Good Critical Thinking On B) explain How Assurance Services Could Have Exposed The Fraud That You Chose In Part (A) Of This Question.
1. From the United Way of America case:
a) Choose one of the charities that experienced fraud. Explain how the three elements of assurance are present in the case (asymmetric information etc.).
In the United Way charity, there were several fraud charges against its long serving president William Aramony. He was found guilty of embezzling millions of dollars that belong belonged to the charity and used them to finance lavish trips around the world and his amorous pursuits.
The first element of assurance that is present in this case is different goals. Those people donating to this charity intended to help the causes that were supported by United Way since at that time it was the largest charity in America. William used football games to promote the charity and get more people to donate to the charity. On the other hand, William used the money to finance a lavish lifestyle and his love affairs. It is safe to speculate that William used theses football game adverts to get money that would support his luxurious lifestyle. This incongruence in the goals of the donors and those of the charity’s president is an element of assurance.
The second element of assurance present in this case is informational asymmetry. During these games, the potential donors got the message that the money they were going to donate was going to help thousands of charities across the nation. What they did not know was that the president of the charity was living a lavish lifestyle that was not commensurate with the salary that he was earning. Would they have known that, maybe they would not have contributed to the charity since they would have concluded that William was embezzling money from the charity to fund this lifestyle. This informational asymmetry is the second element of assurance present in this case.
The third element of assurance is profit making from misleading claims. United Way’s president had a lot to gain from painting the charity as a source of help for other charities. People donated a lot of money to the charity which he in turn used to fund his extravagant lifestyle. Since the charity was growing in leaps and bounds under his leadership, he was able to avoid scrutiny because the charity was doing so well.
First, one needs to engage the services of someone who is well versed with the day to day operations of a charity and how its finances are managed. This expert would have known where to look and thus be able to identify fraudulent activities easily.
Secondly, the criteria he would have been asked to use is to follow the money trail and audit the accounts of all the charity’s employees. While following the money trail, he would have realized that the sum of the money that was donated to the charity was not equal to the money that was used to run the charity plus the money that was disbursed to other charities.
An audit of the charity’s employees would have revealed that some of them, such as the president, were living way beyond their means. This would have exposed the fraud in the charity.
2. Go to the website. Read about how this group comes up with its charity ratings.
a) Do you think Charity Watch is providing assurance about these charities?
Yes, it provides assurance about charities.
b) Why (or why not)?
This is because potential donors can go the website and look at how the charity they intend to donate to spends its contribution. The donor can also see what percentage of his contribution will go to supporting a cause and what percentage will be spent on the charity’s overhead expenses.
c) Disregarding your answer to part B, do you think the group is qualified to evaluate the criteria it uses when rating charities? Explain.
Yes, because it has access to all the documents that regard the charities such as tax returns and financial reports. It also has the technical knowhow on how to interpret this information and is aware of the tactics that charities use so as to increase their ratings. The group is independent and thus has the capability to give unbiased information. The group’s website communicates its findings to all interested parties throughout the world; this makes the information easily accessible.
I am a door to door car insurance salesman. I am responsible for selling car insurance to people who do not have car insurance or to those who want to change their insurer. My employer sells all types of insurance from life insurance, to health, fire and car insurance.
My employer receives assurance from doctors for health and life insurance, from mechanics for car insurance, from building inspectors for house insurance and from property valuers for car, house and fire insurances. This information is important to my employer since it helps him determine the real value of insurance cover that he needs to give.
Those seeking health insurance might lie about pre- existing illnesses so as to get a larger insurance cover or to be covered for diseases that they already have. Car owners and house owners may lie about the real value of their property so as to get a larger cover. Car owners may want to insure a car that has defects so as to get the insurer to pay for repairs; a mechanic ensures that the car is in good condition.
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