You are a staff auditor whose firm is evaluating Equity Funding as a possible audit client. You have been asked by the audit partner to evaluate the company and the possibility of fraud at the organization.

Using the Fraud Triangle, evaluate the risk of fraud at Equity Funding. Provide a recommendation on the likelihood of fraud at Equity Funding (low medium high). Support your recommendation with specific examples.

You can consider factors such as company culture, tone at the top, and systems of internal controls in the organization. Your recommendation will be based on observations (viewed in the movie) and interviews (gleaned from the movie) from the different employees. Memo should be 1 to 2 pages, single-spaced.

The Fraud Triangle1

To fight fraud one must not only realize that it occurs, but also how and why it occurs. Several decades ago, after considerable research, Donald R. Cressey, a well-known criminologist, developed the Fraud Triangle. Interested in the circumstances that led embezzlers to temptation, he published Other Peoples Money: A Study in the Social Psychology of Embezzlement.

Cresseys hypothesis was: "Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property."

Essentially, the three elements of the Fraud Triangle are: Opportunity, Pressure (also known as incentive or motivation) and Rationalization (sometimes called justification or attitude). For fraud to occur, all three elements must be present.

Opportunity

If one is talking about theft, there must be something to steal and a way to steal it. Anything of value is something to steal. Any weakness in a systemfor example, lack of oversightis a way to steal. Of the three elements of the Fraud Triangle, opportunity is often hard to spot, but fairly easy to control through organizational or procedural changes.

Pressure

Pressure in this case is another way of saying motivation. What is it in ones life that drives one to commit fraud? Pressure sometimes involves personal situations that create a demand for more money; such situations might include vices like drug use or gambling or merely life events like a spouse losing a job. At other times, pressure arises from problems on the job; unrealistic performance targets may provide the motive to perpetrate fraud.

Rationalization

There are two aspects to rationalization: One, the fraudster must conclude that the gain to be realized from a fraudulent activity outweighs the possibility for detection. Two, the fraudster needs to justify the fraud. Justification can be related to job dissatisfaction or perceived entitlement, or a current intent to make the victim whole sometime in the future, or saving ones family, possessions or status. Rationalization is discernable by observation of the fraudsters comments or attitudes.