Fraud Triangle Not Good Enough

Appendix A.2 also lists several factors that could provide opportunities for management/employees to commit fraud. One factor that could lead to fraud is if, “There is ineffective monitoring of management as a result of: domination of management by a single person or small group without compensating controls.” The auditors should have taken notice of the lack of controls and segregation of duties with respect to Phar-Mor’s

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

The guardian also indicates that due to economic recession, white collar crime has been pushed to new levels with high rates of fraud continuing to dominate the second half of 2009 (Allen, 2009). This example by the Guardian is just a tip of the iceberg that pinpoints the fact that white collar crime has continued to escalate not only in the United Kingdom but also across the globe. Unfortunately, this type of crime has not received the attention and the intervention it deserves as other crimes continue to be given a priority in curbing them.

Not to our surprise, the employee would almost always choose their economic stability over their integrity. It is still not easy to say that the employee’s conscious didn’t warn them of the risks, the first time. It begins with just a simple upgrade tune up and then trickles to $1,000 in new auto parts. If we look back at the Sear’s auto mechanic example, a mechanic could easily convince the customer that their car needed a whole new system because of the customer’s lack of knowledge of the subject. The customer automatically assumes there is a guaranteed trust commitment to their service, but in turn gets fooled. The evidence unearthed by investigators found nearly identical reports of cheating at one Sears auto repair shop after another.

(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].

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 is an issue that causes major scandals, although it is a very ancient scheme. Recent fraud events gave light to gaps that facilitated its events. Its extent was drastic by affecting financial markets that eventually trickled into global markets. Major organizations and countries worked cohesively and continue to address the gaps and, in effect, implemented strict compliance regulations to diminish and refrain fraudulent activities. Strict compliance regulations are examples of a fraud response plan the small family business could have implemented to refrain the perpetrators from fraudulent incidents, protect organizational assets and the organization’s going concern.

As we drill down into the world of identity theft a little deeper, the Association of Certified Fraud Examiners (ACFE) uses Cressey’s, “Fraud Triangle”, to assist in explaining fraud and how it can be applied to identity theft as there are three (3) factors in the triangle: Pressure, Opportunity, and Rationalization. (ACFE). In the pressure stage, this is usually the motivation of the crime. In the Opportunity stage, the would be criminal has an open window if you will to gain the vital information of the victim. In the final stage of rationalization, the would be criminal now transforms themselves into a modern day Robin Hood where they steal from the victims and give to the poor or in this case; the greedy.

Some industry-specific factors, such as having valuable near-cash assets, can increase the organization's vulnerability. Also they will need to rationalize the actions as justifiable. The individuals committing the fraud must first convince themselves that their behavior is acceptable or will be temporary. For example, Barry Minkow’s believed that the lies and deceit are for the betterment of his company and that with time everything will eventually return to normal.

The second part is opportunity. The opportunity to commit fraud usually arises through weak internal controls.

Fraudulent, erroneous, and illegal acts committed by a public company, usually at a managerial or executive level, have been a very serious problem for many years and have prompted development of strict and updated regulations, such as the Sarbanes-Oxley Act, in an attempt to prevent these occurrences. Unfortunately, these new or updated regulations are not enough to prevent these acts from happening, thus not alleviating the auditors of their responsibility to detect fraud. Some methods that management and auditors can employ to prevent and detect fraud, errors, and illegal acts are: improving knowledge, improving skills,

“The first leg of the fraud triangle represents pressure. This is what motivates the crime in the first place. The individual

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