The fraud triangle – an alternative approach
DOI | https://doi.org/10.1108/JFC-07-2021-0159 |
Published date | 13 October 2021 |
Date | 13 October 2021 |
Pages | 908-924 |
Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
Author | Paschalis Kagias,Anastasia Cheliatsidou,Alexandros Garefalakis,Jamel Azibi,Nikolaos Sariannidis |
The fraud triangle –an
alternative approach
Paschalis Kagias
Department of Accounting and Finance, University of Western Macedonia,
Florina, Greece
Anastasia Cheliatsidou
Department of Business Administration, University of Western Macedonia,
Florina, Greece
Alexandros Garefalakis
Department of Business Administration and Tourism,
Hellenic Mediterranean University, Heraklion, Greece
Jamel Azibi
Faculty of Law, Economics and Management Sciences of Jendouba,
Jendouba University, Tunis, Tunisia, and
Nikolaos Sariannidis
University of Western Macedonia,
Kozani, Greece
Abstract
Purpose –In recent years,Public Accountability and Integrityhave been matters of growing attention, both
in the public and private sector, as citizens demand value for moneyentrusted to the governments through
their taxes. In addition, in many countries, after the recent recession, government budgets and corporate
returns have been reduced.Many corporate scandals have occasionally becomeknown and have had a great
impact on confidence in the market. Even worse, after the pandemic of COVID-19, «bare and exacerbated
massive preexisting problemsin the world’s economic, social and security order, threatens to push up to 100
million people intoextreme poverty in 2020, struck at a time of dwindling trust in representativegovernance»
(UNDP, 2020). The funds of organizations in the private and publicsector have been shrinking, whereas the
situationalpressures of fraud are increased. In this context, Dorris,President and CEO of the ACFE warns for
explosion of fraud in the coming years and reminds thatduring the 2008 economic, companies cut-off, non-
revenue generating activities, such as the internal audit and the compliance departments leaving them
exposed to fraud. Therefore,organizations have to do more with less. The purpose of this paperis to present
the development of the fraud theory on the management’s perspective aiming to contribute to the efficient
developmentof anti-fraud mechanisms
Design/methodology/approach –Having identified the fraud theory developed so far, we provide a
frameworkfor the fraud risk management.
Findings –This paper incorporates cost/benefits considerations, practical considerations and empirical
evidenceon fraud.
Originality/value –This paper provides valuable information to enable the management, who has the
primary responsibility to prevent and detect fraud, to disclaim responsibility by broadening their
understandingof fraud theory.
Keywords Fraud, Corruption, Fraud triangle, Fraud diamond, Hierarchy of needs
Paper type Research paper
JFC
29,3
908
Journalof Financial Crime
Vol.29 No. 3, 2022
pp. 908-924
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-07-2021-0159
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
Introduction
There is not a universally accepted definition either of fraud or, more specifically, occupational
fraud. The Institute of Internal Auditors defines fraud as IIA (2019) «any illegal act characterized
by deceit, concealment, or violation of trust», and Garner (2004) defines it as «a knowing
misrepresentation of the truth or concealment of a material fact to induce another to act to his or
her detriment». In addition, occupational fraud is generally conceived as the fraud committed by
an employee against his employer, by taking advantage of assets and resources, which do not
belong to him. The Association of Certified Fraud Examiners defined occupational fraud as «the
use of one’s occupation for personal enrichment through the deliberate misuse or misapplication
of the organization’s resources or assets (ACFE). Despite the fact there are variousdefinitions, the
meaning is the same. Occupational fraud is an attack from within, from the persons entrusted,
with power and resources.
Interestingly, a major part in fraud literature refers to auditors and how they will identify
cases of fraud, but auditors (both internal and external) have a secondary role in fraud detection,
as the primary responsibility lies with the management. In accordance with ISA 240, in an audit
of financial statements, «the primary responsibility for the prevention and detection of fraud rests
with both those charged with governance of the entity and management». In addition, it is held
that «an auditor conducting an audit in accordance with ISAs is responsible for obtaining
reasonable assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit,
there is an unavoidable risk that some material misstatements of the financial statements may
not be detected, even though the audit is properly planned and performed inaccordance with the
ISAs» (ISA 240). However, based on ISA 265, external auditors are liable to inform t hose who are
charged with governance for the inefficiencies in the internal controls identified during the audit
and are of significant importance. Similarly, International Profession al Practices Framework
(IPPF), () followed by internal auditors, «when assisting management in establishing or
improving risk management processes, internal auditors must refrain from assuming any
management responsibility by actually managing risks» (IPPF 21020).
Remarkably, when referring to fraud and audit it is always relevant to consider the
expectations gap, which is «the difference between what the public expects from the
auditing profession and what the auditingprofession actually provides» (ACCA, 2019). It is
also worth noting that external auditors cannot design internal controls, since this would
give rise to the self-interest threat. Thus, their role is limited to fraud detection. It may be
more relevant to the researchersto place at least equal importance on how the management
discharge responsibilities rather than how an auditor identifies fraud. In this context, the
present paper is focused on the applicationof fraud theory from management’s perspective.
Fraud determinants
The first and one of the most important distinctions of crimes was drawn by Sutherland (1940),
who distinguished crimes in «street crimes» and «white collar crimes» and defined «white collar
crime» as violation of trust. The distinction of the two is important in criminology as it allowed
the investigation of two significantly different types of crime, different in terms of motivations,
victims and punishment. Unlike street crimes, white-collar crimes are related more to violation of
trust and deceit rather than violence, and theyare not so obvious since they are usually committed
under the table and by respected individuals who possess a high social and occupational status.
Examples of white-collar crimes are tax evasion, bribery, forgery and money laundering (in effect,
money laundering is a derivative activity aiming to legitimize the proceedings gained from other
illegal activities). It is worth noting that the present research can become the basis for subsequent
research which will provide a greater insight into white-collar crimes.
Fraud triangle
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