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AIS Romney Ch5 - Part2

The document discusses the "Fraud Triangle" and the key elements that allow fraud to occur: opportunity, rationalization, and pressure or incentive. It describes how the opportunity element provides openings for individuals to commit fraud, conceal it, and convert the stolen goods or money for their own benefit. Various methods of concealing fraud through accounting schemes or creating fake documents are outlined. Finally, the document notes that lack of internal controls and failure to enforce existing controls are among the most common opportunities that enable fraud.

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محمود احمد
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28 views

AIS Romney Ch5 - Part2

The document discusses the "Fraud Triangle" and the key elements that allow fraud to occur: opportunity, rationalization, and pressure or incentive. It describes how the opportunity element provides openings for individuals to commit fraud, conceal it, and convert the stolen goods or money for their own benefit. Various methods of concealing fraud through accounting schemes or creating fake documents are outlined. Finally, the document notes that lack of internal controls and failure to enforce existing controls are among the most common opportunities that enable fraud.

Uploaded by

محمود احمد
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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CH.

5- PART2
Fraud
The “Fraud Triangle”
Donald Cressey

Rationalization
WHO COMMITS FRAUD AND WHY

• Opportunity is the opening or gateway that allows an


individual to:
• Commit the fraud
• Conceal the fraud
• Convert the proceeds
WHO COMMITS FRAUD AND WHY

• Opportunity is the opening or gateway that allows an


individual to:
• Commit the fraud
• Conceal the fraud
• Convert the proceeds
WHO COMMITS FRAUD AND WHY

• Committing the fraud might involve acts such as:


• Misappropriating assets.
• Issuing deceptive financial statements.
• Accepting a bribe in order to make an arrangement that is not in the
company’s best interest.
WHO COMMITS FRAUD AND WHY
• Opportunity is the opening or gateway that allows an
individual to:
• Commit the fraud
• Conceal the fraud
• Convert the proceeds
WHO COMMITS FRAUD AND WHY

• Concealing the fraud often takes more time and


effort and leaves more evidence than the actual
theft or misrepresentation.
• Examples of concealment efforts:
• Charge a stolen asset to an expense account or to
an account receivable that is about to be written off.
WHO COMMITS FRAUD AND WHY

• Concealing the fraud often takes more time and


effort and leaves more evidence than the actual
theft or misrepresentation.
• Examples of concealment efforts:
• Charge a stolen asset to an expense account or to an
account receivable that is about to be written off.
• Create a ghost employee who receives an extra
paycheck.
WHO COMMITS FRAUD AND WHY
• Concealing the fraud often takes more time and
effort and leaves more evidence than the actual
theft or misrepresentation.
• Examples of concealment efforts:
• Charge a stolen asset to an expense account or to an
account receivable that is about to be written off.
• Create a ghost employee who receives an extra
paycheck.
• Steal a payment from Customer A.
• Lapping. • Apply Customer B’s payment to Customer A’s
account so Customer A won’t get a late notice.
• Apply Customer C’s payment to Customer B’s
account, so Customer B won’t get a late notice, etc.
WHO COMMITS FRAUD AND WHY
• Concealing the fraud often takes more time and effort and leaves more
evidence than the actual theft or misrepresentation.
• Examples of concealment efforts:
• Charge a stolen asset to an expense account or to an account receivable
that is about to be written off.
• Create a ghost employee who receives an extra paycheck.
• Lapping.
• Kiting. • Creates “cash” by transferring money between banks.
• Requires multiple bank accounts.
• Basic scheme:
– Write a check on the account of Bank A.
– Bank A doesn’t have sufficient funds to cover the check,
so write a check from an account in Bank B to be
deposited in Bank A.
– Bank B doesn’t have sufficient funds to cover the check,
so write a check from an account in Bank C to be
deposited in Bank B, etc.
WHO COMMITS FRAUD AND WHY

• Opportunity is the opening or gateway that allows an


individual to:
• Commit the fraud
• Conceal the fraud
• Convert the proceeds
WHO COMMITS FRAUD AND WHY

• Unless the target of the theft is cash, then the stolen


goods must be converted to cash or some form that is
beneficial to the perpetrator.
• Checks can be converted through alterations, forged
endorsements, check washing, etc.
• Non-cash assets can be sold (online auctions are a
favorite forum) or returned to the company for cash.
WHO COMMITS FRAUD AND WHY

• If the fraud is a financial statement fraud, then the gains


received may include:
• I have to keep my job.
• The value of my stock or stock options rose.
• I received a raise, promotion, or bonus.
• I have power.
WHO COMMITS FRAUD AND WHY
• There are many opportunities that enable fraud.
Some of the most common are:
• Lack of internal controls
• Failure to enforce controls (the most prevalent reason)
• Excessive trust in key employees
• Incompetent supervisory personnel
• Inattention to details
• Inadequate staff
• Click here for a comprehensive list of
opportunities. Opportunities

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