Fraud Triangle - Literature review Example

Fraud Triangle Literature Review This paper presents a critical review of the literature the fraud triangle as formulated by Donald Cressey. He proposed the fraud triangle consisting of pressure, opportunity, and rationalisation as a framework for understanding fraud and the fraudster. A person in a position of trust may encounter a personal or professional problem that he is unable to get to a resolution via means that have legitimacy within his social circles, and this creates pressure for him to find illegitimate means to solve his problems. Opportunity corresponds to the method by which a crime can be committed with a perceived low risk of being caught, and which can be undertaken in secret. In rationalisation, the fraudster justifies the crime to himself by way self-legitimising the fraud (Lou and Wang 2009; Antenucci, Tackett, Wolf and Claypool 2009). The literature notes that a key concept in the fraud triangle pertains to a shift in the perception of the person in positions of trust as potential “trust violators” (Kassem and Higson 2012). This transition occurs when a trusted person comes to see himself or herself as being in a financial bind that cannot be shared, and which the person knows can be remedied by undertaking actions that are in direct violation of the trust that is bestowed on them. The impetus to action comes from being able to rationalise their action from seeing themselves no longer as trusted people but as people with the right to use the funds that have been put in their trust. The key strength of Wilson (2004) is that it provides a concrete context for understanding employee fraud in terms of the fraud triangle. The advantage of Ramamoorti (2008) is in being able to provide a way to synthesize recent research into fraud as a prelude to enhancing the practice of fraud accounting A strong point in Kassem and Higson (2012) meanwhile is that it is able to situate the fraud triangle in relation to newer fraud models that can be used to provide a more comprehensive understanding of the motivations and capabilities of the fraudster. However, the collective weakness of the above sources is that they lack a more robust discussion of the links of the fraud triangle to more recent literature on fraud and criminal psychology in general (Wilson 2004; Kassem and Higson 2012; Ramamoorti 2008). More recent literature discusses white collar crimes that involve fraud from the point of view of such crimes embodying the three aspects of the fraud triangle (Morales, Gendron and Guenin-Paracini 2014). Such crimes stress by way of example how the inadequacy of process and organisational controls lead to many opportunities for fraud to succeed. A significant contribution of Morales, Gendron and Guenin-Paracini (2014) is that it provides a concrete example of the operation of the fraud triangle in a specific work context. Meanwhile, one area that remains unexplored in the above source is how the insights into the fraud-prone individual in organisations can help deter fraud in white collar contexts (Morales, Gendron and Guenin-Paracini 2014). The fraud triangle literature is vast. As a theorem in psychology it is tightly bound with advances in the field, and in related fields such as criminology. As such, even studies that come from business and accounting-related journals can be mined for valuable insights into how the fraud triangle helps advance psychological research, and vice versa. These include studies by Aghghaleh, Iskandar and Mohamed (2014) and of Murphy and Dacin (2011) that look at the implications of the fraud triangle for business processes and organizational checks and balances. Among the key contributions of Aghghaleh, Iskandar and Mohamed (2014) and of Murphy and Dacin (2011) are that they stress the fundamental psychological underpinnings of the fraud triangle. Meanwhile, their key weaknesses include their relatively shallow treatment of the links of the fraud triangle to newer research on the psychology of fraud (Aghghaleh, Iskandar and Mohamed 2014; Murphy and Dacin 2011). Meanwhile, more recent studies that combine insights into the fraud triangle with those from various criminological/psychological research inquiries reflect the wide application of the fraud triangle in research. For instance, research relating to planned behaviour theory and agency theory can be interpreted in light of the fraud triangle being a key concept that helps illumine both (Choo and Tan 2007; Cohen, Ding, Lesage and Stolowy 2010). The theory of planned behaviour or TPB attributed to Icek Ajzen in 1985 and as cited in Cohen, Ding Lessage and Stolowy (2010) is a theory in social psychology advances the proposition that the intentions behind the actions of individuals can be extrapolated with a high degree of precision from taking into account the individual’s subjective norms, the individual’s perception of his control over his behaviour, and the individual’s attitudes with regard to the behaviour. The TPB is used to dissect the opportunity aspect of the fraud triangle (Cohen, Ding, Lesage and Stolowy 2010). Agency theory as developed by Mitnick (2006) and by Jensen and Meckling posits that there is a fundamental agency problem in an arrangement where the interests of trusted agents diverge from the interests of a party that deposits its trust to such agents by necessity (Choo and Tan 2007). Such is the case with top management acting as agents on behalf shareholders or owners of the firms. Agency theory posits that such deposition of trust occurs with knowledge that agents can abuse their positions of trust to commit fraud. This latter theory is combined with insights from the fraud triangle to broaden the understanding of the nature of corporate fraud (Choo and Tan 2007). The fraud triangle in the context of these two theories helps in understanding the complex motivations and actions of agents on whom organisations deposit their trust. A key strength of Choo and Tan (2007) and of Cohen, Ding, Lesage and Stolowy (2010) is in generating insights from the literature on agency theory and the theory of planned behaviour that reveal how even the most rigorous organisational structures and incentives to check executive fraud can fail. This is because top management may find ways to perpetuate fraud. A key area for improvement for both sources in turn is in further expanding on the links between the fraud triangle on the one hand and agency theory and planned behaviour theory on the other, by way of helping organisations to better address the problem of fraud (Choo and Tan 2007; Cohen, Ding, Lesage and Stolowy 2010). The fraud diamond, in turn, adds the dimension of capability to the original three dimensions of the fraud triangle. An important strength of Aris et al (2013) is that it helps enhance the understanding of the fraudster and his capabilities. The key weakness of this source is its relatively superficial treatment of the fraud diamond and how it aids in profiling the perpetrator of fraud (Aris et al. 2013). Meanwhile, Wall (2012) makes further distinctions between those who are occasional or one-time fraudsters to those who are professional or predatory fraudsters. What differentiates these two sets of potential fraudsters is the motivation aspect of the fraud triangle. As such Wall (2012) helps us better understand how motivation can be the aspect that is most relevant in many cases of fraud. Wall (2012) has the strength of further refining our understanding of the how and why different people are more susceptible to commit fraud than others. Areas that are weak for Wall (2012) relate to the relatively shallow investigation of the influence of rationalization in the perpetuation of fraud (Wall 2012). Meanwhile, Murphy and Dacin (2011) provide an understanding of how the application of the fraud triangle leads to a deeper understanding of the psychology of the descent into crime for the fraudster. A key contribution of Murphy and Dacin (2011) is that it provides insights into how situational contexts can compel ordinary people who are not predisposed to fraud into becoming fraudsters. In many cases situational contexts can negate strong moral convictions, when the opportunity presents itself and the motivation to commit the fraud is strong. A weak area in Murphy and Dacin (2011) is that it does not provide enough evidence that its psychological pathways model is better than the fraud triangle in modeling fraud (Murphy and Dacin 2011). To provide an integrative assessment of the above discussion, the above literature sources have achieved some success in advancing new theories that deepen our theoretical understanding of fraud and the motivations and psychology of the fraudster, by using newer fraud models and leveraging newer insights from more recent academic studies into related psychological fields (Wall 2012; Ramamoorti 2008). The proceeding discussion further evaluates various relevant threads of new research on the fraud triangle and new theories of fraud that incorporate the fraud triangle. Referring to the recent research on situational factors preceding paragraph, situational factors that lead to fraud have deep foundations in the fraud triangle. While some situational factors can induce the commission of fraud, such as the presence of opportunities to commit fraud as outlined in the fraud triangle, other situational factors can also prevent fraud. Those situational factors are tied to the way the organisational climate is set up or the way that climate has evolved through time. For instance, research suggests that an organizational culture where people are made to aware of the errors in most ordinary rationalisations for committing fraud is a culture that helps prevent fraud (Murphy and Dacin 2011). Also a factor is the existence of situational contexts where obedience to a higher authority is ingrained as a powerful norm. In those contexts people are more compelled not to commit a fraud even when the opportunity and the motivation are present. These situational factors all link back to insights from the opportunity aspect of the fraud triangle (Murphy and Dacin 2011). Meanwhile, new psychological models of fraud, such as the model of psychological pathways of fraud (Murphy and Dacin 2011), attempt to improve on the fraud triangle by incorporating a dimension of the fraud triangle and then extending those with insights from new research. The psychological pathways of fraud model, for instance, aims to improve on the fraud triangle by dissecting and classifying the different psychological means to commit fraud. It lists three psychological fraud pathways that in essence include the third aspect of the fraud triangle, rationalisation, as one of the pathways (Murphy and Dacin 2011). The second of the three pathways is fraud committed with no awareness of the fraud, or inadvertent fraud. The third pathway in this psychological pathways of fraud model is fraud that is committed with rationality, done after weighing the benefits and the costs of committing the fraud. This third pathway differs from rationalisation in that it is a carefully measured act. It acknowledges that a fraud is potentially to be undertaken with no attempt at rationalisation implied (Murphy and Dacin 2011). To differentiate between rationality and rationalization, rationality implies the use of reason in a deliberate manner in order to perpetuate a fraud with intent. Rationality also implies that a person about to commit a fraud knows that it is a fraud, and reason is used to make the fraud a success. Meanwhile, rationalisation is more a psychological process where a prior decision to commit a fraud is made acceptable to a person (Murphy and Dacin 2011). Other lines of research leverage the criminological and psychological implications of Cressey’s formulation of the fraudster as violator of trust. Research proceeds from this formulation to profiling the person who commits fraud. Here the focus is on individuals who are not usual fraud suspects. Psychological factors can transform these individuals into likely perpetrators of crimes. Here some recent insights into groupthink and collusion among members of top management apply (Ramamoorti 2008). The emerging thinking is that formal controls in organisations that were originally designed to deter fraud by leveraging the insights from the fraud triangle are at present inadequate. This is because the understanding of the psychological makeup of the fraudster in all kinds of unmapped situational contexts is incomplete (Ramamoorti 2008). To be adequate and effective, such formal controls need to be crafted with insights from the more recent research on the psychology of the fraudster. Examples of this are the insights into the psychological fraud pathways in Murphy and Dacin (2011). Such formal controls also need to take into consideration how ordinary men can be tempted to commit fraud by circumstances, situations, and by little-understood psychological compulsions in various work, group and individual contexts. Integrating, these different lines of research give us a profound appreciation for the depth and profusion of new lines of research that have emanated from the fraud triangle. They also provide new insights into the dynamics of fraud that have practical applications in real-life contexts, and point the way towards further research (Ramamoorti 2008; Morales, Gendron and Guenin-Paracini 2014). 1 References Aghghaleh, S., Iskandar, T. and Mohamed, Z. (2014). Fraud Risk Factors of Fraud Triangle and the Likelihood of Fraud Occurrence: Evidence from Malaysia. Information Management and Business Review 6 (1). [online]. Available at: http://www.ifrnd.org/Research%20Papers/I6 (1)1.pdf [accessed 4/30/2015]. Antenucci, J., Tackett, J., Wolf, F. and Claypool, G. (2010). The Rationalization of Academic Dishonesty in Business Students. Journal of Business and Accounting 2 (1). [online]. Available at: http://asbbs.org/files/2010/JBA%202.1_Fall_%20March_2010_Online.pdf#page=78 [accessed 4/30/2015]. 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Available at: http://www.researchgate.net/profile/Jeremy_Morales/publication/260166571_The_construction_of_the_risky_individual_and_vigilant_organization_A_genealogy_of_the_fraud_triangle/links/004635332903b58e89000000.pdf [accessed 4/30/2015] Murphy, P. and Dacin, M. (2011). Psychological Pathways to Fraud: Understanding and Preventing Fraud in Organizations. Journal of Business Ethics 101. [online]. Available at: http://xa.yimg.com/kq/groups/20454064/2053203011/name/Psychological+Pathway+to+Fraud+Murphy+n+Dacin+2011.pdf [accessed 4/30/2015]. Ramamoorti, S. (2008). The Psychology and Sociology of Fraud: Integrating the Behavioral Sciences Component Into Fraud and Forensic Accounting Curricula. Issues in Accounting Education 23 (4). [online]. Available at: http://ww.w.jthomasniu.org/class/781/Readings/psychoffraud.pdf [accessed 4/30/2015]. Wall, J. (2012). The Power of Systemic Fraud: Implications for the Fraud Triangle from the Professional Investing Community. 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