The Fraud Triangle | AS Auditing

As discussed in the fraud triangle theory, we already know that the fraud triangle consists of three vertices, that are pressure, opportunity, and attitude. When these 3 factors converge, fraud will occur.

In the Company, fraud usually has two levels:

• Employee level: often include theft, misappropriation of assets, running of quotas, improper profit in the provisions of financial interests.
• Management level: often involves fraudulent financial statements to achieve targets that set by owners, often to increase stock prices or to obtain credit. Or fraudulently take advantage of anonymous companies to get benefit from business transactions, causing losses to the Company.

So we are interested in how to apply the fraud triangle in practice?

Please answer that, in order to prevent fraud from happening, we need to “Destroy the vertices of the fraud triangle”.

First of all, we talk about "pressure", this always exists in life and work that cannot be eliminated, but can only be reduced or limited. Some measures to reduce “pressure” are as follows:

• Arrange work more scientifically, improve professional level.
• Apply technology to handle work.
• Create a friendly working environment.
• Build effective teamwork skills.

The second, we seek to eliminate “opportunities”. An "opportunity" will arise when there is no control activity in the company or there is an ineffective internal control system. So we will have some elimination measures as follows:

• Strengthen the internal control system. An important source for fraud detection is feedback, denunciation, information interaction such as mailboxes, hotlines, collective cultural activities. Identifying fraud by using knowledge of accounting, auditing, or law, or hiring experts or consultants to investigate.
• Periodically review the internal control system to avoid obsolescence.
• Have a clear policy in dealing with fraudulent behavior: Discipline, compensation, termination of employment, litigation.

The third, we seek to eliminate “attitude”. Each individual has different attitudes, personalities and moral values. Individuals who do not allow them to commit fraud, but also individuals who allow them to commit fraud and justify for this activity. Therefore, it is necessary to orient this attitude in company behaviour:

• Raise awareness about fraud.
• Regulations and propaganda on labor discipline.
• Issuing a code of ethical behavior and company culture.

Conclusion, when all three factors of the fraud triangle are fully converged, fraud will arise. To prevent fraud, it is necessary to prevent the arising of these three factors, if that be applied well, fraud can be controlled to a minimum.

However, it should be noted that, when applying preventive measures, it is necessary to consider the reality of the business, avoid "making clothes that do not fit to the wearer".

A large or small internal control system that depends on the needs of the Company. Internal control that is too large will be wasteful, cumbersome, and even hinder the flow of business activities. Conversely, if internal controls are too small, fraud will not be detected.