Question

Worldcom accounting fraud case. Identify how each element of the fraud triangle was present in the fraud. In addition, discuss internal controls that could have been in place to prevent the fraud from occurring.

Answer 1

FRAUD TRIANGLE

Fraud triangle is a framework which is designed /developed to describe the reasons for worker's mentality on commiting workplace fraud. It is otherwise an auditing process, done inorder to identify and explain the reasons for an occupational fraud done by the worker. Mainly there are three elements are present in the fraud triangle. And they are :

1. OPPORTUNITY
2. PRESSURE/INCENTIVE
3. RATIONALIZATION

Opportunity : It is one of the element in triangle which explains , the circumsatances for the occurance of a fraud. Opportunity is the element over which the owners of the businees have total/most control .  If one is thinking about any theft ,there must be anything to steal and also the way to steal. It is defined under the opportunity element. Irrespective of other elements, opportunity is very hard to spot, but at a same time it's control is an easy process. Let us site the examples that provide this element to commitig fraud:

• Poor management - A poor or weak management towards commiting ethical practices and following the ethical standards resulted in the company to be susceptible to fraud.
• inefficient internal control - Internal control is yet another factor , which resulted in commiting fraud.These are the process which ensures integrity and accountability to any of the organization. Therefore , inefficiency in such process resulted in fraud.
• Absence of accounting policies in the organization.

Pressure/incentive : Pressure/incentive in fraud triangle refers to the mindset of an employee towards commiting any occupational fraud. Pressure may refers to the personal situation of a employee which demands more money, may resulted to commit fraud. At other times, pressure also refers to the job related factors also, like; target achievements, target based salary , incentives etc. Examples for the pressure elements are:

• Target based activities
• Personnel incentives
• Expectation of management
• Performance based bonus.

Rationalization : It refers to an individual's explanation towards his/her activity of commiting fraud. Mainly there are two aspects for this elements, the first one is, fraudster's achievement /gain from commiting such activities, the second one is , justification of fraud. Examples are:

• Poor treatment from the top level management
• Unethical practices of top level management
• Wrong treatment of employees by the management.

INTERNAL CONTROLS TO PREVENT FRAUD

Internal controls are the plances and policies developed by an organization to control /prevent fraudlent activities in the workplace along with their easy detection. There are many performance to be presented for preventing frauds, and they are :

• Account reconciliation on a monthly basis is mandatory.
• Employees of the organization have to be treated well.
• Delegation of authority helps to create responsibility and dedication among employess
• A backgroung checking have to conduct for all employees and cotractors
• All the business records are to be maintained according the accounting standards and policies.
• All the intercomany transactions are to be reconcile on an monthly basis.
• In the case of fixed assets , a physical inventory process should be done.
• Costs and expenses have to be maintained under budgetary system, inorder to check and make comparison with the actual costs.