Fraud Triangle Theory
Employees should be cognizant of pressures and how
they relate to the school district’s and charter school’s overall fraud risk.
Rationalizations can be reduced by promoting a strong sense of ethical behavior
amongst employees and creating a positive work environment. By implementing
strong internal controls, the district can remove much of the opportunity for
fraud to occur and can increase the chances of detecting it.
Pressure
Pressure is what causes a person to commit fraud.
Pressure can include almost anything including
medical bills, expensive tastes, addiction problems,
etc. Most of the time, pressure comes from a
significant financial need/problem. Often this
need/problem is non-sharable in the eyes of the fraudster. That is, the person
believes, for whatever reason, that their problem must be solved in secret.
However, some frauds are committed simply out of greed alone.
Opportunity
Opportunity is the ability to commit fraud. Because
fraudsters don’t wish to be caught, they must also believe that their
activities will not be detected. Opportunity is created by weak internal
controls, poor management oversight, and/or through use of one’s position and
authority. Failure to establish adequate procedures to detect fraudulent
activity also increases the opportunities fraud for to occur. Of the three
elements, opportunity is the leg that organizations have the most control over.
It is essential that organizations build processes, procedures and controls
that don’t needlessly put employees in a position to commit fraud and that
effectively detect fraudulent activity if it occurs.
Rationalization
Rationalization is a crucial component in most
frauds. Rationalization involves a person reconciling his/her behavior
(stealing) with the commonly accepted notions of decency and trust. Some common
rationalizations for committing fraud are:
The person believes committing fraud is justified to
save a family member or loved one;
The person believes they will lose everything –
family, home, car, etc. if they don’t take the
money;
The person believes that no help is available from
outside;
The person labels the theft as “borrowing”, and
fully intends to pay the stolen money back at
some point;
The person, because of job dissatisfaction
(salaries, job environment, treatment by managers,
etc.), believes that something is owed to him/her;
The person is unable to understand or does not care
about the consequence of their actions or of
accepted notions of decency and trust.
Fraud Diamond Theory
Thanasak Ruankaew, 2016. Beyond the Fraud Diamond. Colorado,
United States
The FDT was first presented by Wolfe and Hermanson in the CPA
Journal (December 2004). It is generally viewed as an expanded version of the
FTT. Figure 2 presents the diagram for FDT. In this theory, an element termed
capability has been added to the three initial fraud elements of the FTT. Wolfe
and Hermanson (2004) argued that although perceived pressure or incentive might
coexist with an opportunity to commit fraud and a rationalization for doing so,
it is unlikely for fraud to take place unless the fourth element (i.e.,
capability) is also present. In other words, the potential perpetrator must
have the skills and ability to commit fraud.
Incentive
Every perpetrator must face some type of pressure to commit fraud.
Perceived pressure is defined as the motivation that leads the perpetrator to
engage in unethical behaviors. It is important to point out that perceived
pressures can occur with all employees at any level of the organization and can
occur for various reasons. Such pressure does not have to be real, if the
perpetrators believe they are being pressured, it can lead to fraudulent
behavior (Albrecht, Hill, & Albrecht, 2006). Although an individual may
demonstrate different motives, research has shown that fraud often occurs as a
response to economic pressures, and most pressures involve a financial need
such as greed, living beyond one’s means, large expenses or personal debt, poor
credit, personal financial losses, and an inability to meet a financial
forecast.
Opportunity
This is the second element necessary for fraud to occur. Opportunity
that exists in organizations has a major impact on an individual’s decision to
commit fraud. Rae and Subramaniam (2008) suggested that, if a susceptible
individual perceives opportunities due to a lack of or inefficient internal
controls and has the ability or power to exploit these opportunities, that
individual may perpetrate a fraud. Perceived opportunity is similar to
perceived pressure; the opportunity does not have to be real, the perpetrators
simply have to believe or perceive that the opportunity exists in order to take
fraudulent action (Albrecht, Hill, et al., 2006; Zikmund, 2008). Individual
factors such as financial need and personal issues are variables that
businesses cannot control; therefore, they can only decide how to react to these
factors through the use of internal controls (McClurg & Butler, 2006).
Rationalization
An attitude or morally acceptable rationalization needs to occur
before fraudulent behavior emerges. It is important to acknowledge that fraud
perpetrators sometimes do not view their actions as unethical; they merely
justify their actions as ethical before fraud takes place (Dorminey et al.,
2010). In other words, rationalization allows the fraudster to view his or her
illegal actions as acceptable. Jackson, Holland, Albrecht, and Woolstenhulme
(2010) concluded that, if a person cannot justify unethical actions, it is
unlikely he or she will engage in fraud. That person, however, may rationalize
those actions in different ways using various justifications. These are some
examples: “I am only borrowing,” “The organization can afford it,” “I deserve a
bonus or a raise but did not get one,” “Everyone’s getting rich, so why
shouldn’t I?” and “It is not really a serious matter” (Ramamoorti, 2008;
Zikmund, 2008).
Capacity
A person’s position or function within a company may give him or
her the ability to create or exploit an opportunity for fraud not available to
others. According to Wolfe and Hermanson (2004), the fraudster also has the
necessary traits and abilities to be the right person to pull it off, and that
this person has recognized this particular fraud opportunity and can turn it
into reality. Wolfe and Hermanson identified important observable traits
related to individuals’ capacity to commit fraud.
Those threats include:
(a) authoritative position or function within the organization;
for example, a CEO might have the ability to influence and perpetuate frauds
due to his or her position within the organization
(b) intelligence to exploit the accounting and internal control
systems’ weaknesses to the greatest advantage and have the ability to
understand how the system works
(c) ego and confidence that fraudulent behaviors will not be
detected, which will have an impact on their decision-making process; thus, the
more confident they are, the greater chance that they will commit fraud
(d) capability toeffectively deal with stress due to the risk of
getting caught and manage the fraud over a long period of time. That person
also must effectively and consistently lie to avoid detection and may even have
to persuade others to believe that fraud does not take place.
MICE
Fraud
Several models
and extended theories of fraud attempt to explain why individuals commit fraud
and financial crimes beyond the rationale afforded by the Fraud Triangle. These
additional models seek to identify supplementary psychological or sociological
antecedents (personality and behavioral characteristics) to describe those
tending toward fraud.
At this initial
step we relate the Fraud Triangle to the Triangle of Fraud Action and identify
an area around the Fraud Triangle where other theories and models are
informative. The area around the Fraud Triangle, Individual
Characteristics—Measures, Constructs, and Combinations of Hazard, is where we
introduce additional behavior and decision models that affect rationalization,
perceived opportunity, and financial pressure. One of the models in this area
is M.I.CE
Recent
discussions have suggested that the motivations of fraud perpetrators may be
more appropriately expanded and identified with the acronym M.I.C.E. (Kranacher
et al. 2011):
M : money
I : ideology
C : coercion
E : ego
(entitlement)
M-I-C-E modifies
the pressure side of the Fraud Triangle, as it provides an expanded set of
motivations beyond a non-shareable financial pressure. Money and ego appear to
be common motivations for fraud. Case histories of Madoff, Stanford, Enron,
WorldCom, Adelphia, Phar-Mor, and ZZZZ Best provide examples where the
convicted perpetrator appears to be motivated by ego or entitlement, as well as
money.
Ideology is
probably a less-frequent motivation for white-collar crime, yet examples come
to mind. First, tax evasion, where the perpetrator cites that ‘‘taxes are
unconstitutional’’ or ‘‘I pay enough taxes,’’ might be examples.
Coercion
describes the condition where an individual is unwilling, but nonetheless
pressured into participating in a fraud scheme. As an example, referring again
to the Walmart–Coughlin case, Patsy Stephens sued Thomas Coughlin claiming that
she was coerced into submitting vouchers and laundering the money through her
own bank account.
Scale
Fraud
The fraud scale was developed through an analysis of 212 frauds in
the early 1980s (Albrecht
et al. 1984).
The study was based on data obtained from internal auditors of companies that
were victims of fraud. Operationalizing
the fraud scale, the degree of fraud risk is determined by jointly considering three
criteria—pressure, opportunity, and integrity.
The
benefit of examining integrity is that an individual’s integrity can be
inferred from past behavior. For example, a person’s integrity is reflected in
his decisions as well as in his decision making processes. More importantly,
personal integrity affects the probability that an individual may rationalize
inappropriate behavior. For example, persons with greater integrity would be
less likely to form rationalizations for justifying inappropriate behavior. From
that perspective, integrity is a refinement of the rationalization construct.
Fraud
Pentagon Theory
Renewable theories that explore more deeply on
the trigger factors of fraud is
pentagon fraud theory (Crowe's fraud pentagon theory). This theory
was put forward by Crowe Howarth in 2011. The theory of fraud pentagon is an
extension of the previous theory of fraud triangle stated by Cressey, in theory
adds two more fraud elements are competence and arrogance.
Additional component on Fraud Pentagon which didn’t exist on Fraud
Triangle:
- Competence (competence) which is described in the theory of fraud pentagon has similar meaning to the capability / ability previously described in the fraud diamond theory by Wolfe and Hermanson in 2014. Competency / capability is the ability employees to ignore internal controls, develop a strategy of concealment, and control the social situation for personal gain (Crowe, 2011).
- Arrogance, according to Crowe, is attitude of superiority over the rights owned and feel that the company's internal controls or policies does not apply to him.
Fraud GONE Theory
GONE theory put forward by a thinker named Jack Bologne where
there are four reasons of fraud. "GONE" which stands for the first
letter of each factor put forward, namely Greed, Opportunity, Need, and
Exposure.
a. Greed (avarice / greed) is the desire to always get the most.
Greed is associated with an individual moral.
b. Opportunity (opportunity / opportunities) is a situation that
could come at any time. In addition, the chance is very dependent on a position
of a person. The higher one's position, the greater the chances of fraud.
c. Need (requirement) may be a contributing factor fraudulent
activity when a person needs (it can be said) is very urgent. Demands for
fulfillment is what then makes a person to take a shortcut to act fraudulently.
d. Exposure (disclosure) in relation to penalties fraud perpetrators.
With the unfolding of a fraud in the company did not rule out recurrence of the
same thing if given a sentence or a witness who is weak and does not pose a
deterrent properties.
Greed and Need is often referred to as the individual factors,
while the opportunity and exposure is referred to as a generic or common
factor.
Created by:
·
Lalita Nadya A (C1L014014) This is me.
·
Junika Pentarosa (C1L014025)
·
Lintang Maharani (C1L014028)
International Accounting
Jenderal Soedirman University
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