Question

Q4-2 This simulation question available sources is based upon a true set of facts. The information contained in the simulation question was What is the Relationship Between the Fraud Triangle and Financial Statement Fraud? -

Required First, search the Internet or refer to textbooks to learn as much as you can about the Fraud Triangle. Then, answer the following:

1. What is the Fraud Triangle? Discuss your understanding of the Fraud Triangle and give examples of financial statement fraud for each of the Triangle: (a) Opportunity-give real or hypothetical examples in financial statement fraud. (b) Pressure-give real or hypothetical examples in financial statement fraud. (c) Rationalization -give real or hypothetical examples in financial statement fraud. e: Remember to cite references/sources from the Internet or textbooks.
2. How can the Fraud Triangle detect/prevent financial statement fraud? Discuss how each of the three elements of the Fraud Triangle can detect/prevent financial statement fraud (a) Opportunity- explain how this element can detect/prevent financial statement fraud. b) Pressure- explain how this element can detect/prevent financial statement fraud how this element can detect/prevent financial statement fraud

Answer 1

The Fraud triangle is a framework designed to explain the reasoning behind a worker’s decision to commit workplace fraud

a) the opportunity

is the means by which the individual will defraud the organisation. In this stage the worker sees a clear course of action by which they can abuse their position to solve the perceived unshareable financial problem in a way that – again, perceived by them – is unlikely to be discovered. In many cases the ability to solve the problem in secret is key to the perception of a viable opportunity.

b)Pressure

is the motivation behind the crime and can be either personal financial pressure, such as debt problems, or workplace debt problems, such as a shortfall in revenue. The pressure is seen by the individual as unsolvable by orthodox, legal, sanctioned routes and unshareable with others who may be able to offer assistance.

example of a perceived unshareable financial problem is gambling debt. Maintenance of a lifestyle is another common example.

c) Rationalization

s the final stage in the fraud triangle. This is a cognitive stage and requires the fraudster to be able to justify the crime in a way that is acceptable to his or her internal moral compass. Most fraudsters are first-time criminals and do not see themselves as criminals, but rather a victim of circumstance. Rationalisations are often based on external factors, such as a need to take care of a family, or a dishonest employer which is seen to minimise or mitigate the harm done by the crime.

Identifying and combating risk factors
Businesses should begin by assessing their baseline risks. Many organizations possess certain intrinsic traits that render them particularly vulnerable to fraud, including:

• The handling of large amounts of cash
• Inventory items or assets that are susceptible to removal and/or resale
• Overly ambitious earnings demands from investors or creditors
• Complicated financial operations

In some cases, there’s little a business can do to eliminate such characteristics; a company that manufactures pocket-sized widgets will necessarily carry an inventory of easily misappropriated items. Organizations must therefore develop quick-response plans that they can immediately deploy upon discovery or suspicion of fraud.

The plan should include mobilization of an investigative team composed of a white-collar crime attorney, a certified fraud examiner and a forensic technology specialist, among others.

Motivation

A perpetrator’s motivation may grow out of financial need caused by greed, addiction, gambling, poor investments, business reversals or an extravagant lifestyle. It may be work-related, rooted in employee dissatisfaction or the perception of questionable management integrity. A perpetrator also may find motivation simply in the challenge of outsmarting the system.

Opportunity

Opportunity represents the only element an organization has any chance of controlling; removing the opportunity may derail potential frauds. Opportunities can come in the form of insufficient job applicant screening, inadequate policies and procedures, overly broad access to information, failure to segregate financial duties and ineffective monitoring of controls.

Rationalization

Rationalization allows a perpetrator to reconcile his unethical actions with his own values. The perpetrator must be able to neutralize the fraud in his mind and push aside any consideration of the possibility of inflicting injury on others. Employees who hold a grudge against their employer, for example, find it easier to commit fraud based on rationalizations such as, “They don’t pay me what I’m worth; I’m only taking what I deserve,” and “Management is dishonest, so I can be dishonest, too.” Others rely on rationalizations such as, “I’m only borrowing the money and will repay it as soon as I can,” “The company doesn’t need the money,” or “The company can afford to write it off.

Pre-emptive measures

Formal anti-fraud programs, including adequate internal controls, can go a long way in preventing and controlling fraud. According to the ACFE survey, the single most effective method of detecting fraud is through a tip line.

The ACFE also recommends internal audits, background and reference checks on employees and applicants, and external audits. Management should develop and implement a clear antifraud policy before fraud becomes a problem, and make the consequences of noncompliance, for both the company and the perpetrator, well known to all employees on a regular basis.