Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The New Fraud Triangle Model

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The New Fraud Triangle Model

Article excerpt

Abstract

Fraud in corporations is a topic that receives significant and growing attention from regulators, auditors, and the public. Increasingly external auditors are being asked to play an important role in helping organizations prevent and detect fraud. Detecting fraud is not an easy task and requires thorough knowledge about the nature of fraud, how it can be committed and concealed. This paper aims at broadening external auditors' knowledge about fraud and why it occurs. It explains Cressey's fraud theory and shows its significance, presents the other fraud models and relates them to Cressey's model, and proposes a new fraud triangle model that external auditors could consider when assessing the risk of fraud.

Keywords: fraud, fraud triangle, cressey's fraud theory, fraud models, fraud detection

INTRODUCTION

Corporate fraud is a topic that has received significant and growing attention from regulators, auditors, and the public. External auditors are increasingly being asked to play an important role in helping organizations prevent and detect fraud. Detecting fraud is not an easy task and requires thorough knowledge about the nature of fraud, why it is committed, and how it can be committed and concealed. Cressey's fraud theory explained why trust violators commit fraud and was widely used by regulators, professionals, and academics. This work has been conceptualised as "the fraud triangle". However, critics of the fraud triangle argued that it cannot help alone in explaining fraud because two factors cannot be observed (rationalisation and pressure), and other important factors, like capabilities of the fraudsters, are ignored.

Hence, in the current paper, Cressey's fraud theory is explained and its significance is highlighted. The paper also assesses the fraud triangle in light of other fraud models, and proposes a new fraud triangle model that should be considered by external auditors in assessing fraud risk.

LITERATURE REVIEW

Why people commit fraud was first examined by Donald Cressey, a criminologist, in 1950. His research was about what drives people to violate trust. He interviewed 250 criminals over a period of 5 months whose behaviour met two criteria: (1) the person must have accepted a position of trust in good faith, and (2) he must have violated the trust. He found that three factors must be present for a person to violate trust and was able to conclude that:

"Trust violators when they conceive of themselves as having a financial problem which is non-shareable, have knowledge or awareness that this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalisations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property" (page 742). The three factors were non-shareable financial problem, opportunity to commit the trust violation, and rationalisation by the trust violator. When it comes to non-shareable financial problem, Cressey stated "[p]ersons become trust violators when they conceive of themselves as having incurred financial obligations which are considered as non-socially- sanctionable and which, consequently, must be satisfied by a private or secret means" (page 741).

He also mentioned that perceived opportunity arises when the fraudster sees a way to use their position of trust to solve the financial problem, knowing they are unlikely to be caught. As for rationalisation, Cressey believed that most fraudsters are first-time offenders with no criminal record. They see themselves as ordinary, honest people who are caught in a bad situation. This enables them justify the crime to themselves in a way that makes it acceptable or justifiable.

Cressey found that:

"In the interviews, many trust violators expressed the idea that they knew the behaviour to be illegal and wrong at all times and that they merely kidded themselves into thinking that it was not illegal" (page 741). …

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