Fraud+Triangle+Framework

The public accounting profession has developed over the years and tax practice has always been an integral component. This practice as a profession embraces a strong public interest notion. But the problem arises whether tax practice should serve the client or maintain the integrity of the tax system. Ethical failures over the past decade have weakened the tax profession and called into question the extent to which practitioners in fact operate in a manner consistent with the public interest. This is in line with the current notion of corporate social responsibility (CSR). The Fraud Triangle Model will be used as a framework for explaining the fundamental causes of the ethical problems that arose in the tax profession.

toc

=**1. Definition** = The fraud triangle model follows from Cressey’s (1953) fraud theory, which explained why trust violators commit fraud and was widely used by regulators, professionals and academics. This theory helps one to detect fraud and the conceptualization of this theory serves as a framework to analyze the tax profession. According to Cressey (1953) fraud does involve three elements: opportunity, incentives and rationalization. These three elements work together in a triangle. So, for fraud to occur, each element has to be present. If each of the elements is not present, fraud will not occur according to Cressey (1953). Opportunity and incentives are derived from the external environment, while rationalization is internal to the individual.

1.1 Opportunity
Opportunities for fraud occur in the tax-reporting environment. Information asymmetry, uncertainty or ambiguity can be considered as opportunities combined with absent or lax monitoring and enforcement mechanisms can create these opportunities. These opportunities might also arise where the detection risk is low. This goes hand in hand with absent or lax monitoring. Lister (2007: 63) describes this as “the fuel that keeps the fire going”.

1.2 Incentives
This element serves to influence judgment and represent the “return” to fraudulent tax reporting (Stuebs and Wilkinson 2010). Incentives can take three primary forms: economic, social and moral.  The effects from these incentives are interrelated and can conflict with one another. The main conflict that arises is the fact that economic considerations of costs and benefits engross the public goods. This leads to a conflict between economic incentives and social and moral incentives. Lister (2007: 63) defines this element as “the source of heat for the fire”.
 * Economic incentives involve individuals behaving in ways thattheir own self-interests.
 * Social incentives involve individuals’ aversion to being seen by others as engaging in wrongful behavior
 * Moral incentives involve individual’s aversion to doing something they consider to be wrong

1.3 Rationalization
This element involves the individuals’ internal response to the external opportunity (Stuebs and Wilkinson 2010: 16). This response shows an individual’s internal moral incentive with economic and social incentives present in the environment and its current situation. A rationalization approach tries to eliminate the difference between what should be done and what is done. Lister (2007: 63) defined it as “the oxygen that keeps the fire burning”.



 Now the elements of the fraud triangle are explained, it is possible to show how these elements lead to a deviation of the normative ideal and why this is happening.

=2. Normative ideal and deviation from it = <span style="font-family: 'Times New Roman',Times,serif;">The nature of our tax system creates incentives and leaves open opportunities for fraud. This leads to a system that is dependent on a tax practitioner’s internal good judgment to limit rationalization and prevent this fraud. The central tenet of avoiding trust violations in tax practice is embedded in the professional requirement to serve the public interest in preference to purely private interest (Stuebs and Wilkinson 2010: 17). This normative ideal is the way things should be. The balance between public and personal interest is key in this normative ideal. Although, in recent decades it became clear that something has gone awry in this balance. This indicates a failure of professional ethics within the tax profession. This deviation from the normative ideal is then based upon the elements in the fraud triangle model. These elements create possibilities for awry in the balance between public and personal interest. The fundamental cause of this failure might be the loss of a public interest emphasis within the accounting profession leading to a focus of on the pursuit of self interest (Stuebs and Wilkinson 2010). This failure might be a reason for companies to act in an unethical manner. The kind of activities involved regarding this unethical manner are, for example, tax planning, tax evasion and tax compliance.

=<span style="font-family: 'Times New Roman',Times,serif;">3. Further research = <span style="font-family: 'Times New Roman',Times,serif;">Other researchers have tried to improve the fraud triangle framework to understand even better why people engage in trust violations. Wolfe and Hermanson (2004) came up with the “Fraud Diamond Model” which includes the element capability. They believe that many frauds would not have occurred without the right person with the right capabilities implementing the details of the fraud. This addition to the model leads to a better understanding of why fraud is committed. Kassem and Higson (2012) integrated this model into the fraud triangle of Cressey (1953) and it now includes motivation, opportunity, integrity and fraudster’s capability. External auditors should consider this model when assessing the risk of fraud.

=<span style="font-family: 'Times New Roman',Times,serif;">4. Conclusion = <span style="font-family: 'Times New Roman',Times,serif;">In the past decades it has become clear that the balance between public and private interest has been disturbed. A way to explain this trust violation is the fraud triangle framework suggested by Cressey (1953). This framework involves three elements: opportunity, incentive and rationalization. If these three elements are present, fraud will occur. This leads to a deviation of the normative ideal of the tax profession. It seems that tax practitioners do not seriously take into account the professional obligation to serve the public interest. They prefer the personal interests to the public interests. This deviation induces companies or individuals to behave in activities like tax evasion, tax planning and tax compliance.