The Theory of the Fraud Triangle - Report Example

Fraud analysis triangle Literature review Fraud analysis triangle Cressey, (1973), introduced the theory of the Fraud Triangle. According to him, fraud occurs when the elements of opportunity, rationalization and motivation (pressure) are present. The pressure to commit a fraud may emanate from financial challenge the offender is facing or out of pure greed. Cressey (1973) indicated that through rationalization, offenders are able to justify their fraudulent behavior. When this happens, they do not interpret the fraudulent behavior as a crime. The offenders may take the moralistic approach where they argue that they are taking the money to assist the less fortunate in the society. Others may promise themselves that they will return the money back in future. Cressey (1973) asserted that the weak internal control in many organizations provide an opportunity for people to commit fraud. These may include the lack of review and oversight of all the activities taking place within an institution. While Cressey contributed immensely to the understanding of why fraudulent behavior is perpetuated in many institutions, there is question of whether potential offenders are able to effectively manage drives, and motives to prevent crimes from happening. His theory also seems to generalize fraudulent crimes in institutions. In their contribution to fraud triangle theory, Schuchter & Levi (2013) echoed most of the assertions made by Cressey. They cite opportunity, motivation and rationalization as the main reasons offenders commit crimes. The opportunity for crimes comes because of lack of punishment for those who have been found to be guilty. In an aim to protect the reputation of their companies, managers fail to disclose fraudulent behavior, hence creating an opportunity for the perpetuation of crime. The book has similar weaknesses as that of Cressey in the sense that it does not state why some people are more prone to crimes than others are. Boulter and Bhattacharya (2013) indicated that institutions were to blame for the increased fraudulent crimes. The authors were referring to the increased opportunity to criminal acts in many institutions. They defined fraud as the use of one’s occupational position to enrich oneself through the misuse of organization’s assets. Managers have been blamed for not been keen at ensuring that employees do not access company’s assets. This is attributed to lack of a strong internal control system in an organization. While Boulter and Bhattacharya (2013) also mentioned rationalization and motivation as determining factors to crimes, they concentrated more on opportunity factor. Their main argument is that opportunity is the main contributing factor. However, unless the motivation and rationalization factors are eliminated, even with strong internal controls, fraudulent behavior will still occur. OGrady (2011) indicated that it was not possible to address one of the factors of fraud triangle at the expense of the other. While rationalization and motivation are psychological in nature, OGrady (2011) indicates that they must be addressed. This book’s main strengths are that it aims at addressing the three major factors contributing to criminal behavior. However, the book does categorically state how organizations are able to eliminate factors such as motivation to crimes or rationalization. In their book, quality of internal control procedures, Rae and Subramanian (2008), seem to blame companies for fraudulent crimes. They state that ineffective leadership, characterised by weak processes, procedures, and lack of management review and oversight were to blame for increased fraudulent incidences. This is especially where the company has not automated its processes to ensure sharing of information. The authors stated that management plays an imperative role in controlling criminal fraudulent behavior. However, the authors seem to put more blame on the company than on the offenders. The latter have also a role to play in ensuring that the vice is not perpetuated. Even with strong internal control and leadership, offenders will manipulate the existing processes and procedures to defraud a company. Hence, a holistic approach to fraudulent behavior in organizations is needed. Wells (2009) echoed similar sentiments stating that lack of a strong organizational culture was a major cause of fraudulent behavior. However, the author has also mentioned that strong internal control and oversight cannot eliminate the behavior. The main goal should be to ensure that the management creates a favorable environment where effective communication and strong bonds with employees can be fostered. The main assumption by the author is that most of the employees engage in fraudulent behavior just to settle some issues they have with a company. This may include lack of incentives from the company or work overload. The author indicates the need to promote employee satisfaction as a way of preventing fraudulent behavior. The main weakness of this book is its assumption that employees in lower managerial level commonly commit white-collar crimes. This is a biased view owing to the fact that those in top managerial positions mostly perpetuate major scandals (Friedrichs, 2009). Friedrichs (2009); and Koller (2012), conducted a study of white-collar crimes in different institutions. They wanted to find out how the theory of fraud triangle applies. People who hold different positions in companies commit the white-collar crimes. Contrary to the perception economic factors prompt criminal behavior, the research by these authors indicated otherwise. They found that a majority of those who committed criminal acts were likely to be those who earn huge salaries and occupying top positions. Hence, Friedrichs (2009); and Koller (2012) rejected the notion fraudulent people who were economically unstable committed crimes. Instead, the authors indicated that greediness and weak morals were the main factors that led to increased criminal behavior in most institutions. The authors also indicated that while strong internal control and leadership was vital in prevention of criminal behavior, a lot needed to be done. This would include the need to focus on motives prompting offenders to engage in crimes. The main strength of the books is that it has been able to eliminate the notion that fraudulent crimes are only committed by those who are economically challenged, and in lower managerial positions. In most institutions, prosecution of the prominent members is almost impossible because of the kind of political influence they possess (Friedrichs, 2009). However, both books did not state categorically, what needs to be done to ensure that those holding top positions in institutions do not perpetuate the fraudulent behavior. Wilks and Zimbelman (2009) also conducted a study with an aim of finding out the main causes of white-collar crimes. Their findings were different, though the triangle theory of crime has been demonstrated. The author focused more on the organizational culture, especially in terms of the relationship between employees and employers. Job insecurity could be one of the main contributors to fraudulent crimes. Employees may decide to steal from an organization when they are not assured of the future of their employment contract. The employee also cited lack of employee motivation and job satisfaction as other likely causes of fraudulent crimes. They indicated that even after addressing the challenge of opportunity, failure to focus on employee welfare could not curb crimes. The book’s main weakness is that the author does not clearly state the role of potential offenders in preventing the white-collar crimes. Tessier (2012) indicated that motivation, justification and opportunity need to be controlled to ensure that fraud in the institutions could be curbed. According him, while punishing those implicated in crimes could deter the repeat of such behavior in future, it is not the most effective strategy. The main aim should be to focus on educating the employees on the need to remain honest in their business transactions, and adhere to the set procedures and processes. Through seminars touching on fraudulent behavior, organization can address the challenge of rationalization and motives, which are psychological in nature. Tessier (2012) agrees that two of the strongest forces that prompt people to commit crimes are motives and opportunities. The author has indicated the importance of incorporating the psychological approach in addressing the challenge of criminal behavior. however, the author did not expound on how the psychological approaches would be used, and how this will be done in insurance companies. The arguments in the book are sound, hence applicable in curbing fraudulent behavior in the institutions. The book provides systematic strategies that need to be applied in reducing white-collar crimes. The book has also put the blame on the offenders rather than the institutions, indicating that unless offenders change their attitudes, war on fraud will not be won. References Boulter, T. and Bhattacharya, S. 2013, Motivation for occupational fraud: an analysis of the fraud triangle using economic logic, International journal of interdisciplinary organizational studies, vol. 7, and pp. 47-59 Donald R. Cressey, Other Peoples Money (Montclair: Patterson Smith, 1973) p. 30. Friedrichs, O. (2009). Trusted Criminals: White Collar Crime in Contemporary Society (4 Ed.). Wadsworth Publishing. p. 50. ISBN 978-0495600824. Koller, A. (2012). "White Collar Crime in Housing: Mortgage Fraud in the United States." El Paso, TX: LFB Scholarly. ISBN 1593325347. ISBN 978-1593325343 OGrady, W. (2011). Crime in Canadian Context: Debates and Controversies (2 Ed.). Oxford University Press. ISBN 9780195433784 Rae, K. and Subramanian, N. (2008).Quality of internal control procedures: Antecedents and moderating effects on organizational justice and employee fraud, managerial auditing Journal, 23(2): 104-124 Schuchter, A. & Levi, M., 2013. The fraud triangle revisited. Security, Journal, 2(13), 1-24 Tessier, D. (2012). The Fraud Triangle Theory, How a three-pronged approach can improve your bottom line. Wells, Joseph T. (2009).Principles of Fraud Examination. Wiley. ISBN 978-0-470-12883-1 Wilks, T. and Zimbelman, M. (2004). Decomposition of Fraud-Risk Assessments and Auditors’ Sensitivity to Fraud Cues. Contemporary Accounting Research, 21 (3):719-745 Read More