Question

what is fraud triangle? what 3 pressure can lead to the fraud?? advantages and disadvantages of each method of accounting information system

Answer 1

The Fraud Triangle

The fraud triangle is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components which, together, lead to fraudulent behavior:

1. Perceived unshareable financial need

2. Perceived opportunity

3. Rationalization

The fraud triangle is a framework used to explain the motivation behind an individual’s decision to commit fraud.The fraud triangle consists of three components: (1) Opportunity, (2) Incentive, and (3) Rationalization.Fraud refers to the deception that is intentional and caused by an employee or organization for personal gain.

Examples that provide opportunities for committing fraud include:

1. Weak internal controls

Internal controls are processes and procedures implemented to ensure the integrity of accounting and financial information. Weak internal controls such as poor separation of duties, lack of supervision, and poor documentation processes give rise to opportunities for fraud.

2. Poor tone at the top

Tone at the top refers to upper management and board of directors’ commitment towards being ethical, showing integrity, and being honest. A poor tone at the top results in a company that is more susceptible to fraud.

3. Inadequate accounting policies

Accounting policies refer to how items on the financial statements are recorded. Poor (inadequate) accounting policies may provide an opportunity for employees to manipulate numbers.

Advantages:

The Fraud Triangle is a theory that was developed by criminologist Dr. Donald Cressey. Cressey, who primarily focused on embezzlers in his research, hypothesized that there are three factors that must be present in order for a person to commit fraud. These three factors are: opportunity, pressure and rationalization. With these three circumstances in place, people are more likely to commit fraud. However, there are ways to prevent this, and we do not mean credit card processors fraud. We mean inside fraud. We have listed five helpful tips that will allow you to mitigate the fraud triangle and even eliminate some of the contributing factors of fraud.

The fraud triangle, as mentioned above, is comprised of three parts. The first of these is pressure on the individual. The second is the opportunity is present to commit fraud. The third, and final, component is the ability of the individual to rationalize their wrongdoing. The fraud this leads to can be something as little as wrongfully using a cell phone company account or as grave as embezzling tens of thousands of dollars. Now that you know what the fraud triangle is, keep reading below to learn how to prevent it.

Zero Tolerance

The first thing that you can do to prevent fraud in your company is to establish a zero tolerance policy for fraud. The key here is to eliminate the “rationalization” factor of the fraud triangle. Many employees can convince themselves that what they are doing is not truly wrong, either because they are using the embezzled money to help their family, or because higher-ups are embezzling even more money. You can prevent this type of thinking by making it clear that no fraud of any kind will be tolerated for any reason.

Code Of Ethics

In addition to the zero tolerance policy, you can also help to eliminate the rationalization factor of the fraud triangle by promoting your company’s code of ethics. First, you should go over enterprise wide conduct and ethics policies. Review them to ensure that they send the right kind of message to your employees when it comes to fraud. Simply encouraging them to adhere to the simpler moral standards of your business can significantly reduce their chances of committing fraud.

Internal Controls

Another important factor to eliminate in the fraud triangle is opportunity. This is entirely preventable with the proper set of checks and balances. Setting up internal controls for the flow of money throughout your organization is essential to preventing white collar crime. No single employee should have unchecked access to your company funds. Instead, maintaining levels of accountability will help keep fraudulent employees at bay.

Random Audits

Unlike checks and balances, random audits do not directly eliminate the opportunity to commit fraud. However, they do help. Having random audits of your Quickbooks payroll account and similar software will limit an employee’s chances of successfully embezzling money. This system is especially important because it is unpredictable. which will keep employees on their toes.

Report System

Lastly, you can help protect your business from fraud by developing a report system for all-level employees. That is why this is oneo f the most popular small business trends of the moment. By encouraging your employees to keep a vigilant eye out for fraudulent acts, you are creating a culture of accountability. Providing them with a way to report suspicious activity is another important step. Create a safe, private way for employees to come to you about potential problems.

The fraud triangle is based on three important factors: pressure, opportunity and rationalization. Eliminating opportunity and rationalization are two of the easiest ways that you can prevent fraud in your company. Refer back to this post the next time you are reviewing your business’s policies for preventing fraud and consider utilizing some of these tips. This will also be incredibly useful if you plan on buying an existing business. No matter what type of business owner you are, always brush up on the fraud triangle to prevent fraud at your organization.

Disadvantages:

1.The fraud triangle is not a general theory of crime and cannot explain every occurrence of fraud (see
Hirschi & Gottfredson, 1989).1. Pressure, opportunity, and rationalisation do not need to converge and bepresent in all fraudulent acts.
2. The fraud triangle does not adequately address the predatory fraudster and those that are better organised.

2.Non-shareable financial pressure is an incomplete
descriptor of the fraudster’s motivation (see Dorminey et al., 2010).The pressure to commit the fraud does not need to be non-sharable and financial.
3.Opportunity does not address collusive behaviour and management overrides (see Alleyne & Howard, 2005; Dorminey et al., 2010; Lokanan,2014).Opportunity does not take
into consideration criminalcooperation, i.e., the process in which individuals pool their expertise to commit fraud.4.1. Rationalisation is not observable (see Murphy, 2012).
2. Some fraudster does not need rationalisation to commit fraud (see Murphy & Dacin, 2011).1. Rationalisation cannot be quantified and measured.
2. The predatory fraudster does not need to rationalise
her/his action; all s/he needs is an opportunity to act.

Pressure/Incentive - The perpetrator has some sort of motive or reason for committing the fraud. For example, the perpetrator might feel significant pressure due to personal financial concerns caused by gambling, uncontrolled spending or significant medical costs.

• Rationalization - The perpetrator can somehow mentally justify (i.e. rationalize) his/her actions. For example, in order to rationalize his/her behavior, the perpetrator might say "I am only borrowing the money and will pay it back later".

•   Opportunity - The perpetrator has some means of accessing the resources needed to commit the fraud. For example, the perpetrator might be a "trusted" employee into which the sole proprietor (Links to an external site.) has entrusted all accounting functions, such as receiving, recording, and reconciling customer payments. In this case, the employee would have the opportunity to steal customer payments AND cover the theft up in the accounting records.