In order to understand why people commit fraud, many companies use the fraud triangle to analyze the attributes, which make people commit fraud. The importance of the fraud triangle is to understand fraud and its significance demonstrated in the Darren Darren’s case. The explanation of why people commit fraud is examined by the use of fraud triangle. It evaluates the circumstances that make employees violate ethical standards and be involved in the fraud cases. Therefore, fraud triangle joins the perceived pressure, perceived opportunity and rationalization to facilitate fraud.
The first required attribute is Incentive, motivation, or pressure to commit fraud. This is as a result of non-sharable financial need. The fraudster concludes that his financial problems could not be shared with other persons who might have aided in solving the problem. These non-shareable financial pressures include sudden financial setbacks, poor credit standing and inability to obtain credit, unexpected important medical expenditures and living beyond one’s means among others. Therefore, in the case of Darren, the non-sharable financial need motivated him into committing the fraud. He experienced difficult financial circumstances in his personal life, and realized that without some extra source of funds the only way to resolve his problem is committing fraud, otherwise he would be forced to file bankruptcy. His desperation to resolve his financial crisis motivated him into committing fraud. He concluded that he cannot share his financial problems with could not be shared with supervisors because if they realize his financial distress they would aid in solving the problem by giving him a loan
The second needed attribute is opportunity. The employee must have a chance to practice fraud without anyone noticing. This opportunity can arise from poor internal controls, poor training, ineffective anti-fraud programs and weak ethical culture among others. In most cases, opportunity has been examined solely within the context of poor internal controls, particularly based on the segregation of duties. In the case of Darren, he had a chance to commit the fraud without being detected because he was an accounts receivable accountant at AE&P Inc. for 8 years. He was a dependable employee who completed his work on time and in a professional manner. His experience and professional way of doing his work was an opportunity for him to commit a fraud because no one could suspect him.
Similarly, since Darren had recently moved into a large new home in an upscale neighborhood no one will suspect he had financial setbacks and could result in fraud acts. Another opportunity for Darren to commit fraud was poor internal controls, particularly based on the segregation of duties. He was accounts receivable accountant, responsible for making the cash deposit, and posting payments and invoices to the customer subsidiary accounts. He also provided the general ledger accountant with the verified deposit slip from the bank to make the cash deposit entry on the general ledger. This was an opportunity for him to commit fraud because he was the only one responsible in those duties. This also gave him the opportunity to cover his tracks by falsifying customer accounts because he knew he was the only one responsible in these duties. Therefore, poor internal controls based on the segregation of duties in the AE&P Inc. gave Darren an opportunity to commit fraud.
The third attribute is rationalization. In this case morally acceptable rationalization is vital before the crime takes place. This is so because a fraudster does not view himself as a criminal, he justifies his misdeeds to himself before he commits the fraud. For example, Darren’s rationalizes his actions by thinking the money he was taking was a loan, and could pay back after solving the family financial issues. Similarly, he thought that since supervisors knew of his financial distress they will glad him a loan. The rationalization allows the perpetrator to view illegal behavior as acceptable, therefore preserving his self image as a trustworthy person. This does not happen because in fraud the payback promise of that loan does not occur.
For instance, Darren made a promise to himself that as soon as he would, he will pay the funds back. However, Darren did not keep his promise as he continued to need additional funds to support his family. At the end, he stole in excess of $250,000 from AE&P Inc. via his accounts receivable fraud. Just like pressure, rationalization is not a readily observable trait because it is hard to see what someone is thinking. This happens because no one would foresee the act of Darren to commit fraud.
The fraud cases have increased significantly currently as a result of unethical behavior demonstrated by the employees. Therefore, as the managers of AE&P Inc. I could introduce methods and strategies to curtail the fraud cases in the future. Since, the most cases occur due to poor internal control in the organization. I will introduce detective controls, which are made to uncover fraud and unethical behavior when it happens. For instance, methods that seek advice and report misconduct tend to offer employees with channels for reporting concerns about fraud or other unethical behavior. I will introduce an information system, which will help to manage the internal controls and misconduct of employees. As the manager of AE&P Inc. I will introduce the deposit account fraud survey, which offers data on check fraud via electronic check process. This method detects fraud committed via remote channels such debit cards, and other transactions like the one used by the Darren.
A significant part of a successful fraud and unethical prevention strategy is the use of due diligence in promoting and employing employees. The due diligence will be vital to the employees seen has had authority over the financial reporting activities. As a manager I will screen employees who have access to confidential information and integrity risks that can affect the value of the transaction. The due diligence will consider the ethical behavior which is consistent with the organizational values and standards.
Similarly, communication and training are very important in reducing fraud in the organization. Therefore, it is vital to communicate issues in an effective manner because lack of planning and prioritization will fail to provide employees with a clear message that their control accountabilities be taken seriously. In formulating training and communication strategy, I will consider developing fraud and unethical behavior awareness initiatives. This will have a comprehensive impact on job duties and risks fields. Similarly, this will be integrated with other training efforts, which will aim at reducing fraud cases. Therefore, proper conduct is very important communication vehicle that management can use to curtail fraud cases.