Not-So-Fit-Bit is a high-tech company that designs, develops, manufacturers, markets, and services fitness-based wrist bands on a global basis together with software which can be integrated into any mobile phone so that a user can monitor their daily progress toward exercising goals.The Company introduced this innovative product two years ago, and presently has a substantial competitive lead in the market in both product innovation and price/performance relationship to the point where their worldwide market share for this product currently stands at 85%.At the same time, revenues and net income have increased substantially over the past two years, resulting in a tremendous increase in the Companys stock price and a current P/E ratio which is more than double the average P/E ratio of NYSE-listed firms.

Paul Jones was recently appointed as the CFO of Not-So-Fit-Bit.Paul has worked in the high-tech industry for various firms in various financial capacities, including corporate controller, treasurer, and assistant CFO, for 20 years as of the date of his CFO appointment.Paul took over the CFO role right after Not-So-Fit-Bit released record earnings for the fiscal year ended December 31, 2016, and after the Company filed its Annual Report on Form 10K for that year.The CEO of Not-So-Fit-Bit, Nancy Fitness, requested a meeting together with Paul and other members of management including engineering, product development, manufacturing, marketing, sales, and service a few weeks after Paul started in his CFO position.In this meeting, Paul noticed that each member of management appeared to be totally stressed out and the tension in the meeting room was high as soon as the meeting started.The meeting started with sales and marketing showing the management team that sales had slowed significantly in the first quarter.Engineering updated everyone with the news that Apple had announced a new wrist-band exercise monitoring product line and introduced it to the worldwide market with extensive fanfare two weeks ago, with both pricing and performance that exceeded Not-So-Fit-Bits main wrist band product line.Manufacturing reported significant product quality issues were occurring, especially with the raw materials used in producing the main wrist band product line.The meeting ended with very few positive comments by the members of the management team present at the meeting.

After this meeting, Paul went back to his office, as Nancy asked Paul to update the Companys quarterly and coming years projections of revenues and net income compared to budgeted levels.The Companys IT and Internal Audit Departments report to Paul, as well as the traditional accounting functions including the Corporate Controller. Paul noticed since he started that members of each of these departments including the IT Director, the Internal Audit Director, and the Corporate Controller and many members of their staffs, were working extremely large amounts of overtime and weekends.Paul met with each of these Department heads to get an update on the status of the current quarter numbers, the budgets, especially revenues and expenses, and Paul was led to believe that the Company was on target to meet external revenue and profit expectations for the current quarter.

The first quarter ended on March 31.The books were closed, and despite all the information Paul listened to at the CEOs management team meeting just a few weeks earlier, the Company indeed met the current quarters revenue and profit expectations.

Which element(s) (parts) of the fraud triangle can be applied to the situation occurring at Not-So-Fit-Bit?For the element(s) you selected, apply it (each) to the facts of the case.

2. You are partner in a small, local CPA firm.One of your clients is the sole owner of a 20-year old, rapidly growing, successful firm.The owner is getting frustrated with the amount of losses she is experiencing due to fraud.You estimate that she is losing about 7% of revenues each year due to fraud.

What frustrates the owner is not only the amount of fraud losses, but how such behavior is inconsistent with the culture she has tried to build in the firm.While the firm has grown to a little over 500 employees, making it impossible for her to know every one of them, she still tries to build a sense of family within the organization.For example, she tries to personally interview each prospective new employee before they are hired.However, she has asked her Personnel Department not to do extensive background checks on employees because she feels that would signal a lack of trust by management towards the employees.

Part of the owner's efforts to build a sense of teamwork and family within the organization has led to a "hands off" approach to management.When the firm was smaller, she used to have a liberal, personal open door policy, but had to drop it when the firm grew too large.She still maintains the policy, but only for the managers that report directly to her.

You have determined that the company has adequate controls in place, and the owner tries to ensure that people dont override them.However, she believes that as the owner, she wouldn't steal from herself so she periodically overrides the controls herself.

Employees have been caught in fraudulent activities in the past, but the owner has never bothered prosecuting them.She doesn't want the negative publicity that would result and she believes that publicly humiliating former employees would undermine her efforts to build a family atmosphere within the firm.

What aspects of the company would you recommend she change in order to reduce the amount of fraud that is occurring?