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- Business Integrity Part 1: Exploring Fraud
Business ethics education increased in importance following the passage of the Sarbanes Oxley (SOX) legislation in 2002. SOX was directly related to multiple corporate fraud issues within organizations including Enron, Tyco, Waste Management, HealthSouth, WorldCom, AIG, Bernard Madoff, and others (Deno & Flynn, 2018). Authors have been writing about issues surrounding leadership and management responsibilities regarding internal controls and best practices for business integrity.
The definition of fraud is a wrongful, illegal or criminal deception or act intended to result in financial or personal gain or by concealing the truth or material fact to the detriment of the recipient of the information (Free & Murphy, 2015). The Association of Certified Examiners (ACFE) classified fraud as “fraud and abuse” in the workplace, and financial statement fraud as utilizing a person’s position to gain benefit by deliberately misusing or through misapplication of assets (ACFE, 2018).
Fraud can occur in many different situations depending on where in the financial transaction stage it originated; from asset misappropriation that can occur at the beginning of the transaction (theft of cash), to supplier fraud (kickbacks and false purchases), to the general ledger (financial statement fraud). Additionally, some fraud schemes can occur in multiple transaction stages that may include internal or external schemes, asset misappropriation, supplier or investment fraud, and financial statement fraud.
The primary theory or framework describing fraud behavior is the fraud triangle, which has been used in the development of global professional auditing processes and standards. (Free & Murphy, 2015). Fraud theory was developed by Cressey (1953) and later termed “the fraud triangle.”
Morales et al. (2014) suggested that the description of the fraud triangle was designed to support the use of strong internal controls and processes for prevention along with organizations such as the ACFE. Morales et al. (2014) stated:
In other words, the triangle provides fraud specialists with an investigative template that individualizes fraud, holds organizations responsible for controlling it, and renders futile any systemic questioning. As a result, fraud is circumscribed to the realm of the specific: individuals subjected to pressure and somehow able to rationalize the act should not be left in a position to commit fraud. From this perspective, it is incumbent on the organization to ensure that the three legs of the triangle are properly overseen through a rigorous structure of internal control. Fraud is thus constituted as a problem at the confluence of the individual and the organization; it is certainly not represented as a social, political, or historical problem (p. 178).
[u05s1] Unit 05 Study 1
Use the Capella University Library to read the following. These articles examine the ethical differences and challenges of conducting business:
- Ann Riney, F. (2018). Two‐step fraud defense system: Prevention and detection. Journal of Corporate Accounting & Finance (Wiley), 29(2), 74–86.
- Association of Certified Fraud Examiners. (2018).& Report to the nations: 2018 Global study on occupational fraud and abuse. (10th ed). Retrieved from https://www.acfe.com/report-to-the-nations/2018/default.aspx
- Deno, C. F., & Flynn, L. (2018). Ethical standards for accounting students: A classroom exercise of internal controls.& Journal of Business and Educational Leadership, 7(1), 4–13.
- Free, C., & Murphy, P. (2015). The ties that bind: The decision to co-offend in fraud.& Contemporary Accounting Research, 32(1), 18–54.
- Morales, J., Gendron, Y., & Guénin-Paracini, H. (2014)& The construction of the risky individual and vigilant organization: A genealogy of the fraud triangle. Accounting, Organizations and Society, 39(3), 170–194.
- Toggle Drawer
Exploring Various Fraud Theories
After reading the articles assigned in this unit and doing your own research, complete the following: Exploring various fraud theories. Compare and contrast Cressey’s (1953) fraud triangle with another more recent fraud theories such as Dorminey (2012) fraud scale theory; Wolfe and Hermanson (2004) fraud diamond theory; Kassem and Higson (2012) new fraud triangle model; or Dorminey, Fleming, Kranacher and Rilery, Jr. (2012) the meta-model of fraud. How have these theories evolved from Cressey?
Support your position with references to the readings in this unit and your own research. Be sure you follow current APA guidelines for citations and references.
Respond to the post of at least two of your peers. Use this discussion to share experiences and ideas. Ask questions, seek clarity, and offer your own perspective.