Attestation Update – A&A for CPAs

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Is it time to upgrade our understanding of the fraud triangle?

with 8 comments

Like all working CPAs, I get the concept of the fraud triangle. Opportunity, motivation, and rationalization combine to create a ripe environment for fraud.

I get it. I’ve written about it a lot. Even wrote a short e-book.

I have a vague realization we need to expand the discussion somehow. Why my discomfort?

Trying to reconcile one specific fraud to the fraud triangle

Matt Kelly has a first-hand report at Compliance Week on an acquaintance who was revealed as a fraudster: Psychology of the Fraudster, as Told From the Front Lines.

Mr. Kelly describes someone who was discovered by an investigation following a drunken incident at the corporate sales meeting. The conclusion was this really nice guy, pleasant, outgoing, and quite successful in the sales area had stolen about $180k over the course of a year through padded expense reports.

Mr. Kelly can’t fit that into the standard fraud triangle.

Likewise with the insider trading incident at KPMG.

I look at the allegations against Mr. Scott London in the criminal indictment and then look at what I know of the fraud triangle.

I can’t put them together.

If he’d bought a $3M or $5M home at the peak of the market, I could understand (don’t laugh, that would only be 2 or 3 times the guessed-at amount of his annual comp). But published reports state he lives in the same home he bought about the time he would have been promoted to partner. That puts his house at somewhere around one-third of his annual comp.

How could the regional audit PIC of a Big 4 firm in the second largest market in the US possibly develop a rationalization that the alleged insider trading was okay?

And don’t throw out that he’s a dummy. No matter what your thoughts are about the Big 4, you don’t get to partner without being really bright. And you have to be exquisitely smart to get to audit PIC of any office, let alone some place like the LA market, to say nothing of being the regional PIC. I knew a few of the partners while I worked at PMM. Everyone one of them was incredibly bright, savvy, and knowledgeable.

With the caliber of reporters working the story, I’m guessing that if there were serious money trouble, drugs, or a girlfriend, we would have heard some reports by now.

The whole greed angle just doesn’t work – the amounts alleged are well under $100k. We are talking an amount equal to several weeks comp.

So I’m left scratching my head trying to put the allegations into the framework of the fraud triangle. It doesn’t fit.

Back to Mr. Kelly’s article. He points toward new ideas in the works. Specifically expanding the fraud triangle into the fraud pentagon by adding arrogance and competence.

At this point, I just have questions that need research. Need to do some reading. All of us CPAs working audits probably need to do some more reading.

Oh, and I see you Certified Fraud Examiners and academics out there rolling your eyes at me.  I know I’m just starting to think about what you’ve been studying for years. Please humor me. There’s probably 60,000 auditors (just a wild guess) in line right behind me that need to do some more learning too. Bear with us as we stretch our brains.

Written by Jim Ulvog

April 26, 2013, 10:39 am at 10:39 am

Posted in Audits, Fraud

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8 Responses

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  1. The Fraud Triangle is no longer adequate or sufficiently reliable for antifraud professionals. The “rationalization” leg of the triangle does not apply to sociopaths, who have no need to rationalize actions which they do not see as wrong. We as a society/culture have allowed sociopaths to permeate the upper echelons of business and government – in fact, this is often how we reward their behavior! We reap what we sow.

    Kelly nails it when he writes, “Jonathan Marks, the anti-fraud guru and all-around sharp guy at Crowe Horwath, has long said that the idea of the fraud triangle is wrong. Marks prefers a model he calls the fraud pentagon, that adds two more dimensions: arrogance and competence. The triangle, he says, only explains low-level employees who commit small-time fraud: the clerk who steals money to pay for his spouse’s cancer treatment, or the office manager who scams enough cash to take her family on a vacation she believes they deserve.

    “That triangle doesn’t explain the likes of fraud committed by senior executives or highly successful people, such as our man Jack. Those types of frauds, Marks says, are driven far more by greed and lust for power, committed by men (I mean, have you ever seen a major corporate fraud committed by a woman?) who love the thrill of the game more than the financial reward.”

    The old model may remain adequate to describe low level, occupational fraud. But for the types of fraud that can cripple entire companies, a new model is clearly needed.

    While others have written about turning the fraud triangle into a diamond, the terms often seem to be misplaced, e.g. capability and competence on the one hand or disgruntlement, resentment and anger on the other. The greatest risk, as we have repeatedly seen, is from those at the highest levels of authority. I would turn the triangle into a pyramid, with the base being a psychological predisposition to commit fraud.

    http://www.fraud-magazine.com/article.aspx?id=4294970127 (link is to an abstract, I can’t post the entire article – ACFE members only)

    “There are people in our world, lots of them, who are very different from you and me. They look normal and even act normally in most ways, but most definitely are not. They have absolutely no conscience. They are incapable of basic feelings of care, love and compassion. They are not this way by choice, rather they are born this way, wired this way. They are not bound by the same rules that govern our lives: rules of fairness, respect, honor and commitment. Much to the contrary, they want only for themselves.”

    Source: http://www.thebusinessowner.com/business-guidance/professional-development/2009/11/the-sociopath-next-door

    Keith Mautner

    April 28, 2013, 14:42 pm at 2:42 pm

  2. To summarize the linked article, they conclude with a single “fraud diamond” for two kinds of fraud perpetrators: “The Accidental Fraudster” (relying on Pressure and Rationalizations from the old fraud triangle); and “The Predator” (adding “criminal mindset” and “arrogance” to create a fraud diamond).

    I disagree with “criminal mindset.” I would call it a “personality defect” or “social norms defect.”

    I also neglected in my last post to point out that “capability” and “competence” are duplicative of opportunity, while anger and resentment are duplicative of rationalization, which is why I don’t find these “fraud diamonds” to be useful alternatives to the fraud triangle.

    Keith Mautner

    April 28, 2013, 14:58 pm at 2:58 pm

  3. Keith, thanks for your comments. Those are good articles to start reading.

    Without having done much more than read the summary and the sociopath article, it seems that having sophisticated abiity to pull a scam and the competence to execute it well & create good covering would be an extension of opportunity. A manager or executive has more opportunity than an a/r clerk. Likewise with resentment or anger. Those would be a part of rationalization.

    Likewise with ideology. Thinking “cause X is so critically important to the survival of humanity that it is inexcusable and morally offensive NOT to do ….” would justify fraud and a host of otherwise illegal things. That would be a perfect example of motivation mentioned in the ACFE summary and also rationalization.

    Lots more thinking and learning to do. Thanks for the links.

    Jim Ulvog

    April 28, 2013, 16:53 pm at 4:53 pm

  4. Keith Mautner

    April 28, 2013, 19:00 pm at 7:00 pm

  5. […] For a good stretch on how to analyze fraud, check out a great article “Beyond the Fraud Triangle,” in The CPA Journal, written by Jack Dorminey, Scott Fleming, Mary-Jo Kranacher, and Richard Riley. This article was mentioned by a commenter in an earlier post. […]


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