Understanding Fraud Triangle And Its Relevance In Detecting And Preventing Fraud

The Fraud Triangle Constituents

1. The individuals could be motivated to conduct fraud due to financial pressures, work pressures or vices. In addition, the fraud perpetrators could be motivated through perceived opportunity for committing fraud and the ability to rationalise their deeds (Bhasin 2015). The fraud triangle comprises of three constituents to commit frauds and these include perceived pressure, perceived opportunity and technique of rationalising the fraud. With the help of fraud triangle, it is possible to determine the motives, opportunities and causes, which an individual possesses while committing fraud. Thus, the application of fraud triangle would help to concentrate on those organisational areas for detecting and preventing fraud.

Figure 1: Fraud Triangle

(Source: Boritz, Carnaghan and Alencar 2014)

The fraud incident of Clive Peeters Limited could be related with the above-depicted fraud triangle and scale and these are briefly discussed as follows:

Perceived Pressure:

The perceived pressure on the individual is the motivation behind the crime, which could arise due to financial pressure or workplace pressure. The most common forms of financial pressure include gambling debt and lifestyle maintenance (Gbegi and Adebisi 2014). In this case, Sonya Causer, the payroll manager of Clive Peeters Limited, has spent nearly a year of the business earnings in nine properties located in Australia. In this case, the lifestyle maintenance could be considered as the perceived pressure on the individual.

Perceived Opportunity:

This is the technique through an individual would be able to commit fraud. In case of Clive Peeters Limited, Ms Causer has falsified the payroll records of the organisation by transferring its cash availability to her personal bank account. In order to safeguard her actions, Ms Causer has modified the payroll records of the organisation.

Rationalisation:

This is the final phase, in which the fraudster finds ways to justify, which is acceptable to her internal moral compass (Kumar 2017). In case of Clive Peeters Limited, Ms Causer has aimed to falsify the financial records of the organisation by modifying the figures on internal accounting systems. In order to protect herself, Ms Causer has provided an explanation that she falsified the accounting ledger entries for helping the organisation.

2. It is assumed that Sonya Causer has committed the fraud in Singapore with the presumption that Clive Peteers Limited is a Singaporean firm. Under such scenario, in order to prove the falsification of accounts, Section 477A, Penal Code of Singapore could be used to conduct the same. According to this section, any person with an intention to defraud destroys, conceals or falsifies any book for his/her employer would be punished for a sentence term of 10 years or fine or both (Lillis et al. 2016). In order to prove the guilt of Sonya Causer, Clive Peteers Limited could obtain electronic records depicting the account falsification to accuse the person as guilty. The major elements need to support this charge include the passing of false entry in company accounts with full willingness and fraudulent intent (Seda and Kramer 2014).

3. The accounting fraud of Sonya Causer, the payroll manager of Clive Peeters Limited, has played the biggest role in the collapse of the organisation. The person has falsified the accounts and transferred $20 million cash into her bank account. Such fraud is further followed by fall in sales during the past month, which is another reason behind collapse of the organisation. In addition, poor liquidity position of the company could be adjudged as another reason behind such collapse (Williams 2014).Due to such condition, the management of the organisation has sold its 44 stores. Harvey Norman has purchased its retail store, operational processes and stocks for $55 millions. Thus, these above-mentioned factors have lead to the collapse of Clive Peeters Limited together.

Application of Fraud Triangle in Detecting and Preventing Fraud

4. a)

Particulars			Horizontal
2008 ($’000)	2009 ($’000)	% Change
Revenue	534,883	496,859	-7.11%
Cost of Sales	393,795	375,969	-4.53%
Gross Profit	141,088	120,890	-14.32%
Other revenue	38,271	36,622	-4.31%
Other income	22	–	-100.00%
Distribution expenses	10,360	10,121	-2.31%
Occupancy expenses	26,307	30,315	15.24%
Administration expenses	33,239	32,840	-1.20%
Sales and marketing expenses	80,288	75,693	-5.72%
Finance costs	3,011	3,421	13.62%
Misappropriation of expense	–	4,815
Other expenses	11,482	11,653	1.49%
Profit before income tax expense	14,694	(11,346)	-177.22%
Income tax expense	4,421	2,374	-46.30%
Profit for the period	10,273	(8,972)	-187.34%
Earnings per share:
Basic	8	(7)	-187.65%
Diluted	8.1	(7.1)	-187.65%

Table 1: Horizontal analysis of income statement of Clive Peeters Limited for the years 2008 and 2009

(Source: As created by author)

Particulars			Horizontal
2008 ($’000)	2009 ($’000)	% Change
Current Assets:
Cash and cash equivalents	17,083	4,561	-73.30%
Trade and other receivables	31,952	27,096	-15.20%
Inventories	131,388	108,080	-17.74%
Other	12,599	19,116	51.73%
Total Current Assets	193,022	158,853	-17.70%
Non-Current Assets:
Plant and equipment	23,284	21,345	-8.33%
Brand names	10,600	10,600	0.00%
Goodwill	24,102	24,170	0.28%
Other intangibles	427	1,061	148.48%
Other non-current financial assets	12	12	0.00%
Deferred tax assets	3,561	4,137	16.18%
Total Non-Current Assets	61,986	61,325	-1.07%
Total Assets	255,008	220,178	-13.66%
Non-Current Liabilities:
Deferred tax liabilities	2,460	2,460	0.00%
Trade and other payables	3,910	4,182	0.0695652
Provisions	368	425	15.49%
Borrowings	30,066	32,500	8.10%
Total Non-Current Liabilities	36,804	39,567	7.51%
Current Liabilities:
Trade and other payables	114,672	91,351	-20.34%
Current tax liabilities	1,058	–	-100.00%
Provisions	5,521	5,791	4.89%
Borrowings	16,742	14,066	-15.98%
Total Current Liabilities	137,993	111,208	-19.41%
Total Liabilities	174,797	150,775	-13.74%
Net Assets	80,211	69,403	-13.47%
Equity:
Issued capital	54,578	54,578	0.00%
Equity settled employee benefits reserve	–	69
Retained earnings	25,633	14,756	-42.43%
Total Equity	80,211	69,403	-13.47%

Table 2: Horizontal analysis of balance sheet statement of Clive Peeters Limited for the years 2008 and 2009

(Source: As created by author)

Particulars			Horizontal
2008 ($’000)	2009 ($’000)	% Change
Cash Flows from Operating Activities:
Receipts from customers	618,758	595,371	-3.78%
Payments to suppliers and employees	(599,846)	(584,393)	-2.58%
Proceeds from insurance	1,713	848	-50.50%
Interest received	412	185	-55.10%
Interest and other costs of finance paid	(3,011)	(3,421)	13.62%
Tax paid	(4,811)	626	-113.01%
Misappropriated funds	(3,871)	(14,677)	279.15%
Net cash provided by operating activities	9,344	(5,461)	-158.44%
Cash Flows from Investing Activities:
Payments for businesses	(6,410)	–	-100.00%
Proceeds from disposal of plant and equipment	37	53	43.24%
Payment for intangibles	(182)	(877)	381.87%
Payment for plant and equipment	(8,619)	(4,090)	-52.55%
Net cash used in investing activities	(15,174)	(4,914)	-67.62%
Cash Flows from Financing Activities:
Proceeds from borrowings	20,000	–	-100.00%
Repayment of borrowings	(679)	(242)	-64.36%
Dividends paid	(7,620)	(1,905)	-75.00%
Net cash provided by financing activities	11,701	(2,147)	-118.35%
Net cash increase/decrease in cash held	5,871	(12,522)	-313.29%
Cash at the beginning of the financial year	11,212	17,083	52.36%
Cash at the end of the financial year	17,083	4,561	-73.30%

Table 3: Horizontal analysis of cash flow statement of Clive Peeters Limited for the years 2008 and 2009

(Source: As created by author)

Particulars			Horizontal
2008 ($’000)	2009 ($’000)	% Change
Retained Earnings:
Retained earnings at the beginning of the year	22,980	25,633	11.54%
Net profit attributable to members of the parent entity	10,273	(8,972)	-187.34%
Dividends Paid	(7,620)	(1,905)	-75.00%
Retained earnings at the end of the year	25,633	14,756	-42.43%
Issued Capital:
Share capital at the beginning of the year	54,578	54,578	0.00%
Share capital at the end of the year	54,578	54,578	0.00%
Total recognised income and expense for the year:
Profit for the year	10,273	(8,972)	-187.34%
Total income and expense for the period	10,273	(8,972)	-187.34%

Table 4: Horizontal analysis of statement of changes in equity of Clive Peeters Limited for the years 2008 and 2009

(Source: As created by author)

4. b)

Particulars			Vertical
2008 ($’000)	2009 ($’000)	% change in 2008	% change in 2009
Revenue	534,883	496,859	379.11%	411.00%
Cost of Sales	393,795	375,969	-279.11%	-311.00%
Gross Profit	141,088	120,890	100.00%	100.00%
Other revenue	38,271	36,622	260.45%	-322.77%
Other income	22	–	0.15%	0.00%
Distribution expenses	10,360	10,121	-70.50%	89.20%
Occupancy expenses	26,307	30,315	-179.03%	267.19%
Administration expenses	33,239	32,840	-226.21%	289.44%
Sales and marketing expenses	80,288	75,693	-546.40%	667.13%
Finance costs	3,011	3,421	-20.49%	30.15%
Misappropriation of expense	–	4,815	0.00%	42.44%
Other expenses	11,482	11,653	-78.14%	102.71%
Profit before income tax expense	14,694	(11,346)	143.04%	126.46%
Income tax expense	4,421	2,374	-43.04%	26.46%
Profit for the period	10,273	(8,972)	100.00%	100.00%
Earnings per share:
Basic	8	(7)
Diluted	8.1	(7.1)

Table 5: Vertical analysis of income statement of Clive Peeters Limited for the years 2008 and 2009

(Source: As created by author)

Particulars			Vertical
2008 ($’000)	2009 ($’000)	% change in 2008	% change in 2009
Current Assets:
Cash and cash equivalents	17,083	4,561	8.85%	2.87%
Trade and other receivables	31,952	27,096	16.55%	17.06%
Inventories	131,388	108,080	68.07%	68.04%
Other	12,599	19,116	6.53%	12.03%
Total Current Assets	193,022	158,853	75.69%	72.15%
Non-Current Assets:
Plant and equipment	23,284	21,345	37.56%	34.81%
Brand names	10,600	10,600	17.10%	17.28%
Goodwill	24,102	24,170	38.88%	39.41%
Other intangibles	427	1,061	0.69%	1.73%
Other non-current financial assets	12	12	0.02%	0.02%
Deferred tax assets	3,561	4,137	5.74%	6.75%
Total Non-Current Assets	61,986	61,325	24.31%	27.85%
Total Assets	255,008	220,178	100.00%	100.00%
Non-Current Liabilities:
Deferred tax liabilities	2,460	2,460	6.68%	6.22%
Trade and other payables	3,910	4,182	10.62%	10.57%
Provisions	368	425	1.00%	1.07%
Borrowings	30,066	32,500	81.69%	82.14%
Total Non-Current Liabilities	36,804	39,567	21.06%	26.24%
Current Liabilities:
Trade and other payables	114,672	91,351	83.10%	82.14%
Current tax liabilities	1,058	–	0.77%	0.00%
Provisions	5,521	5,791	4.00%	5.21%
Borrowings	16,742	14,066	12.13%	12.65%
Total Current Liabilities	137,993	111,208	78.94%	73.76%
Total Liabilities	174,797	150,775	100.00%	100.00%
Net Assets	80,211	69,403	100.00%	100.00%
Equity:
Issued capital	54,578	54,578	68.04%	78.64%
Equity settled employee benefits reserve	–	69	0.00%	0.10%
Retained earnings	25,633	14,756	31.96%	21.26%
Total Equity	80,211	69,403	100.00%	100.00%

Table 6: Vertical analysis of balance sheet statement of Clive Peeters Limited for the years 2008 and 2009

(Source: As created by author)

Particulars			Vertical
2008 ($’000)	2009 ($’000)	% change in 2008	% change in 2009
Cash Flows from Operating Activities:
Receipts from customers	618,758	595,371	6621.98%	-10902.23%
Payments to suppliers and employees	(599,846)	(584,393)	-6419.58%	10701.21%
Proceeds from insurance	1,713	848	18.33%	-15.53%
Interest received	412	185	4.41%	-3.39%
Interest and other costs of finance paid	(3,011)	(3,421)	-32.22%	62.64%
Tax paid	(4,811)	626	-51.49%	-11.46%
Misappropriated funds	(3,871)	(14,677)	-41.43%	268.76%
Net cash provided by operating activities	9,344	(5,461)	100.00%	100.00%
Cash Flows from Investing Activities:
Payments for businesses	(6,410)	–	42.24%	0.00%
Proceeds from disposal of plant and equipment	37	53	-0.24%	-1.08%
Payment for intangibles	(182)	(877)	1.20%	17.85%
Payment for plant and equipment	(8,619)	(4,090)	56.80%	83.23%
Net cash used in investing activities	(15,174)	(4,914)	100.00%	100.00%
Cash Flows from Financing Activities:
Proceeds from borrowings	20,000	–	170.93%	0.00%
Repayment of borrowings	(679)	(242)	-5.80%	11.27%
Dividends paid	(7,620)	(1,905)	-65.12%	88.73%
Net cash provided by financing activities	11,701	(2,147)	100.00%	100.00%
Net cash increase/decrease in cash held	5,871	(12,522)	34.37%	-274.55%
Cash at the beginning of the financial year	11,212	17,083	65.63%	374.55%
Cash at the end of the financial year	17,083	4,561	100.00%	100.00%

Table 7: Vertical analysis of cash flow statement of Clive Peeters Limited for the years 2008 and 2009

(Source: As created by author)

Particulars			Vertical
2008 ($’000)	2009 ($’000)	% change in 2008	% change in 2009
Retained Earnings:
Retained earnings at the beginning of the year	22,980	25,633	89.65%	173.71%
Net profit attributable to members of the parent entity	10,273	(8,972)	40.08%	-60.80%
Dividends Paid	(7,620)	(1,905)	-29.73%	-12.91%
Retained earnings at the end of the year	25,633	14,756	100.00%	100.00%
Issued Capital:
Share capital at the beginning of the year	54,578	54,578	100.00%	100.00%
Share capital at the end of the year	54,578	54,578	100.00%	100.00%
Total recognised income and expense for the year:
Profit for the year	10,273	(8,972)	100.00%	100.00%
Total income and expense for the period	10,273	(8,972)	100.00%	100.00%

Table 8: Vertical analysis of statement of changes in equity of Clive Peeters Limited for the years 2008 and 2009

(Source: As created by author)

Income statement:

From the horizontal and vertical analyses of income statement, it has been found that the net profit for the organisation has fallen sharply in 2009 from $14,694,000 in 2008 to ($11,346,000) in 2009. This is due to the fall in overall revenues and rise in occupancy expenses. As a result, it has been struggling to maintain its position in the Australian market.

Balance sheet statement:

From the horizontal and vertical analyses of balance sheet statement, it has been found that the organisation has experienced a significant fall in net assets from $80,211 in 2008 to $69,403 in 2009. The same trend is observed in case of retained earnings, as the amount has declined to $14,756 in 2009 from $25,633 in 2008. This depicts that the fraudulent act of Sonya Causer has increased the amount of debt burden, which has lowered down its overall profitability (Taha 2016).

Cash flow statement:

From the horizontal and vertical analyses of cash flow statement, it has been found that the net cash inflows from operating activities have declined largely by -158.44% in 2009 due to higher amount of misappropriated funds. As a result, it has reduced the amount of cash availability of the organisation, which has further the amount of dividend distribution.

Statement of changes in equity:

The horizontal and vertical analyses clearly inherit that the organisation has experienced a fall in net profit due to which the shareholders have earned minimised return on investments. This has further lowered down the amount of retained earnings for the organisation, thus, creating difficulties to carry out its day-to-day operations.

4. c)

Particulars	Details	2008	2009
Revenue	A	534,883	496,859
Cost of Sales	B	393,795	375,969
Gross Profit	C	141,088	120,890
Net Profit	D	10,273	(8,972)
Current Assets	E	193,022	158,853
Current Liabilities	F	137,993	111,208
Opening inventory	G	98,906	131,388
Closing inventory	H	131,388	108,080
Average inventory	I=(G+H)/2	115,147	119,734
Gross Margin	C/A	26.38%	24.33%
Net Margin	D/A	1.92%	-1.81%
Current Ratio	E/F	1.40	1.43
Quick Ratio	(E-G)/F	0.45	0.46
Inventory Turnover	365/(B/I)	106.73	116.24

Table 9: Five key ratios of Clive Peeters Limited for the years 2008-2009

(Source: As created by author)

According to the above table, it has been evident that both gross margin and net margin of the organisation has fallen sharply. This is because of the declining revenue margin and the increasing operational expenses. In addition, the organisation has been struggling from poor liquidity position, as depicted out through current and quick ratios, due to rising amount of debt burden and fall in working capital base. Finally, Clive Peeters Limited has experienced a fall in market demand, as longer time is taken to release its inventory. Hence, from the above evaluation, it is evident that the company is not able to maintain its competitive edge in the Australian market due to falling revenue, market demand and increasing debt burden.

4. d)

Particulars	Details	Basis	2008	2009
Receivables	A		31952	27096
Sales	B		534883	496859
Days Sales in Receivables Index (DSRI)	A/B	Current year/Previous year	0.91
Gross Profit	C		141088	120890
Gross Margin Index (GMI)	C/B	Previous year/Current year	1.08
Non-Current Assets	D		61986	61325
Plant and equipment	E		23284	21345
Total Assets	F		255008	220178
Asset Quality Index (AQI)	(D-E)/F	Current year/Previous year	1.20
Sales Growth Index (SGI)	B	Current year/Previous year	-0.07
Depreciation	G		8016	11747
Plant and equipment	H		9112	11841
Depreciation Index (DEPI)	G/(G+H)	Previous year/Current year	0.94
Sales, general and administrative expense	I		113527	108533
Sales, general and administrative expense index (SGAI)	I/B	Current year/Previous year	1.03
Current Assets	J		193022	158853
Current Liabilities	K		137993	111208
Working Capital	L=(I-K)		55029	47645
Cash	M		17083	4561
Depreciation	N		8016	11747
Total Accruals to total assets (TATA)	(L-M)/N	Current year/Previous year	1.05
Total Debt	O	36804	39567
Total Assets	P	255008	220178
Leverage Index	O/P	Current year/Previous year	1.25

Table 10: Beneish ratios of Clive Peeters Limited for the years 2008-2009

(Source: As created by author)

4. e)

In order to achieve the 5-variable M-score, the following formula has been applied:

M= -6.065 + 0.823*DSRI + 0.906*GMI + 0.593*AQI + 0.717*SGI + 0.107*DEPI

	-6.065
	0.823
	0.906
	0.593
	0.717
	0.107
DSRI	0.91
GMI	1.08
AQI	1.2
SGI	-0.07
DEPI	0.94
M-Score	-3.5756

8-variable M-score:

In order to achieve the 5-variable M-score, the following formula has been applied:

M = -4.84 + 0.92*DSRI + 0.528*GMI + 0.404*AQI + 0.892*SGI + 0.115*DEPI – 0.172*SGAI + 4.679*TATA – 0.327*LVGI

	-4.84
	0.92
	0.528
	0.404
	0.892
	0.115
	0.172
	4.679
	-0.327
DSRI	0.91
GMI	1.08
AQI	1.2
SGI	-0.07
DEPI	0.94
SGAI	1.03
TATA	1.05
LVGI	1.25
M-Score	2.24244

In case, if the score obtained is above -1.78, it denotes that the firm is a strong manipulator. For Clive Peeters Limited, the score is well above the mentioned one, which again validates the falsification of accounts on the part of Sonya Causer.

References:

Bhasin, M.L., 2015. An empirical investigation of the relevant skills of forensic accountants: experience of a developing economy.

Boritz, J.E., Carnaghan, C. and Alencar, P.S., 2014. Business modeling to improve auditor risk assessment: An investigation of alternative representations. Journal of Information Systems, 28(2), pp.231-256.

Gbegi, D.O. and Adebisi, J.F., 2014. Forensic accounting skills and techniques in fraud investigation in the Nigerian public sector. Mediterranean Journal of Social Sciences, 5(3), p.243.

Kumar, M., 2017. Investigation of Credit Risk based on Indian Firm Performance. International Journal of Risk and Contingency Management (IJRCM), 6(2), pp.35-46.

Lillis, D., Becker, B., O’Sullivan, T. and Scanlon, M., 2016. Current Challenges and Future Research Areas for Digital Forensic Investigation. arXiv preprint arXiv:1604.03850.

Seda, M. and Kramer, B.K.P., 2014. An examination of the availability and composition of forensic accounting education in the United States and other countries. Journal of Forensic & Investigative Accounting, 6(1), pp.1-46.

Taha, K.H., 2016. Extracting Useful Information from Mobile Communication Data for Forensic Investigation. Advanced Science Letters, 22(10), pp.3100-3104.

Williams, J.W., 2014. The private eyes of corporate culture: the forensic accounting and corporate investigation industry and the production of corporate financial security. In Corporate Security in the 21st Century (pp. 56-77). Palgrave Macmillan UK.

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