Academic journal article Journal of Legal, Ethical and Regulatory Issues

New Tactics in Fighting Financial Crimes: Moving beyond the Fraud Triangle

Academic journal article Journal of Legal, Ethical and Regulatory Issues

New Tactics in Fighting Financial Crimes: Moving beyond the Fraud Triangle

Article excerpt


Fraud and financial crimes can be noted throughout history and financial statement fraud can be documented as early as the 1600's (Dorminey, Fleming, et al.). Sarna (2010) relates the story of the Tulip Bulb scandal of 1636 (often considered the first well-documented instance of securities manipulation fraud) and how it significantly affected the Dutch exchange market. In the 1920's, Carlo Ponzi (who the Ponzi Scheme is named after) duped thousands of investors out of more than $20 million dollars, causing six banks to fail (Burnsed, n.d.).

Cressey's (1973) Fraud Triangle examined the motivation for crime which included pressure (or incentive), opportunity, and rationalization as factors that can be helpful when trying to identify fraudulent activity. However, Dorminey, et al. (2012) believed that the Fraud Triangle was only one important piece of identifying the risk of assurance services. The authors note a challenge for the fraud triangle can be that not every fraud occurrence may be identified by the fraud triangle theory. The authors state that fraudsters' motivation may be expanded and identified with the acronym MICE: money, ideology, coercion, and ego or entitlement. In addition, Wolfe and Hermanson (2004) identified an important fourth element which they thought should be added to Cressey's (1973) Fraud Triangle. The authors believed that capability was equally as important as Cressey's initial three factors. Adding the element of capability to the Fraud Triangle as shown in Figure 1, could aid in fraud prevention and detection.

Wolfe and Hermanson (2004) noted that many of the multimillion-dollar frauds could not have been perpetrated had it not been for the fraudsters' capabilities in place at the time of the fraud opportunity. For example, a CFO or Division Manager would have signing authority that other lower-level staff may not possess. In addition, the authors also mentioned that the person with the opportunity would need to be savvy enough to understand control weaknesses as well as have the capability to over-rule or ignore valuable internal controls. Capability would be especially important with frauds being perpetrated in collusion with others as well.

When thinking about fraud prevention managers would do well to remember Benjamin Franklin's (1735) axiom that "An ounce of prevention is worth a pound of cure." Therefore, in the next two sections we will first discuss fraud's prevention and then its detection. After that, the following sections will include fraud's investigation with its likely resultant data loss and the need for preserving a company's remaining data.


Computer Forensic Analysis

The collection of techniques and tools used to find evidence in a computer (Ramaswamy, 2005).

Corporate Governance

Corporate governance is most often viewed as both the structure and the relationships which determine corporate direction and performance. "The system of checks and balances designed to ensure that corporate managers are just as vigilant on behalf of long-term shareholder value as they would be if it was their own money at risk".


Financial Accounting Standards Board (FASB)

Nongovernmental body with the authority to promulgate Generally Accepted Accounting Principles (GAAP) and reporting practices and are published in the form of FASB Statements.


Financial Fraud

Financial statement fraud is deliberate misrepresentation, misstatement or omission of financial statement data for the purpose of misleading the reader and creating a false impression of an organization's financial strength (Agarwal & Medury, 2014;

Sarbanes-Oxley Act

Federal law enacted in 2002 that introduced major reforms in corporate governance and financial reporting (also called the Corporate Responsibility Act) is regarded as the most sweeping securities legislation since the securities and exchange act of 1934. …

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