Fraud Triangle And Weak Internal Control Liberty University Acct 650 Essay, Db 1

1039 words - 5 pages

Running head: FRAUD TRIANGLE AND INTERNAL CONTROL 1
FRAUD TRIANGLE AND INTERNAL CONTROL 1
Fraud Triangle and Internal Control Systems
Discussion Board 1
Anita M. Joslyn
ACCT 650 Corporate Governance and Fraudulent Financial Reporting
Liberty University
16 May 2019
Fraud Triangle and Internal Control Systems
While evil exists in this world, there will always be those who will search out “ways to take advantage” of others (Harris, 2010, p. 74). A brief description of Cressey’s fraud triangle offers three attributes that fraudsters usually possess when committing their illegal activities. Since internal control systems may be the main deterrent to fraud within a company, how a weak internal control system may result in fraudulent financial reporting and an illustration of a weak system will be briefly examined. A Biblical application of how Christian ethics apply will also be presented.
Fraud Triangle
The fraud triangle is based on Cressey’s work and includes “three common traits” (Roden, Cox, & Kim, 2016, p. 81). These authors indicated one side of this triangle is the opportunity to carry out the fraud (p. 81). This side of the triangle is discussed further in the next section. Another side “is a perceived financial need or pressure providing motivation” for whatever the fraud activities might deliver (Roden, et al., 2016, p. 81). This need or pressure might be comprised of “poor financial performance, excessive pressure to meet targets, and significant performance-based compensation” (p. 82). Rationalizing the fraudulent actions to align them “with their values” is the third side of this triangle (p. 81). This rationalization might involve beliefs that the forecasts are unrealistic or a “strained relationship with” auditors (p. 83).
Internal Control System
Liu, Wright, and Wu (2015) stated a widespread belief about internal control systems “is that strengthening” them “will reduce fraudulent financial reporting since” these systems were created to “limit opportunities for such behavior” (p. 307).
How Weak Internal Control Systems Could Result in Fraudulent Financial Reporting
Higgins (2012) presented six control measures which should be an efficient deterrent (p. 1181). The first of these measures is to establish one person who is responsible for each specific task (p. 1181). Therefore, any fraud committed involving that task will make that individual suspected. Whereas, if many are accountable for a given task, there would be many suspects to eliminate. Next is to segregate duties so “different individuals should be responsible for related activities” (p. 1181). Related to this measure is the documentation procedures control. These “documents provide evidence that transactions and events have occurred” (p. 1181). These last two measures provide a system of checks and balances. A control measure which also increases the effectiveness of those checks and balances is having an “independent internal verification” employee (p. 1181). This is someone who is not involved in the task checking the task for accuracy. Higgins identified a fifth measure as “physical, mechanical, and electronic controls” (p. 1181). These “safeguard assets and enhance the accuracy and reliability of the accounting records” (p. 1181). These might include security officers, changing passwords frequently, locks, and inventorying assets and products often. The final measure given is human resource controls. This should include “bond[ing] employees who handle cash; rotat[ing] employees’ duties and require[ing] employees to take vacations; [and] conduct[ing] thorough background checks (p. 1181). These internal control measures seem to be based on one side of Cressey’s fraud triangle as they are aimed at eliminating opportunities to commit fraud.
Illustration of a Weak Internal Control System
A weak internal control system will provide many opportunities for the commission of fraud. Roden, et al. (2016) gave as primary examples of this the ineffective monitoring of managers, a domineering manager, and the high turnover rates of employees (p. 81).
In the case of Mission, Hughes (personal communication, March 25, 2019) detailed the lack of assigned or segregated duties and indicated the physical documents were often changed in the course of processing them though the semi-manual system Mission was operating under until 2012. Their Logistics and Security manager often forced changes to be made to the documents to cover his theft. He used intimidation and sexual abuse to enforce his desires. The company only had an independent internal verification employee for quality control. Due to the high turnover rate of the Mexican employees, the company did not bond employees nor require them to take vacations. The background checks Mission completed were not thorough since most employees were there on six-month work visas. Hughes acknowledged the strongest internal control at Mission until 2012 was the independently contracted security officers. However, security’s specific post duties manual included a page titled “impossible tasks to complete” which involved such things as reading credit card sized ID clearly from a one-inch picture on the closed-circuit security monitor (L. Hughes, personal communication, March 25, 2019).
Biblical Application
Ephesians 6:11-18 lists the Armor of God and some facts about it. By figuratively keeping this armor on, which could be considered an internal control system, Christians are able to successfully fight against evil such as fraud. This armor consists of seven parts. The first is truth. Being truthful in all things should not allow Christians to commit fraud, thereby, eliminating the rationalization portion of the fraud triangle. Another portion of this armor is prayer or communication with God. Being in constant contact with God should remove the pressure and desire to commit fraud, which is a form of stealing. While the opportunity to carry out fraud may still be there, the other portions of the armor, especially the Sword of the Spirit, should inhibit Christians from doing it.
References
Harris, R. (2010). Internal control & fraud conference: An important accountability event. The Journal of Government Financial Management, 59(3), 74-75. Retrieved from http://ezproxy.liberty.edu/login?url=https://search-proquest-com.ezproxy.liberty.edu/docview/756665889?accountid=12085
Higgins, H. N. (2012). Learning internal controls from a fraud case at bank of china. Issues in Accounting Education, 27(4), 1171-1192. Retrieved from http://ezproxy.liberty.edu/login?url=https://search-proquest-com.ezproxy.liberty.edu/docview/1268718151?accountid=12085
Liu, X. K., Wright, A. M., & Wu, Y. . (2015). Managers' unethical fraudulent financial reporting: The effect of control strength and control framing. Journal of Business Ethics, 129(2), 295-310. Retrieved from http://dx.doi.org.ezproxy.liberty.edu/10.1007/s10551-014-2156-1
Roden, D. M., Cox, S. R., & Kim, J. Y. (2016). The fraud triangle as a predictor of corporate fraud. Academy of Accounting and Financial Studies Journal, 20(1), 80-92. Retrieved from http://go.galegroup.com.ezproxy.liberty.edu/ps/i.do?p=AONE&u=vic_liberty&id=GALE%7CA459075376&v=2.1&it=r&sid=summon

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