Question

Frauds are more likely to occur in which of the following?

1) large, historically profitable companies.
2) companies with an active board of directors.
3) smaller companies where one or two individuals have almost all control in decision making.
4) any company, as the probability of a fraud does not change with the size of a company.

Answer 1

Frauds are more likely to occur in smaller companies where limited oversight allows one or two individuals to control decision-making, unlike larger companies with active governance mechanisms like a board of directors and auditors.

Step-by-step explanation:

Frauds are more likely to occur in smaller companies where one or two individuals have almost all control in decision-making. These types of companies often lack the robust corporate governance and oversight that larger companies with active board of directors and external auditors tend to have. In larger, historically profitable companies, there is usually a board of directors elected by the shareholders that serves as the first line of defense against fraud, together with external auditing firms and outside investors who can exercise some level of oversight. Without these safeguards, small companies can more easily fall prey to the whims of the few individuals in control, making it easier to perpetrate frauds unnoticed. In contrast, an active board of directors is typically involved in overseeing the firm's management and ensuring the interests of shareholders, serving as a deterrent to potential fraudulent activities.