APPENDIX 4: LIST OF SCHEDULE 1 OFFENCES 270
3.4 FRAUD DIAMOND MODEL
Albrecht et al. (2006:51) suggest that fraudsters also use other rationalisations such as the belief that fraud is perpetrated with a good cause in mind; the fraudster will rectify the book entries once the financial pressure is sorted out, and lastly, either the integrity or reputation of the fraudster has to be sacrificed in order to prevent embarrassment to them should the fraud be detected and exposed. Wolfe and Hermanson (2004:38) summarise rationalisation as the
“attitude” of a fraudster towards his conduct. The Merriam-Webster Dictionary (2014) describes attitude as “a feeling or way of thinking that affects a person's behaviour”. The manner in which a person thinks or rationalises his/her intended actions will influence his/her response towards that conduct. The elements of the fraud triangle are of particular relevance when addressing employee fraud and prevention strategies at universities in KwaZulu-Natal.
Figure 3.3: Fraud Diamond
Source: Wolfe and Hermanson (2004:38)
3.4.1 Capability
Wolfe and Hermanson (2004:38) suggest that frauds, which result in significant losses, are usually committed by “the right person with the right capabilities”. The authors hold the view that a person has to have the requisite traits to recognise an opportunity to commit fraud and the capacity to exploit that opportunity, thereby committing the fraudulent act. The other elements of the fraud triangle have to be present as well for fraud to take place.
According to Wolfe and Hermanson (2004:39), there are six types of traits and abilities that are symptomatic of a fraudster’s capability. These employee capabilities are based on the following:
Position or type of job
Intelligent and experienced
Egoist and confident
Persuasive personality
Liar
Handles stress well
The above authors suggest that fraudsters often rely on their position within an organisation to exploit opportunities or to create new opportunities to commit fraud. They are usually highly intelligent people who have substantial experience in their fields of expertise, and they understand the weaknesses within the organisations for which they work. They are confident
and have big egos, which make them believe that they are invincible. These types of people can influence other employees or suppliers to perpetrate and/or conceal the fraud. A fraudster is a good liar who is capable of maintaining a consistent trail of lies aimed at concealing the fraud. Lastly, fraudsters handle stress well because they need to continuously ensure that the fraud remains undetected in order to protect them (Wolfe and Hermanson, 2004:39).
KPMG (2013:7) suggest a differing view, arguing that the element of capability is a sub- category of the element of opportunity because the fraudster has to possess certain personal traits that predispose him/her to exploit existing opportunities to commit fraud. KPMG (2013:5) finds that there are only three elements which drive fraud, based on the fraud triangle.
The fourth element of capability, proffered by Wolfe and Hermanson, should be considered as a sub-element of opportunity.
Wolfe and Hermanson (2004:42) identify three steps in attempting to understand the capability of a person to commit fraud. Firstly, they suggest that an assessment is made of the traits and skills of senior executives and other key employees. These could include vetting their background, having discussions with them, observing their behaviour to identify any signs of dishonesty and taking note of what other people say about the behaviour of the person.
Secondly, if a person’s capability is identified as a risk, then adequate and appropriate internal controls have to be implemented, concurrent with regular auditing of the control environment associated with this person. These interventions have to be based on elements of the fraud diamond, but with specific focus on the capability of these employees to exploit identified opportunities. Lastly, it is suggested that a reassessment is made of the senior executives and key employees as an ongoing process. There is a need to reassess their capabilities as these tend to change as they are promoted in the organisation and gather more knowledge and authority in new positions. This may prompt a review of internal controls and/or the level of oversight over the new activities. According to Wolfe and Hermanson (2004:42), changes in business processes or systems may also warrant relevant review and enhancement of existing internal controls, due to new opportunities being created for employees who have the capability to commit fraud.
The above three steps suggested by Wolfe and Hermanson may not be pragmatic in a real life sense because the proactive vetting and clandestine enquiry processes suggested may not be easily achievable. This is more so when the employee being vetted is a senior manager or
executive director. However, global fraud surveys, such as the survey by the ACFE (2014:40), continuously reflect that these senior levels of management are more prone to commit fraud than other junior levels of employees.
According to Dorminey et al. (2011:23), there are two different types of fraudsters. They are
“predators” and “accidental fraudsters”. Predator fraudsters could be compared to career- criminals who commit crimes as a way of life. They have a criminal mind-set which is boosted by their arrogance. Predators are well organised, conceal their fraudulent schemes well and are not intimidated by auditors and other internal control interventions. Dorminey et al. (2011:23) postulate that a predator does not need pressure or rationalisation to commit fraud. The predator only seeks opportunities to commit fraud because of his/her criminal mind-set. This is unlike the accidental fraudster who requires all three elements of the fraud triangle to commit fraud. Dorminey et al. (2011:23) proffer a rival “New Fraud Diamond” model which is depicted in Figure 3.4 below. This “New Fraud Diamond” model reflects the aspects which motivate both types of fraudsters (accidental and predators). According to Dorminey et al.
(2011:23), the fraud triangle was created with the accidental fraudster in mind because they are law-abiding citizens who would not normally commit fraud.
Dorminey et al. (2011:23) found that predator fraudsters actively search for employment where they can commence their fraudulent schemes as soon as they are employed. Accidental fraudsters can eventually become predators if they are not caught out. The common element contained in the New Fraud Diamond model is opportunity. Both the predator and the accidental fraudster have to exploit an opportunity to commit fraud. Figure 3.4 below depicts the common element of opportunity:
Figure 3.4: A New Fraud Diamond emerges with a Common Element
Source: Dorminey et al. (2011:23)
The seminal fraud triangle model remains regularly cited by researchers such as Wells (2001:89), Albrecht et al. (2006:33) and Coenen (2008:10), who are involved in the study of employee fraud globally. The fraud diamond and the new fraud diamond models seek to enhance the understanding of researchers and other role players in the fields of fraud prevention and detection. Both predators and accidental fraudsters pose a risk to organisations.
The fraud triangle model has evolved into the fraud diamond model, which posits the existence of four elements that a fraudster requires to perpetrate fraud. The fourth element of the fraud diamond model is “capability”. Wolfe and Hermanson (2004:38) hold that fraud is committed by a person who has the “the right capabilities” to commit fraud. An honest employee who is under financial pressure, who is able to rationalise the unlawful deed, and who has found a weakness (opportunity) in the internal control system would not commit fraud if she/he is a law-abiding citizen. The fraud triangle model does not take into consideration the capability of a potential fraudster. The view of KPMG (2013:7) that the element of capability is a sub- category of the element of opportunity is not supported because Cressey (1973:30) holds that there has to be deficient internal financial controls (opportunity) which the fraudster exploits in order to commit the fraud. A dishonest employee with the capability to commit fraud would take advantage of such an opportunity to commit fraud. An honest employee would not exploit that opportunity to commit fraud. It is essential to understand the element of capability in order to prevent fraud.
The major theoretical stance that underpins this study is based on these four elements of the fraud diamond model, which are pressure, opportunity, rationalisation and capability. The ability to identify fraudsters and how they operate will be of assistance in addressing employee fraud and prevention strategies at universities in KwaZulu-Natal. In this regard, it is imperative that a holistic approach be considered by universities in KwaZulu-Natal.