Fraud diamond risk indicator: An assessment of its importance and usage

Abstract

Recent fraud surveys published by large accounting professional firms in Malaysia (e.g. KPMG 2009, PriceWaterHouseCooper 2009) indicated that preceding actual financial fraud cases, red flags or indicators have always been detected by auditors. Nevertheless such red flags are often ignored or "pushed under the carpet" by companies who are victims of such frauds. The reasons for ignoring the indicators vary from "an effort towards facesaving" to "the amount is too small to affect the company's performance". Using the fraud diamond model, the current study is undertaken to identify what fraud risk indicators are considered as important and whether they are ultimately used by companies to prevent or to detect financial fraud. The study uses a questionnaire survey on three groups of accounting professionals: external auditors, internal auditors and government auditors who are often involved in financial fraud detection and investigation. A total of 135 professionals responded. The results provide basic understanding as to why fraud indicators are often ignored and not taken seriously. Moving forward, the study provides important "what to do list" for accounting professionals in their effort to mitigate financial fraud cases in the future.

Effects of Internal Controls, Fraud Motives and Experience in Assessing Likelihood of Fraud Risk

“…While [11] find that "opportunity red flags" is the top five important indicator for internal and government auditors. Opportunity being look as an influences to the distribution of criminal behavior, for example if the employee have the financial pressure but thus not have the opportunity then the fraud could not be happens probably high.…”

“…To assess the fraud risk, auditor need to understand the opportunity in the fraud triangle because opportunity allow fraudster to seek a solution through illegitimate means [8]. Plus the previous research [5], [11] also suggesting the opportunity is the important element when assessing the fraud risk.…”

“…Exposure to the fraud triangle to both will make the ability in assessing of the likelihood of fraud risk increase. However auditor more reluctant to adopt the fraud triangle alone in assessing the fraud risk because of the exposure they have compare to the student [3], [11]. Therefore the third hypotheses will be: 3 = Auditor and student have a different perspective about internal control framework and fraud triangle element (i.e.…”

“…Auditor able to identify the fraud triangle element during the performing the audit but the level of usage of fraud triangle element still low. As [11] find there's an obvious gap between what is perceived to be important and what is actually being used as fraud risk indicators by the practicing practitioners. Beside of the training, auditor need to be exposed into a various task for them to get hand on experienced in detecting fraud because the more experienced auditors are generally more likely to detect fraud than inexperienced auditors [6].…”

Integrating ethical values into fraud triangle theory in assessing employee fraud: Evidence from the Malaysian banking industry

“…In the past, much opportunity is possible for employees to commit white collar crimes if internal control of the management is low (Kassem & Higson, 2012;Wolfe & Hermanson, 2004). Previous studies (Dinapoli, 2008;Omar & Din, 2010;Lou &Wang, 2011, andDellaportas, 2013) have indicated that various elements, such as unclear separation of roles and responsibilities, poor documentation on policies, procedures and guidelines, insufficient physical controls by security guards, entering the transaction in an untimely manner, unrestricted access to corporate check books, and insecure control of cash boxes, present numerous opportunities for fraud to occur within the banking sector. Thus, management should emphasize on policy implementation and strengthen the power of internal control.…”