The Role Of The Fraud Triangle In Fraud Commission In Saudi Banks-FINAL

ROLE OF THE FRAUD TRIANGLE

The role of the fraud triangle in fraud commission in Saudi Banks

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ROLE OF THE FRAUD TRIANGLE

Abstract

For over the years, Saudi Arabia has been a victim of fraud cases. Fraud can be described as,

deceiving intentionally so as to damage someone, or just to gain something in return. In order to

curb fraud, banks in Saudi Arabia formed a committee called Saudi Banks, which campaigns

against fraud. This paper focuses on the elements of the fraud triangle, and its role in the fraud

commission in Saudi Banks. It illustrates the relationship between fraud and each of these

elements, and how each element constitutes to the occurrence of a fraud.

Keywords: Fraud, Saudi Banks, the Fraud triangle

ROLE OF THE FRAUD TRIANGLE

Introduction

“Fraud triangle” is a term first used by Donald Cressey, a crime-sociology expert. It was his

theory to explain why people engage in fraud. In the 1960’s he was well known as a famed

criminologist. He stated that for a fraud to take place, it needed some components; opportunity,

pressure, and rationalization. Donald Cressey puts his assumptions as follows:

Trusted persons become trust violators when they conceive of themselves as having a

financial problem which is non-shareable, are aware that 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. (Donald R. Cressey, 1953).

In an attempt to curb Fraud, Saudi Banks, a committee which was formed by various banks in

Saudi Arabia started anti-fraud campaigns in parts of Saudi Arabia. The aim of these campaigns

was to educate the public on the roles of the fraud triangle in committing fraud, and how an

individual would be able to identify and avoid these elements of fraud.

Fraud in Saudi Arabia has been an endemic in the past years. However, since the formation of

the committee by the Saudi Arabian banks, Saudi Arabia has been ranked as one of the top

countries that are fighting against Fraud. Mr. Talat Zaki Hafiz, the secretary general of Saudi

Banks stated that by ordaining the strict rules for annihilating financial crimes and adhering to

the provisions of international bodies e.g. The France-based Financial Action Task Force

(FATF).

ROLE OF THE FRAUD TRIANGLE

He also added that this initiative was strongly supported by the Saudi Arabian Monetary agency.

In addition, the Agency set-up units that oversees the local banks, ensuring that they are not

exploited by fraudsters.

The components of the Fraud triangle are explained in detail below:

Opportunity and Fraud

For one to commit fraud there must be an opportunity presenting itself. It is the capability to

engage in fraud. An opportunity presents itself when the fraudster believes that their actions will

not be exposed. It is only possible when the employee gains the access to vital information that

enables them to engage in fraud. Opportunity originates from poor management, and abuse of

authority. Mostly, organizations have charge of this component. It is therefore vital that

organizations construct effective procedures and processes that keep employees away from fraud

opportunities.

Donald Cressey stated that most fraudsters use their trusted organization positions as an

opportunity to commit fraud. In Saudi Arabia most fraud cases were found to have risen from the

opportunities seized by senior officials in organizations, who controlled trusted activities of the

organizations. So the officials easily saw opportunities for fraud.

Pressure and Fraud

Pressure, sometimes referred to as motivation, or incentive, is another component of the fraud

triangle. It is a necessity which is felt by the fraudster. It can be any need; financial, health, etc.

or even performance related, where by the fraudsters is under pressure for good performance at

work. Also, pressure can come from addictions. Pressure is often the main cause of a fraudulent

ROLE OF THE FRAUD TRIANGLE

act by a person. The need is further classified into two, primary need and secondary need.

Primary needs are the basic needs. That is; Food, Shelter, and Clothing. An individual can

temporarily lack these needs and therefore opt to commit fraud. These necessities often put the

individual in a compromising situation, whereby he/she sees that committing the fraud is the

only option left. Secondary needs are often the luxury needs e.g. better lifestyles.

It is evident that this motivation is vital for a fraud to occur. An individual must develop the need

first before even seeing the opportunity to commit fraud.

Rationalization and Fraud

Rationalization can be described as the capability of a person to persuade his/herself that

something commonly known as wrong is okay. It includes a person propitiating his/her actions

with the conceptions of trust. The person will believe that what was wrong is now acceptable,

provided that it is done for a worthy cause. Rationalization is generally easy for people who are

already dishonest in nature and hard for honest people.

Rationalization is a vital component in most fraudulent actions. Examples of common

rationalizations are:

 The person believes that he is “just borrowing money” and he will return it.

 The person believes that by engaging in the fraudulent act he/she will save a loved one.

 The person believes that he/she deserves a raise.

 The person is dissatisfied with the treatment by the senior staff.

 The person cares less about the effects of their actions.

ROLE OF THE FRAUD TRIANGLE

Collusion and Fraud

Collusion can be describes as a concealed agreement made by two or more people in an attempt

to execute a fraudulent act. This is the most difficult component of fraud to expose. It has been

proven difficult to detect this type of fraud, since it involves a group of individuals who are

committing the fraud together.

It involves carefully laying out a plan that will involve all the individuals in the agreement to

commit fraud in order to fulfill their needs. The involvement of many people enables collusion to

detriment the organization’s security against fraud related issues, and therefore in many cases it

is nearly impossible for an auditor to detect that there was a fraud.

To avoid Collusion, a strong routine system-check of the organization’s financial reports and

balance sheets should be put in place. If this check is compromised, then this type of fraud is

likely to occur and its effect can be devastating. This is because of the cooperation with others

and thus hindering exposure.

Saudi banks educate its members on the dangers of this component of fraud, by introducing new

innovations that examine their employees’ behaviors. The employees are also educated on the

dangers of committing fraud, or helping others commit fraud and the importance of reporting

fraud.

ROLE OF THE FRAUD TRIANGLE

With reference to Saudi Banks, the following hypotheses are assumed:

H1 - There may be significant relation between Opportunity and Fraud.

Since Fraud cannot occur unless the potential fraudster sees an opportunity and seizes it, it can

therefore be noted that there is a notable relation that exists between opportunity and fraud. Saudi

Banks are interestingly taking measures to reduce the opportunity gaps that are created in the

organizations.

H2 - There may be significant relation between Pressure and Fraud.

An individual can have a certain need and thus make it the cause to commit fraud. It is therefore

evident that the pressure must be associated with the importance of the action, where by the

fraudster needs to undertake the act of fraud, so as to fulfill certain needs.

H3 - There may be significant relation between Rationalization and Fraud.

As explained above, rationalization enables the individual to make false excuses that comfort

him/her to commit fraud. Therefore, the individual must have convinced his/herself well enough,

so that he/she is able to engage in fraud. Saudi banks ensure awareness to the public, by

distributing leaflets, pamphlets and news-letters that help the public to know about the dangers of

fraud.

H4 - Collusion may mediate between Opportunity and Fraud.

The involvement of another individual in seizing an opportunity which requires team-work is

evidence that Collusion can intercede between Opportunity and Fraud. An individual will only

accept to take part in a fraudulent act if he also sees the opportunity presented to him.

H5 - Collusion may mediate between Pressure and Fraud.

This is evident when two or more individuals develop the same needs and therefore make an

agreement to commit fraud, in an attempt to satisfy their needs. The individuals are motivated by

the mutual feelings. Therefore, an individual with a certain need can be motivated by collusion.

H6 - Collusion may mediate between Rationalization and Fraud.

Individuals can be convinced by their co-workers into taking part in a fraudulent act. Although

he/she believes it is wrong, the involvement of a close co-worker can comfort him/her in to

believing that taking part in the act justifies him/her. Therefore, Collusion can be involved in the

relationship between rationalization and Fraud.

ROLE OF THE FRAUD TRIANGLE

References

http://www.boisestate.edu The Fraud triangle and what you can do about it. THE CERTIFIED

ACCOUNTANT 1st Quarter 2009 Issue # 37

Leisner, J. K. (2011). When there’s a team effort to defraud. New York: Stonebridge Business

Partners.

Wolfe, D. T. and Hermanson, D. R. (2004). The fraud diamond: Considering the four elements

of fraud. The CPA Journal, December, pp.1-5.

Murdock, H. (2008). The three dimensions of fraud. Internal Auditor, pp.1-14, August.

Arbor A. The Fraud Triangle. University of Michigan.

Mancino, Jane. 1997. The Auditor and Fraud. The Journal of Accountancy. 193 (April):

32-37.

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