Question

Please answer the following question:

Topic:

A combination of explanation of fraud examination and the fraud triangle.

You will explain this by including introduction, discussion on the fraud triangle and how you, as a fraud examiner, you might utilize it. Explain what you believe fraud examination entails and does the fraud triangle work in conjunction with it. Discuss what the requirements are in your state to become a forensic accountant. Include a conclusion.

Answer 1

PART I -

The Fraud triangle is a framework designed to explain the reasoning behind a worker’s decision to commit workplace fraud. The three stages, categorised by the effect on the individual, can be summarised as pressure, opportunity and rationalisation. Broken down, they are:

• Step 1 – the pressure on the individual – 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. A common example of a perceived unshareable financial problem is gambling debt. Maintenance of a lifestyle is another common example.
• Step 2 – the opportunity to commit fraud – 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.
• Step 3 – the ability rationalise the crime – is 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.

The term fraud triangle was first coined by American sociologist Donald R. Cressey who worked extensively in the fields of criminology and white-collar crime. Fraud is often a white-collar crime but not always.

PART II-

hen your work duties revolve around auditing or the detection of fraudulent behavior, the Fraud Triangle model is a useful resource in identifying potential offenders or situations. But what if your duties involve risk assessment or training? The Fraud Triangle can also provide a visual analysis of future business decisions and the building blocks of instructor-led training.

The Fraud Triangle helps fraud examiners understand why individuals commit fraud. The three elements — perceived pressure, opportunity and rationalization — create a trifecta of the perfect storm.

Whether you're working as an auditing or compliance professional, or you're a hired consultant, you should be embedded and engaged in an organization so that owners or managers seek your guidance and are open to your input. Without this relationship, you won't secure a seat at the table (or the podium in this case) to begin this type of analysis.

If you're now deeply involved in the organization, its leaders might request, let's say, your advice about the risks of entering into a new geographical market. Or they might want to conduct a risk profile for a new position they're creating. Whatever the situation, they're looking for your guidance.

Start the process of identifying the risk areas on each leg of the triangle. You might have to research culture, processes and requirements before you begin. If you're entering into a new market or business process, you might be no more educated than your client. So identify a select team for a brainstorming exercise to promote your client's trust and buy-in. Find people that have experience in the risk area you're analyzing and engaging.

Now the process begins for examining the three legs of your Fraud Triangle. If you get stuck, here are some things to consider:

• Pressure – What are employees' external and internal pressures? Are you moving them around the world? Are they the family breadwinners? What kind of message is the company sending them about success, and is this adding undue pressure?
• Rationalization – Some typical rationalizations: Employees might not think it's harmful to take from a company that's doing well. Or they're disgruntled. Or their families are in financial crises.
• Opportunity – Engage business personnel from sales, accounting, supply chain and operations for answers. What are the holes in the organization's processes and procedures? Does it have proper separation of duties? What are the fraud touchpoints? Touchpoints, if you're focusing on anti-corruption, for example, might be any contact with government officials.

Solve risks with a mitigation plan

Once you've identified all the risk areas in each side of the Fraud Triangle, begin to address mitigation. A fraud examiner with extensive training and experience is well-suited for this task. Mitigation methods can provide priorities and direction. For example:

• Send a clear message – Mission statements, memos from the CEO and certifications all help communicate an organization's stances on a risk area.
• Training – Necessary focused training, based on risk, is a component of governmental guidance on compliance programs, such as those the U.S. Department of Justice issued on the Foreign Corrupt Practices Act.
• Employee relocation – Expats and relocated employees might need special attention to help them with their job and life transitions. This can include obtaining a driver's license, bank accounts, getting personal items shipped or providing tax advice. Prepare them for cultural nuances in their assignment country. Don't give them a reason to feel abandoned or disenfranchised.
• Hiring – A critical fraud prevention measure is the hiring of employees who believe in an ethical culture and show a high measure of integrity. Hiring key people in your risk area might require additional screening.
• Audits and check-ups – More employees are working remotely or with limited supervision. Auditing, site visits and frequent contact are necessary in such high-risk situations.

The end product

When I first discuss the Fraud Triangle concepts with organization management, I'll often draw the illustration in an informal meeting. But once management begins to understand those concepts, I'll later show a professional PowerPoint presentation of a completed risk assessment Fraud Triangle for maximum impact and a strong visual argument. (When preparing the presentation, don't forget to talk to the organization's legal department about maintaining attorney-client privilege and/or work product assertions.)

These presentations — whether on the back of a napkin or on the wall — usually spark a lot of discussion so be ready to answer questions and provide supporting documentation. Plans, programs and materials will emerge, and hopefully you'll be right in the middle of them.

The Fraud Triangle as a training tool

If you find yourself in a training role, the Fraud Triangle is a great tool for scenario-based training sessions. Give your trainees a blank triangle and a well-written fraud problem and guide them through the process. The expectation isn't to turn business personnel into fraud examiners, auditors or law enforcement, but if they can learn the critical skill of fraud issue identification then your job will be a bit easier, and the organization will be more likely to maintain a culture of compliance. Your interactive, scenario-based training sessions will help you solidify your reputation as an expert, and educating others provides additional job satisfaction.

As fraud examiners, we must often take our world to others who don't live in it, who aren't comfortable thinking about the negative side of business or are unaware of all of the risks they're exposed to in the midst of business development opportunities. A simple visual using Cressey's Fraud Triangle theory — a cornerstone of fraud examination — is an effective way to open the door.

PART III

Forensic accountants generally need a minimum of a bachelor's degree in accounting or business. Some employers additionally require a certification or a master's degree in public accounting and advanced coursework in fraud or criminal investigation, especially as it relates to financial record keeping. There are also forensic accounting degrees that focus on specific preparation for a forensic accounting career. If you are aiming to become a forensic accountant, you can expect a process similar to this:

1. Attend a degree program and/or gain experience in a related field.*
2. Take and pass the Uniform Certified Public Accountant (CPA) Examination.**
3. Apply for an open position as a forensic accountant.
4. Complete an interview.
5. Get hired as a forensic accountant.
6. Receive training on the job once hired.