Fraud Triangle Not Good Enough

Topics: Fraud, Management, Internal control Pages: 14 (3941 words) Published: February 7, 2011
Playing Offense in a High-risk Environment

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Playing Offense in a High-risk Environment

“Today’s fraudster is clever and operates in an environment ripe for criminal activity. Economic unrest is making it easier for employees to find ways to set fraud in motion – and a new breed of offenders is finding cunning ways to do so. After more than 60 years, the classic fraud triangle of three elements or events that motivate an employee to cross the line has morphed ™ into Crowe’s Fraud Pentagon. Company boards and

senior management must take an offensive stance against the five conditions that precipitate fraud with a clear plan that limits the opportunity for fraud and minimizes the impact when fraud does occur.” Jonathan Marks, Partner-in-charge, fraud and ethics practice Crowe Horwath LLP


Crowe Horwath LLP

Then and Now 1950s
Straight-line reporting authority Dual responsibility Single suppliers Local or regional service area Step-up salary structure CEO as businessman Businesses led by owners

Matrix organizations Autonomous authority Multiple vendors and global trading partners Global reach Performance-based pay CEO as celebrity Businesses led by managers and directors

With the economic downturn forcing budget cuts, reorganizations, and work force reductions, the pressure on corporations and key individuals to meet performance targets is elevated. So too is the risk of fraud. Each corporate change presents yet another opportunity for individuals to slip in undetected and override controls in their quest to meet performance targets, pad their pockets, or prime the machine for corporate advancement. The cost of fraud can be astronomical. Twenty years ago, when ZZZZ Best Co. Inc., founder Barry Minkow lied, stole, and cheated his way to higher stock prices, the cost to investors was about $26 million. Today, potential losses from New York money manager Bernard Madoff’s alleged Ponzi scheme could be $50 billion or more. In both cases, economic pressure and greed played key roles in the deception. Most business executives have had to deal with incidents of fraud, the largest of which can result in management shakeups, corporate closures, and the erosion of confidence in capital markets. All criminal activity can tarnish the reputation

and brands of affected organizations, and it is increasingly resulting in hefty fines or settlement fees. In January 2009, Halliburton Energy Services agreed to pay $559 million to settle federal charges that a former unit bribed Nigerian officials.1 Pfizer Inc. similarly agreed to pay $2.3 billion to settle a federal probe into the marketing of the painkiller Bextra.2

Today’s fraudster is more independentminded and armed with more information and access to corporate assets than was the perpetrator of Cressey’s era. Corporations have evolved to rely more heavily on outsourcing, global partnerships, and the technology that links them together. The corporate ladder structure common in the 1950s has given way to matrix organizations where individuals with greater autonomy have the authority to effect change across the organization. Performance-based pay and rewards, commonly replacing step-up pay structures, create greater incentive for employees to find unethical ways to reach performance targets. Corporate culture today celebrates wealth and fame, creating a push among employees for hefty payouts and greater recognition at any price. And since many businesses no longer are ownermanaged, managers and directors at the helm are unlikely to bear ownership costs when mishaps occur. These differences support the need to expand the fraud triangle to a five-sided Crowe’s Fraud Pentagon, where an employee’s competence or power to perform and arrogance or lack of conscience are factored into the conditions generally present when

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