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.
Incentice
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 (Albrecht,
Hill, et al., 2006; Albrecht Turnbull, Zhang, & Skousen, 2010; Howe &
Malgwi, 2006). Specifically, about 95% of all fraud cases were influenced by
financial pressure, according to Albrecht, Hill, et al. (2006).
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). Holtfreter (2004)
suggested two mechanisms that organizations can use to prevent fraud. The first
is to implement pre-employment screening; the second is to implement mechanisms
(internal controls) during the course of employment. The system of internal
controls is clearly necessary for businesses’ success, which is critical for
businesses to have some types of controls in place to eliminate the opportunity
element.
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.
M.I.C.E 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
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.
My group consist of:
Lintang Maharani C1L014028(Me)
Junika Pentarosa C1L013025
Lalita Nadya Amalia C1L014014
International Accounting
Jenderal Soedirman University
