How The Fraud Triangle And Risk Factors Enabled Fraud At Fur

How the Fraud Triangle and Risk Factors Enabled Fraud at Furniture World

Furniture World, a retail outlet based in North Carolina, experienced a significant internal fraud incident when an employee, Elizabeth Pine, embezzled over $250,000 from the company over a period of 16 months. Pine, a trusted payroll clerk for over 15 years, manipulated the payroll system by arranging payments for fictitious employees, which were electronically deposited into bank accounts controlled by her. The fraud was ultimately uncovered during an internal audit when discrepancies in the payroll, such as multiple names with invalid Social Security numbers, came to light. This case exemplifies the complex interplay between individual motivations, perceived opportunities, and rationalizations, encapsulated in the Fraud Triangle, and highlights the importance of fraud risk management within organizations.

The Fraud Triangle Components and Their Role in the Case

The Fraud Triangle, developed by Donald Cressey, posits that three elements must converge for occupational fraud to occur: perceived pressure (motivation), perceived opportunity, and rationalization. In the Furniture World case, these components played critical roles in enabling the fraud.

Perceived Pressure (Motivation)

Elizabeth Pine faced considerable personal financial pressures, which likely motivated her to commit fraud. Detective Berry reported that Pine had recently divorced, had three children to support, and maintained several high-balance credit cards. These factors created financial strain, fostering an environment where embezzlement appeared to be a solution to her personal financial problems. Such pressures are common in fraud cases where individuals feel compelled to meet financial obligations or maintain their standard of living (Wells, 2014).

Perceived Opportunity

The company's internal controls over payroll processes provided Pine with a significant opportunity to commit fraud. As the payroll clerk, she had access to sensitive payroll data and the ability to authorize payments. The absence of strict segregation of duties and inadequate oversight allowed her to manipulate payroll records and arrange payments for fictitious employees without immediate detection. The internal audit’s discovery indicates that oversight mechanisms were insufficient to prevent or detect the fraud promptly (Albrecht et al., 2019).

Rationalization

Rationalization involves an individual justifying fraudulent behavior, often by perceiving they are justified due to their circumstances. Pine apparently believed her actions were justified to alleviate her financial burdens. Her intent to repay the stolen funds suggests a rationalization that her misconduct was a temporary response to her financial difficulties, a common rationalization in occupational fraud (Cressey, 1953). This mental justification enabled her to view her actions as morally acceptable, reducing psychological barriers to committing theft.

Application of Dr. Steve Albrecht’s Fraud Risk Factors and Theories

Using Dr. Steve Albrecht’s framework, which emphasizes organizational and individual factors influencing fraud, several elements facilitated Pine’s fraudulent activities. Albrecht stresses the importance of recognizing risk factors such as weak internal controls, lack of oversight, and employee financial pressures (Albrecht et al., 2019). The case illustrates that the internal control environment was inadequate, given that a trusted employee with long tenure exploited her position undetected for over a year and a half.

Furthermore, Albrecht’s model highlights employee vulnerability factors such as financial distress, which was evident in Pine’s personal situation. The combination of operational opportunity and personal financial pressures created a high-risk environment that ultimately led to fraud. Other risk factors include an organizational culture that perhaps lacked sufficient emphasis on internal controls and ethical standards, making employees more susceptible to rationalization and temptation (Wilkinson & Sparrow, 2019).

Assessment Using Hollinger and Clark’s Fraud Theories and Recommendations

Hollinger and Clark (1983) emphasize the role of organizational culture, management oversight, and internal control systems in preventing fraud. They argue that organizations that foster ethical climates, enforce strong controls, and promote transparency are less prone to such misconduct. In the Furniture World case, the company performed correctly by conducting an internal audit after discrepancies appeared. This indicates a functioning oversight mechanism capable of detecting anomalies; however, proactive measures were insufficient to prevent the fraud.

To prevent similar incidents, organizations should implement stronger internal controls, such as separating payroll duties, conducting regular and surprise audits, and establishing whistleblower policies. Employee background checks and ongoing ethics training could also reinforce a culture of integrity. Technology solutions, like automated payroll verification systems, can detect anomalies early, reducing opportunities for manipulation (Crook, 2018).

Conclusion

The Furniture World case exemplifies how the convergence of personal pressures, opportunity, and rationalization can lead to occupational fraud. The Fraud Triangle provides a useful lens to understand how Pine’s motive, opportunity, and rationalization aligned. Applying fraud risk assessment frameworks, such as Albrecht’s factors, highlights the importance of internal controls and organizational culture in fraud prevention. While the company’s detection efforts ultimately uncovered the fraud, preventative measures, including enhanced internal controls, oversight, and organizational ethics, could have mitigated the risk. Organizations must remain vigilant and proactive to combat fraud effectively and protect their assets and reputation.

References

• Albrecht, W. S., Albrecht, C. C., Albrecht, C. O., & Zimbelman, M. F. (2019). Fraud examination (6th ed.). Cengage Learning.
• Cressey, D. R. (1953). Other people's money: A study in the social psychology of embezzlement. Montclair State College.
• Crook, T. (2018). Fraud risk management: Building a proactive program. Journal of Business Ethics, 152(3), 617-629.
• Hollinger, R. C., & Clark, S. M. (1983). occupational crime: The criminal careers of employed offenders. West Publishing.
• Wilkinson, P., & Sparrow, M. (2019). Ethical challenges in fraud prevention: Organizational culture and internal controls. Journal of Financial Crime, 26(2), 400-414.
• Wells, J. T. (2014). Occupational Fraud and Abuse (7th ed.). AICPA.