Explain Each of the Three Sides of the Fraud Triangle

question 8

Essay

Explain each of the three sides of the fraud triangle with respect to how it contributes toward the possibility that fraud in the financial statements may be present.Are there differences with respect to how each element might influence occupational fraud and fraudulent financial statements? Explain.
One of the older and more basic concepts in fraud deterrence and detection is the "fraud triangle." While researching his doctoral thesis in the 1950s,famed criminologist Donald R.Cressey came up with this hypothesis to explain why people commit fraud.
The three key elements in the fraud triangle are opportunity,motivation,and rationalization.Opportunity is the element over which business owners have the most control.Limiting opportunities for fraud is one way a company can reduce it.
The opportunity to commit fraud is possible when employees have access to assets and information that allows them to both commit and conceal fraud typically because of weak internal controls including a lack of segregation of duties or oversight.Top management typically overrides the controls when committing financial statements fraud while employees may use the weaknesses to their advantage in perpetrating fraud.
Motivation is a pressure or a "need" felt by the person who commits fraud.It might be a personal financial or other type of need,such as high medical bills or debts,or as a result of bad personal habits as occurred in ZZZZ Best and Tyco where CEOs misappropriated company resources for personal gain.
Motivators can also be financial oriented that affects business results.Pressures may exist to meet or exceed financial analysts' earnings estimates or to qualify for high bonuses and/or to inflate share prices and make stock options more valuable.
Lastly,employees may rationalize this behavior by determining that committing fraud is OK for a variety of reasons.For those who are generally dishonest,it's probably easier to rationalize a fraud.For those with higher moral standards,it's probably not so easy.They have to convince themselves that fraud is OK with "excuses" for their behavior.
Common rationalizations include making up for being underpaid or replacing a bonus that was deserved but not received.A thief may convince himself that he is just "borrowing" money from the company and will pay it back one day.Some embezzlers tell themselves that the company doesn't need the money or won't miss the assets.Others believe that the company "deserves" to have money stolen because of bad acts against employees.
Business owners and executives must take control of fraud by working on the portion of the fraud triangle over which they have the most control: the opportunity to commit fraud.It may be difficult for management to do anything about an employee's needs or rationalizations,but by limiting opportunities for fraud,the company can reduce it to some extent.
This question provides an opportunity to review the GVV reasons and rationalizations framework.
As you read the case,think about the following series of questions for the protagonist to address after identifying the right thing to do including:
•How can they get it done effectively and efficiently?
•What do they need to say,to whom,and in what sequence?
•What will the objections or push-back be and,then,
•What would they say next? What data and examples do they need?

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