o Aligns employee and organizational goals o Yields maximum information about the decisions or actions of the individual or organizational unit o Is easy to measure o Is easy to understand and communicate  A single performance measure rarely possesses all of these Evaluating Cost and Profit Centres  Cost centre managers have two roles in organizations: achieving cost targets for a given level of output in the short term and making continuous efficiency improvements to cute costs in the long term  In the short term, organizations typically use budget variances to measure cost centre performance  Long-Term Measures  Benchmarking – a process that involves comparing the effectiveness and efficiency of various activities and business processes in a firm against the best practices in the industry – not controllable by the decision maker  Kaizen – a philosophy of continuous improvement – encourages and rewards employees who constantly seek and suggest improvements to activities and business processes (one way is to hold managers accountable for achieving permanent cost reductions)  Discretionary Cost Centres  No obvious relation between inputs and outputs so measuring output can be difficult  The manager’s evaluation is primarily subjective  Often the manager is required to operate within a fixed budget set at top management’s discretion  The manager is also responsible for meeting qualitative targets Performance Evaluation in Profit Centres  The goal of a profit centre manager is to maximize profit by increase revenues, decreasing costs, or both  Most large organizations treat geographically dispersed location as profit centres  Many corporations also form divisions along product lines  Some organizations form complex matrix structures where they measure profit both by region and by product  Firms often use profit before taxes to evaluate profit centres: o Profit before taxes = Revenue − variable costs − traceable fixed costs = Contribution margin − traceable fixed costs  Firms use the master budget as the benchmark because a profit centre manager has decision rights over both outputs and inputs  Firms often compare actual profit with past profit and with industry profit Performance Measurement in Investment Centres  An organization evaluates an investment centre on how well it uses the funds made available to it  Three popular measures of investment centre performances are return on investment (ROI), residual income (RI), and economic value added (EVA)  Firms use these measures to evaluate whether the investment centre manager is meeting or exceeding performance expectations and to allocate available funds to divisions in the most profitable manner Return on Investment  Return on investment (ROI) is a measure of the profit generated per dollar of investment. Calculated as: o ROI = Profit/Investment  An investment centre’s profit results from its operations  Profit includes all revenue and expense items directly related to the centre’s operations  Include taxes only if the division’s choices significantly influence the corporate tax burden  Do not include assets  Three options exist to incorporate depreciable fixed assets o Net book value – (most commonly used to calculate ROI) the original acquisition cost of plant and equipment less accumulated depreciation. If the asset becomes older, the accumulated depreciation increases and the net book value decreases ROI is often higher for older assets o Gross book value – the original acquisition cost. Does not include depreciation charges. The asset’s age is less of a factor. Fails to represent the true investment of the company at the time of the evaluation o Replacement or current value of the asset – more likely to represent the true value of the asset. Can be difficult and tedious  Advantages of ROI  Effective summary measure of business profitability  Could evaluate investments by comparing their ROIs with those of similar investments in the past, as well as the experiences of other firms in the industry  Controls for size by expressing the return per investment dollar  Easy to compare the performance of investment centres of different size  Can decompose ROI into smaller pieces, allowing managers to see how individual actions map into overall profitability  Disadvantages of ROI  Fosters underinvestment  Ignores future-period considerations, making it less suitable for evaluating long- term performance Pages 156-77 Introduction: Fraud Examination  Fraud examination – resolving allegations of fraud – whether from tips, complaints, or accounting clues  Involves obtaining documentary evidence, interviewing witnesses and potential suspects, writing investigative reports, testifying to findings, and assisting in the general detection and prevention of fraud  Forensic accounting – the use of any accounting knowledge or skill for courtroom purposes, and can therefore involve not only fraud, but also bankruptcy, business valuations and disputes, divorce, and a host of other litigation support services Fraud Examination Methodology  Fraud examiner starts by developing a hypothesis to explain how the alleged fraud was committed, and by whom  Internal frauds – offenses committed by the people who work for organizations – most costly and most common  External frauds – offenses committed by individuals against other individuals by individuals against organizations Predication  Predication is the totality of circumstances that would lead a reasonable, professionally trained, prudent individual to believe that a fraud has occurred, is occurring, or will occur  All fraud examinations must be based on proper predication Fraud Theory Approach  Fraud theory begins with an assumption and is then tested to determine whether it can be proven.  The fraud theory approach involves the following sequence of steps: o Analyze available data o Create a hypothesis – worse case scenario o Test the hypothesis – what if scenario o Refine and amend the hypothesis – determine whether a crime has been committed Tools Used in Fraud Examinations  The fraud examiner must be skilled in the examination of financial statements, books and records, and supporting documents o Must also know the legal ramifications of evidence, and how to maintain the chain of custody over documents  Interview – the process of obtaining relevant information about the matter from those who have knowledge of it o Evidence is usually gathered in a manner that moves from the general to specific o Interviews corroborative witnesses o Interviews suspected co-conspirators – from thought to be least culpable to most o Interviews the prime suspect  Observation Defining Occupational Fraud and Abuse The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets  Four elements common to these schemas: o Is clandestine o Violates the employee’s fiduciary duties to the organization o Is committed for the purpose of direct or indirect financial benefit to the employee o Costs the employing organization assets, revenues, or reserves Defining Fraud  Of the three ways to illegally relieve a victim of money – force, trickery, or larceny – all offenses that employ trickery are frauds  Under common law, 4 general elements that must be present for a fraud to exist: o A material false statement o Knowledge that the statement was false when it was uttered o Reliance of the victim on the false statement o Damages resulting from the victim’s reliance on the false statement  Larceny – stealing. In order to prove someone has committed larcey we would need the following 4 elements: (1) There was a taking or carrying away (2) of the money or property of another (3) without the consent of the owner and (4) with the intent to deprive the owner of its use or possession  Conversion – an unauthorized assumption and exercise of the right of ownership over goods or personal chattels belonging to another, to the alteration of their condition or the exclusion of the owner’s rights  Embezzle – willfully to take, or convert one’s own use, another’s money or property of which the wrongdoer acquired possession lawfully, by reason of some office or employment or position of trust  Fiduciary – someone who acts for the benefit of another  Breach of fiduciary duty consists: o A fiduciary relationship between the plaintiff and the defendant o Breach of the defendant’s (fiduciary’s) duty to the plaintiff o Harm to the plaintiff or benefit to the fiduciary resulting from the breach Defining Abuse  A corrupt practice or custom  Improper or excessive use or treatment: misuse  A deceitful act: deception Research in Occupational Fraud and Abuse Edwin H. Sutherland  White-collar crime – any financial or economic crime, from the mailroom to the boardroom  Believed the learning process involved two specific areas: the techniques for committing crime and the attitudes, drives, rationalizations, and motives of the criminal mind  Dishonest employees will eventually infect a portion of honest ones, but honest employees will also eventually have an influence of some dishonest ones Donald R. Cressey Cressey’s Hypothesis  “Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non shareable, are aware this problem can be secretly resolved by violating of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusts persons with their conceptions of themselves as users of entrusted funds or property”  Known as the “Fraud Triangle” o The first leg of the triangle represents a perceived non-shareable financial need, the second represents perceived opportunity, and the third stands of rationalization Nonshareable Financial Problems  The violator considered that a financial problem which confronted him could not be shared with persons who probably could have aided in the solution of the problem  Non-shareable problems arose from situations that fell into 6 basic categories: o Violation of ascribed obligations o Problems resulting from personal failure o Business reversals o Physical isolation o Status-gaining o Employer-employee relations  Non-shareable problems threatened the status of the subjects, or threatened to prevent them from achieving a higher status than the one they occupied at the time of their violation Violation of Ascribed Obligations  Strong motivator of financial crimes  The mere fact that a person holds a trusted position carries with it the implied duty to act in a manner becoming that status Problems Resulting from Personal Failure  Problems that a trusted person feels he caused through bad judgment, and for which he therefore feels personally responsible Business Reversals  The trust violators tend to see their problems as arising from conditions beyond their control: inflation, high interest rates, economic downturns, etc.  These problems are not caused by the subject’s own failings, but by an outside force Physical Isolation  The trusted person simply has no one to whom to turn Status Gaining  The offenders are motivated by a desire to improve their status Employer-Employee Relations  Most common situation: an employed person who resent his status within the organization in which he is trusted, yet who at the same time feels that he has no choice but to continue working for the organization  Strong motivator for the perceived employee to want to get even when he feels ill- treated  The Importance of Solving the Problem in Secret  The approval of groups important to the trusted person had been lost or a distinct feeling that present group approval would be lost if certain activity were revealed, with the result that the trusted person was effectively isolated from persons who could assist him in solving problems arising from that activity  Perceived Opportunity  All three elements must be present for a trust violation to occur  General information – the knowledge might come from hearing of other embezzlements, from seeing the dishonest behaviour of other employees, or just from generally being aware of the fact that the employee is in a position in which he could take advantage of the employer’s faith in him  Technical skill – the abilities needed to commit the violation  Rationalizations  Part of the motivation for the crime  Because the embezzler does not view himself as a criminal, he must justify the misdeeds before he ever commits them  Embezzlers usually rationalized their crimes by viewing them as: o Essentially noncriminal o Justified o Part of a general irresponsibility for which they were not completely accountable Independent Businessmen  Persons in business for themselves who converted “deposits” that had been entrusted to them  Common excuses: o They were borrowing the money the converted o The funds entrusted to them were really their and you can’t steal from yourself Long-Term Violators 
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