The fraud triangle is described as a system commonly utilized in making a comprehensive review to clarify the purpose of a person’s choice of committing fraud. The three significant components of the fraud triangle are (i) opportunity (ii) pressure (iii) rationalization.
In this context, pressure is the ultimate motivation for committing a crime. In a business organization, individuals can be inspired to commit fraud based on various reasons such as the desire to maintain a lavish lifestyle, gambling addiction, the excessive consumption of drugs, or even issues to do with financial distress (Tickner & Button, 2021). To mitigate this type of fraud, management should take a series of actions which are highlighted below.
Rewarding employees on the basis of performance: The management should take a proactive analysis of the organizational performance in order to provide incentives to the employees in an organization.
Focusing on regulatory issues: The organization has the ultimate mandate of complying with all the regulatory policies in an attempt to avoid any forms of legal conflicts that might arise.
Cash flow: In order to mitigate any form of risk in an organization, it is necessary for an organization to focus on all the emotional issues of cash flows.
Division of duties: The duties in the organization should be dynamically divided in the criteria through which employees who are responsible for handling finances could not be handling books for recording cash transactions in order to avoid any form of manipulations (Abdullahi & Mansor, 2018).
Duties delegations: The top management should take a proactive role in the delegation of duties to lower authority, especially to lower levels, and regulation of proper intervals in systematic initiatives of controlling fraud in an organization.
Improvement of reporting system: In an organization, it has been noted that in some cases, employees have grievances that their superiors cannot solve. Therefore setting up a reporting system and committee for employee grievances on the entity’s website can help employees to communicate directly to the higher management (Lokanan, 2018). This can help in reducing employee grievances & doing fraud.
Know Your Customer regulation: In order to control any form of fraud in an organization, before accepting any sales orders or recruiting employees, management should collect & analyze the past data, which can help in reducing defaults and entering fraud.
In an organization, the form of fraud usually occurs in a situation where the staff members are conversant that the management will demote them as a result of poor performance. In order to respond to such a situation, such staff may collaborate in defrauding an organization as a dynamic process of rationalization. To address fraud related to rationalization, the following steps should be taken;
Feedback: It is the ultimate responsibility of the management to gradually collect feedback from employees with a mission of ensuring that the grievances are addressed accordingly (Abdullahi & Mansor, 2018). The feedback is necessary for ensuring that different challenges faced by the employees got analyzed and resolved accordingly.
Engaging employees: It is important for the management to engage the employees in all aspects of the decision-making process to ensure that the organizational goals are achieved effectively.
IC’s critical monitoring: Management should check whether ICs are effective regularly. If any deficiencies are found, then immediately, management should revise the IC. Otherwise, it may create an incentive to create fraud.
Massive training: The organization should conduct a series of vigorous training with employees, especially during the situation through which a new process is being adopted.
Pattern analysis: Management should analyze the behavior of the employees by their tastes & lifestyle. These may have an impact on doing fraud in the entity.
Enhancement of management control: It is the ultimate responsibility of an organization to always design IC on higher management since the fraud done on a higher level can have a greater negative impact on an organization.
Theft monitoring: Any form of petty theft should never be tolerated, whereas those who engage in such fraud need to face dire consequences.
This aspect of the fraud triangle implies the ideal circumstances or opportunity that makes it possible for employees in an organization to easily initiate fraud. The following are some of the steps that can be taken by the organization to mitigate risks in this section;
Regulating all aspects of party regulations: The business organization should take a proactive role in designing policies that are related to the terms and conditions associated with the third party.
High-level management of marketable assets: Assets that are highly liquid-like Bills should be in the control of higher officers and should be drawn under proper authorization.
Inventory controls: Strong controls are essential to ensure that any forms of misplacement of assets are controlled.
Internal control: Sufficient internal controls to be designed, implemented & regulated to avoid incentives for employees for making fraud.
Management: The organization should be run by the management by designing strategies based on the entity’s goals. These goals are further subdivided into objectives that are assigned to the employees. Top management should always analyze the performance. Otherwise, the entity may not achieve its goals.
Accounting policies and controls: Accounting policies should be consistently applied as followed in the previous year (PY), and if changed, then its effect is properly disclosed in the FS so that users of FS can interpret the results properly.
Duties segregation: There is a need to segregate duties in an organization to ensure that the fraud becomes challenging to be initiated.
Controls: There is a need for extensive enhancement of internal controls to ensure that any forms of incentives are avoided at all costs.
Abdullahi, R., & Mansor, N. (2018). Fraud prevention initiatives in the Nigerian public sector: understanding the relationship of fraud incidences and the elements of fraud triangle theory. Journal of Financial Crime.
Homer, E. M. (2020). Testing the fraud triangle: a systematic review. Journal of Financial Crime.
Nurkhin, A. (2018). What determinants of academic fraud behavior? from fraud triangle to fraud pentagon perspective. KnE Social Sciences, 154-167.
Tickner, P., & Button, M. (2021). Deconstructing the origins of Cressey’s Fraud Triangle. Journal of Financial Crime.