Elements of the Fraud Triangle

Minkow 's business had been clearly a Ponzi scheme. He promised investors highly returns on the insurance restorations business, but in reality, investors were being repaid with money from new investors. Some of the loans were negotiated at outrageous rates of interest so that they were obtained fast enough to pay off earlier loans. ZZZZ Best did operate its carpet-cleaning business which differed itself from a typical Ponzi and the carpet-cleaning division won high marks for its quality.iii However, its insurance restoration division was totally a phony department and little real business existed.

1. The three aspects of fraud - Perceived pressure, Rationalization, and Opportunity were present in the CIT case as follows:

(TCO 5) Fraud is an intentional misrepresentation of facts, made for the purpose of persuading another party to act in a way that causes injury or damage to that party. In our readings and discussions we have seen several examples of fraud in business. Using that experience (1) provide an example of a common fraudulent practice in business with an explanation of how the practice works and (2) name and describe each of the elements of the Fraud Triangle.

Internal fraud consists in “a type of fraud that is committed by an individual against an organization. [Furthermore], a perpetrator of fraud engages in activities that are designed to defraud, misappropriate property, or circumvent the regulations, law, or policies of a company”[8]. Not only has the incidence of internal fraud increased in frequency because of the availability of sensitive information such as client details or confidential business documents; moreover, this type of fraud is found in various types of organizations, ranging from corporations, public service institutions and financial institutions. Our analysis will concentrate on the most common and prolific types of internal fraud, namely identity theft, insider trading, loan fraud and wire fraud. Interestingly, PriceWaterhouseCooper conducted a survey that revealed that the “demographics of a typical fraudster are as follows: males (85% of cases), 31-50 years (72% of cases), reached high-school level (50%), Bachelor’s or post graduate degree (50%) and middle or senior management (52%)”[9].

After reading the case, it was truly fascinating how a very young man, Barry Minkow, could pull off such a huge fraud and how greed and audaciousness can make someone become so unethical. The fact that a young man had a goal and would do everything and anything to make sure he reaches his goal led him to commit fraud through his fake insurance restoration business. It all started when he was 15 years old and was driven to be successful, so he began a carpet cleaning business but soon came to realize that he would make it big if he were in the insurance restoration business. The way he gained customers for his business was by calling channel 4 in Los Angeles, pretending to be a fact customer, and explaining to them how the 16-year-old owner

It is important to first gain an understanding of the various types of fraud, in order to aid understanding in regards to the prevention of fraudulent activity. This paper begins with a review of the definition of financial fraud, and identification of the different fraud types. Further, included is an examination of what motivates individuals to commit fraud, including an identification of some of the method in which people commit fraud. A discussion of the importance of the fraud triangle, and how rationalization contributes to fraud is a key area of focus. Finally, there is an examination of some controls that prevent and detect fraudulent behavior, including the value and importance of understanding the nature of fraud for

Fraud deterrence occurs in several stages, and the key is to know that prevention is not to same as deterrence. First is the impact of controls

Fraud is defined as an intentional deception, false statement or misrepresentation made by a person with the knowledge that the deception could result in unauthorized benefit to oneself or another person. It includes any act that constitutes fraud under applicable federal or state law. The Association of Certified Fraud Examiners (ACFE) reported in 2010 that they estimated the annual cost of fraud approaching 5% of an organization's revenues ($2.9 trillion worldwide). An example of an industry that has ongoing problems with fraud, is the healthcare industry. Since the 1960’s health care costs have risen from 28 billion dollars per year to an estimated 1.9 trillion dollars per year in 2004 (Snapshot, 2006). That rise in cost accounts for an average of 6,300 dollars per person per year spent on health care, compared to 3,600 dollars per person per year in 1994 (Snapshot, 2006). This paper will examine the current status of the healthcare industry, who commits fraud, types of fraud and recommendations for organizational leaders to put in place.

On April 21, 2001, Lee Farkas, the former chairman of a private mortgage lending company, Taylor, Bean, & Whitaker (TBW), was convicted for his role in a more than $2.9 billion fraud scheme (Schoenberg, 2011). This action contributed to the failures of Colonial Bank, one of the 25 largest banks in the United States, and TBW, one of the largest privately held mortgage lending companies in the United States. According to court documents and evidence presented at the trial, Farkas and his co-conspirators engaged in a scheme that misappropriated more than $1.4 billion from Colonial Bank’s Mortgage Warehouse Lending division and

5.6.1 There are several factors that can contribute to fraudulent activity. Firstly, the presence of the motivation for an employee to commit fraudulent action, such as being under financial pressure, having unmanageable debt or an addiction. Secondly, an opportunity to carry out fraudulent activities, such as poor internal controls implementation or wrong segregation of duties, coupled with a lack of physical security measures like CCTV cameras, locked money tins and boxes. Low ethical and moral standards of managers can lead to employees following the same pattern. Also, a lack of effective communication within the organisation, so that employees do not feel appreciated, or that their work is not valued. Common types of fraud are: illegal

Albrecht, Steve W. 2014. Fraud Magazine. Iconic Fraud Triangle Endures: Metaphor Diagram Helps Everybody Understand Fraud. Accessed at the Fraud Magazine’s website (March 6, 2014): http://www.fraud-magazine.com/article.aspx?id=4294983342

In Greenspan’s situation, his apparently reliable evidence was not from independent third party. When Greenspan confirmed the existence of ZZZZ’s insurance restoration contracts, he contacted Tom Padgett who at the time was an active and willing participant in Minkow’s fraudulent schemes.

Fraud is defined as a deliberate misrepresentation that causes a person or business to suffer damages, often in the form of monetary losses through deception or concealment. And Occupational Fraud as defined by the ACFE is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. Traditional fraud triangle theory by Donald Cressey explains that propensity of fraud occurring in an organization lies on three critical elements which are Pressure, Opportunity, and Rationalization.

Among the nine factors of the perfect fraud storm; the economy, incentives, and expectations all fulfilled the three elements of the fraud triangle providing the necessary motivation for management to succumb to

Professional skepticism practices as neutral but discipline approach to detection and investigation. Per SAS No. 1 it suggests that an auditor neither assumers that management is dishonest or assumes unquestionable honesty. Professional skepticism requires fraud examiners to “pull on thread” in which means Red flags are warning signal or something that demands attention or provokes an irate reaction. Red Flag symptoms of fraud may be divided into at least six categories: unexplained accounting anomalies, exploited internal control weaknesses, identified analytical anomalies where non