FRAUDULENT FINANCIAL REPORTING: SAFENET, INC. Instructions: Study the case that starts on page 3 carefully. Then write concise answers to the following questions regarding the SafeNet, Inc. Clearly label your responses with proper headings and subheadings. Be very specific and precise. Answers that appear to be beating around the bush will not get any credit. (1) Fraud and the Fraud Triangle: Two major classification schemes of fraud types exist in the fraud literature. One classification scheme identifies five types of fraud. The five types of fraud are (1) vendor, (2) customer, (3) management or financial statement, (4) investment scams, and (5) employee embezzlement. The second major classification scheme includes three types of fraud. These three types of fraud include (1) corruption, (2) asset misappropriation, and (3) financial statement. List the type(s) of fraud committed by Argo at SafeNet. Explain your response. (2) Fraud and the Fraud Triangle: List and discuss the elements of the fraud triangle as they relate to Carole Argo. The three elements of the fraud triangle pressure, opportunity, and rationalization appear in this case. (3) Describe the conditions at SafeNet, Inc. that allowed for the perpetration of this fraud. (4) Describe at least three specific internal control policies and/or procedures that would have helped to prevent the fraud described in the SafeNet case. Justify your response. (5) Red Flags are also known as Fraud Symptoms. List the red flags mentioned in the case. Provide justification from the case for the flags you identified. (6) List and describe two internal controls that you believe might have helped to detect this fraud. Explain how the internal controls you listed would have helped to detect this fraud. (7) Corporate Governance topic discussion: Please compare and contrast the corporate governance structure at SafeNet for these two periods (Pre-Sox 2 and Post-SOX). Do you believe the post-SOX changes in corporate governance served the purpose of preventing management fraud in terms of Audit Committee, Compensation Committee, and Board of Directors? Please justify your response. The face of corporate governance changed as a result of the Sarbanes-Oxley Act of 2002 legislation. An evaluation of SafeNets proxy statement before and after SOX provides a glimpse into some of these changes. Obtain SafeNets definitive proxy statements (filing type DEF 14A) for the meetings held on July 22, 2002 (pre-SOX) and July 28, 2006 (post-SOX) from the SEC EDGAR database (http://www.sec.gov/edgar/searchedgar/ webusers.htm). (Hint: filing dates will be earlier than the meeting dates.) Compare and contrast the corporate governance structure at SafeNet for these two periods. (Hint: begin with the 2006 meeting; search the proxy statement for Corporate Governance.) Your discussion should include, but not limit to, the similarities and differences between the two periods. Include in your discussion the purpose of the committees, the number of members, number of meetings, payment for attendance at meetings, and anything else you find to compare and contrast. Create a chart/table may be useful to assimilate information for each of the Board of Directors, the Audit Committee, and the Compensation Committee. 2002 Meeting 2006 Meeting (Fiscal Year 2001) (Fiscal Year 2005) Number of members Number of independent directors Number of meetings Pay for meetings (8) Consequences to Carole Argo and SafeNet, Inc.: Conduct research to determine the outcomes of the SEC v. Carole Argo and the U.S. DOJ v. Carole Argo. Describe the outcomes and the consequences imposed on Carole Argo. Document your sources.