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Dissertation Manuscript

Submitted to Northcentral University

Graduate Faculty of the School of Business in Partial Fulfillment of the

Requirements for the Degree of

DOCTOR OF PHILOSOPHY

Walfyette Powell

Prescott Valley, Arizona

December 2016

A Phenomenological Study of SAS No. 99 and Auditors' Perception of the Fraud Triangle Theory

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A Phenomenological Study of SAS No. 99 and Auditors' Perception of the Fraud Triangle Theory

Walfyette Powell

Approved by:

Ann Armstrong, EdD 1/30/2017

Chair: Ann Armstrong, EdD Date

Certified by: 1/30/17

Dean of School: Peter Bemski, PhD Date

Abstract

The fraud triangle theory is the underpinning principle of SAS No 99 and it is utilized by

auditors to detect and assess the likelihood of fraud during a financial statement audit.

Although the theory is relied upon to detect fraud many scholars believe it is inadequate

in fraud detection. From 2002 to 2008, undetected fraud increased from 5% to 7%. Based

on this claim it is evident that the fraud triangle theory has not improved auditors’ ability

to detect fraud. The theory articulates three critical elements that are present for a typical

individual who engages in fraud: opportunity, perceived pressure, and rationalization.

The theory has gained recognition over the last forty years; however, Kassem, Higson,

and Buchholz suggest that the fraud triangle is ineffective in detecting fraud. They

suggest that a new fraud theory should be implemented that includes motivation,

integrity, and capability because it would improve auditors’ ability to detect the

likelihood of financial statement fraud. The purpose of this qualitative phenomenological

study was to understand and describe U.S. auditors’ perceptions of the effectiveness of

fraud triangle theory and to determine if motivation, integrity, and capability should be

included in fraud theory. The researchers suggest the fraud triangle should be modified

and it should include motivation and capability which is observable events and

rationalization should be removed because it is not an observable event. Future research

on the fraud triangle theory should focus on two important areas. First, future research

should identify techniques to determine if an employee has rationalized their actions to

commit financial fraud and future research should focus on modifying SAS No. 99.

Lastly, findings from this research may help auditors to perform their duties to detect

whether financial statement fraud exists in an organization.

Acknowledgements

First and foremost, I would like to thank God my heavenly father who has given

me the strength, fortitude and faith to successfully complete my dissertation “I never

would have made it without you.” Next, I want to thank my mother and sisters who have

always supported me in my endeavors, their words of encouragement and faith in my

abilities inspired me throughout my dissertation journey. My family’s love and support

gave me the tools I needed to achieve my goals. I know that I am lucky to have such a

wonderful support-base - thanks for the love!

Lastly, I am forever grateful to Dr. Armstrong, my dissertation chair. Your words

of support, Skype meetings, and telephone calls were appreciated, and without your help,

this dissertation would not have been possible.

Faith

I can do all things through Christ which strengthens me Philippians 4:13

Table of Contents

Chapter 1: Introduction ....................................................................................................... 7

Statement of the Problem ............................................................................................ 11 Purpose of the Study ................................................................................................... 12 Theoretical Framework ............................................................................................... 13 Research Questions ..................................................................................................... 15 Nature of the Study ..................................................................................................... 15 Significance of the Study ............................................................................................ 16 Definition of Key Terms ............................................................................................. 17 Summary ..................................................................................................................... 19

Chapter 2: Literature Review ............................................................................................ 21

Brainstorming ............................................................................................................. 36 Professional Skepticism in Fraud Detection ............................................................... 39 Analytical Procedures ................................................................................................. 42 SAS No. 99 and Internal Control ................................................................................ 45 The Evolution of Statements of Auditing Standards .................................................. 49 Risk Assessment ......................................................................................................... 55 Audit Evidence............................................................................................................ 61

Chapter 3: Research Method ............................................................................................. 69

Research Methods and Design(s)................................................................................ 70 Population ................................................................................................................... 71 Sample......................................................................................................................... 72 Materials/Instruments ................................................................................................. 74 Data Collection, Processing, and Analysis ................................................................. 76 Assumptions ................................................................................................................ 82 Limitations .................................................................................................................. 83 Delimitations ............................................................................................................... 83 Ethical Assurances ...................................................................................................... 84 Summary ..................................................................................................................... 85

Chapter 4 ........................................................................................................................... 87

Results ......................................................................................................................... 90 Evaluation of Analysis ................................................................................................ 95 Summary ................................................................................................................... 118

Chapter 5: Implications, Recommendations, and Conclusions ...................................... 120

References ....................................................................................................................... 144

Appendix A: .................................................................................................................... 151

Appendix B: .................................................................................................................... 152

Appendix C: .................................................................................................................... 155

List of Tables Table 1 .............................................................................................................................. 92 Table 2 .............................................................................................................................. 97 Table 3 .............................................................................................................................. 97 Table 4 .............................................................................................................................. 98 Table 5 ............................................................................................................................ 101 Table 6 ............................................................................................................................ 102 Table 7 ............................................................................................................................ 104 Table 8 ............................................................................................................................ 105 Table 9 ............................................................................................................................ 107 Table 10 .......................................................................................................................... 108 Table 11 .......................................................................................................................... 110 Table 12 .......................................................................................................................... 111 Table 13 .......................................................................................................................... 111 Table 14 .......................................................................................................................... 112 Table 15 .......................................................................................................................... 114 Table 16 .......................................................................................................................... 116

Chapter 1: Introduction

The Nations on Occupational Fraud & Abuse stated that each year 5% of a

company’s revenue is lost due to fraud (Campanelli, 2016). This number is staggering

because it equates to millions of dollars each year. In the worst-case scenario, financial

statement fraud has destroyed billion-dollar companies, such as Enron, Arthur Anderson,

and WorldCom. Because financial statement fraud has a catastrophic effect on the

economy, it is a major concern to the Public Company Accounting Oversight Board

(PCAOB), whose responsibility it is to protect the investing public by ensuring that

financial statement fraud does not occur or that the impact of financial statement fraud is

kept to a minimum.

To ensure that financial statement fraud is kept to a minimum, the Public

Company Accounting Oversight Board (PCAOB) has specific guidelines that auditors

must follow when an auditing a company’s financial statements

(http://pcaobus.org/Rules, 2016). Auditing is the process of verifying accounting

information to ensure that the data is accurately presented. However, because of the

increase in financial statement fraud, new regulations require that auditors improve their

auditing procedures to detect the likelihood of fraud during an audit (Kranacher et al.,

2011). To ensure auditors improve their ability to detect fraud, The Statement on

Auditing Standard No. 99 (SAS No. 99) was enacted (AICPA, 2002). SAS No. 99

identifies the skills, provides the guidance, and identifies the standards that auditors must

follow to plan and perform the audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement (AICPA, 1997). To obtain this

reasonable assurance, auditors must look for fraud throughout the entire audit process.

Fraud is defined as an “intentional deception,” whether by omission or co-

omission, that causes its victim to suffer an economic loss or the perpetrator to realize a

gain (Kranacher, Wiley, & Wells, 2011, p. 5). Fraud can occur in many forms, such as

check fraud, securities fraud, occupational fraud, and financial statement fraud

(Kranacher, Wiley, & Wells). Financial statement fraud arises from financial reporting

misstatements and from misappropriation of assets (Casabona & Grego, 2003). To ensure

that public companies did not prepare fraudulent financial statements, they are required to

have an annual audit that follows the policies and procedures of SAS No. 99.

SAS No. 99, which was enacted in October 2002, and which supersedes SAS No.

82 (Casabona & Grego, 2003). SAS No. 82 identified the responsibilities of auditors in

evaluating the risk of material financial misstatements due to fraud, whereas as SAS No.

99 identifies how auditors plan the audit in response to the risk identified (Whittington, &

Landsittel, 2001). SAS No. 99 does not change the auditors’ responsibility to detect

fraud; nonetheless, it is an improved version of SAS No. 82 because it provides

additional guidance on how auditors should plan and perform the audit to detect fraud

(AICPA, 2002).

One of the major components of SAS No. 99 is the fraud triangle. The fraud

triangle was developed by Donald Cressey (1953), an American criminologist and

sociologist who conducted extensive research on the mindset of white-collar criminals.

Cressey’s research led him to develop the fraud triangle theory. The theory articulates

three critical elements that must be present for a typical individual to engage in fraud

(Kranacher et al., 2011). The three elements are perceived opportunity, perceived

pressure, and rationalization (Kranacher et al., 2011).

Individuals can be pressured financially for many reasons, such as poor credit,

living beyond one’s means, gambling, and drugs (Buchholz, 2012). Individuals may

attempt to relive financial pressure by stealing from their organization (Buchholz, 2012).

For example, the fraudster may obtain economic benefits by stealing cash from an

organization. However, a fraudster cannot steal cash from the company without having

the opportunity, which is another component of the fraud triangle theory.

Opportunity is an element of the fraud triangle theory over which companies have

the most control. Companies have control over opportunity because the opportunity to

commit fraud is determined by the company’s internal control structure. Therefore, if a

company creates a secure internal control structure, it will reduce the opportunity for

fraud to occur. To create a secure internal control structure, a company must design the

appropriate policies and procedures. If a company’s internal controls are not properly

designed, these internal controls can be compromised (Buchholz, 2012). To illustrate, if a

company keep checks or cash in an unsecure location, the opportunity for an employee to

steal the cash or checks is present.

The last component of the fraud triangle theory is rationalization, which is the

process of a fraudster justifying his or her actions for doing wrong (Kranacher et al.,

2011). Rationalization may include thoughts such as dissatisfaction with the company

because of poor working conditions, low wages, unreasonable working hours, or lack of

health insurance. During rationalization, the fraudster comes to believe that he or she is

entitled to steal because of dissatisfaction with the company (Bucholz, 2012).

Background

The fraud triangle is a theory that auditors rely on when assessing a company’s

vulnerability to financial statement fraud. The fraud triangle theory is the underlying

principle of SAS No. 99; however, eleven years after the implementation of SAS No. 99,

financial statement fraud still remains undetected. Claims have proven that from 2002 to

2008, undetected fraud increased from 5% to 7% (Saksena, 2010). Based on this claim, it

is evident that fraud triangle theory has not improved auditors’ ability to assess a

company’s vulnerability to financial statement fraud. Therefore, this study was important

because it will explain auditors’ perceptions of the effectiveness of the fraud triangle

theory and clarify whether the fraud triangle theory should be modified to include

motivation, integrity, and capability. If auditors are able to detect fraud, it will improve

stakeholders; confidence in the financial statements they rely on prior to investing in a

company.

The fraud triangle theory identifies opportunity, rationalization, and pressure as

the underlying assumptions that auditors should consider when assessing the likelihood

of fraud in an organization (Kranacher et al., 2011). Although auditors rely on the fraud

triangle, some scholars believe that the theory is not sufficient to determine the extent of

fraud in an organization (Dorminey et al., 2010; Kassem & Higson, 2012; Kranacher et

al., 2011). The fraud triangle has deficiencies; therefore, it should not be relied upon for

detecting financial statement fraud (Buchholz, 2012). One deficiency is rationalization.

Rationalization is a deficiency because it cannot be observed, meaning that an auditor

cannot observe how a person rationalizes their actions. The fraud triangle lacks objective

criteria for identifying pressure and rationalization; therefore, it is not effective in

determining fraud (Dorminey et al., 2010).

Kassem and Higson (2012) explained that because the fraud triangle is ineffective

in detecting fraud, a new fraud triangle should be implemented. To further study the fraud

triangle theory and its effectiveness, Kranacher, Riley, and Wells (2011) wrote that to

improve auditor’s ability to detect the likelihood of fraud in a company, the fraud triangle

should be expanded to include motivation. Kassem and Higson (2012) suggested that the

fraud triangle is ineffective in detecting fraud and that a new fraud triangle should be

implemented that includes motivation, integrity, and capability.

Statement of the Problem

SAS No. 99 was implemented on December 15, 2002 because of scandals that

occurred at major corporations such as Enron and WorldCom (Labaton, 2006). The

underlying principle of SAS No. 99 is the fraud triangle theory, which is a framework

that assists auditors in analyzing a company’s vulnerability to fraud. However, eleven

years after the implementation of SAS No. 99, much financial statement fraud is still

undetected. Saksena (2010) claimed that from 2002 to 2008, undetected fraud increased

from 5% to 7%, which results in billions of dollars in losses. Based on this claim, it may

be that the fraud triangle theory has not improved auditor’s ability to detect a company’s

vulnerability to financial statement fraud.

Buchholz (2012) explained that the fraud triangle has importance for detecting

fraud in a financial statement audit, but that it also has deficiencies and should not be

solely relied upon. Kassem and Higson (2012) suggested that the fraud triangle is

ineffective for detecting fraud and that a new triangle should be implemented that

includes motivation, integrity, and capability as additional factors. The specific problem

that was the focus of this study, was the deficiencies in the fraud triangle theory from

the perspective of U.S. auditors and what they believed should be included for auditors to

better detect fraud. If this problem is not fixed financial statement fraud will continue to

go undetected, which cost investors and creditors billions of dollars of lost revenue.

Lastly, the economy will suffer if corporations do not have access to cash to expand and

grow their business.

Purpose of the Study

The purpose of this qualitative phenomenological study was to understand and

describe U.S. auditors’ perceptions of the effectiveness of fraud triangle theory and to

explore whether the addition of new elements, such as motivation, integrity, and

capability, would offer additional explanatory value to understanding why fraud occurs.

Findings from the research questions may help auditors in performing their duties to

detect whether financial statement fraud exists in an organization.

The phenomenological study included face-to-face interviews. The sample for this

study consisted of auditors who will be recruited from the Georgia Society of CPAs,

Linked-in Group “Trendlines,” or from personal contacts. Data was collected through in-

depth interviews with auditors who met the inclusion criteria for the study. To ensure that

the questions were appropriate for this phenomenological study, a colleague who is a

college professor and dissertation consultant was utilized. After the questions were been

selected, interviews were conducted until data saturation occurs; however, the minimum

number of interviews is six senior level auditors. Senior level auditors are individuals

who have worked in auditing firms for a minimum of five years.

Theoretical Framework

The purpose of this phenomenological study was to understand and describe U.S.

auditors’ perceptions of the effectiveness of the fraud triangle in determining whether

fraud could exist in financial statements and to determine if motivation, integrity, and

capability should be included in the fraud triangle. To determine if financial statement

fraud has occurred, auditors must rely on the fraud triangle theory, which is the

underlying principle of SAS No. 99 (Kranacher, Riley, & Wells, 2011). SAS No. 99

requires auditors to obtain reasonable assurance of whether the financial statements

contain material misstatements (Casabona & Grego, 2003). Cressey developed the fraud

triangle theory in 1953, and the theory has influenced the development of accounting

fraud theory (Kranacher et al., 2011). The fraud triangle identifies opportunity,

rationalization, and pressure as the underlying assumptions that auditors should consider

when assessing the likelihood of fraud in an organization (Kranacher et al., 2011).

Although auditors rely on the fraud triangle, some scholars believe that the fraud

triangle is not sufficient to determine fraud in an organization (Dorminey et al., 2010;

Kassem & Higson 2012; Kranacher et al., 2011) Buchholz (2012) explained that the

fraud triangle has importance for detecting fraud in a financial statement audit but that it

also has deficiencies and should not be solely relied upon. One deficiency is

rationalization. Rationalization is a deficiency because it cannot be observed, meaning

that an auditor cannot observe how a person rationalizes their actions. The fraud triangle

lacks objective criteria for identifying pressure and rationalization; therefore, the theory is

not effective in determining fraud (Dorminey et al., 2010). In addition, Kassem and

Higson (2012) explained that because the fraud triangle is ineffective in detecting fraud a

new fraud triangle should be implemented.

Currently, there is a contradiction in the literate on fraud theory. Scholars such as

Dorminey et al. (2010), Kassem and Higson (2012), and Kranacher et al. (2011) believe

that the fraud triangle is not sufficient to determine fraud in an organization, whereas

Cressey (1953) believed fraud triangle theory to be effective in detecting a company’s

vulnerability to financial statement fraud. Because of this contradiction, further studies

are needed to understand auditors’ perceptions of the utility of fraud triangle theory and if

motivation, integrity, and capability should be included in the fraud theory.

To further study the fraud triangle theory and its effectiveness, Kranacher, Riley,

and Wells (2011) wrote that to improve auditor’s ability to detect the likelihood of fraud

in a company, the fraud triangle should be expanded to include motivation. Kassem and

Higson (2012) suggested that the fraud triangle is ineffective in detecting fraud and that a

new fraud triangle should be implemented that includes motivation, integrity, and

capability.

To determine if financial statement fraud has occurred, auditors must rely on the

fraud triangle theory, which is the underlying principle of SAS No. 99. This

phenomenological study is a study of auditors’ perceptions of the effectiveness of the

fraud triangle theory and if motivation, integrity, and capability should be included in the

fraud triangle. Expanding research on auditors’ perceptions of the fraud triangle theory is

important because it will benefit the auditing profession and the approach that auditors

will use to determine if fraud exists in financial statements.

Research Questions

The purpose of this phenomenological study was to understand auditors’

perceptions of the fraud triangle theory and if motivation, integrity, and capability should

be included in the fraud theory. To accomplish this purpose, the following research

questions were developed.

Q1. How do auditors perceive and describe their experiences with fraud and the

use of the fraud triangle theory?

Q2. Do you think motivation, integrity, and capability should be included in the

fraud triangle theory? If so, why?

Q3. Do you think there are other elements that auditors should be include in the

fraud theory? If so, why?

Nature of the Study

The purpose of this phenomenological study was to understand auditors’

perceptions of the fraud triangle theory. To accomplish this, a phenomenological

approach was utilized to understand auditors’ lived experiences of utilizing the fraud

triangle theory. As identified by Moustakas (1994), phenomenology derives its meaning

from human experiences by exploring the structures of human consciousness in those

experiences.

This phenomenological study on auditors’ experiences with fraud included a

transcription of interviews and analysis (Van Manen, 1997). An issue that is of major

debate in phenomenological research is how many participants should be included in a

phenomenological study. In a phenomenological study, the number of participants is not

as important as who has had a particular experience (Giorgi, 2009). A researcher should

use at least three participants because of the challenges associated with using one or two

participants (Giorgi, 2009). It is important to have a “sufficient number of variations

independent of the individual whose description is being analyzed” (Giorgi, 2008, p. 36).

A researcher should recognize that data saturation occurs when an increase in the

number of participants leads to diminished returns and lack of new data (Giorgi, 2008).

Finally, a phenomenological study focuses on depth strategies and should not be

confused with research based upon sampling strategies, which includes a large number of

participants. An acceptable sample size for phenomenological research is generally 2 to

10 participants (Boyd, 2001; Giorgi, 2009).

For this phenomenological study, six certified public accountants who worked for

various accounting firms were interviewed. The certified public accountants was selected

and recruited at the Georgia Society of CPAs meetings, by the Linked-in group

“Trendline,” or through relationships built with CPAs over the last ten years. Data for this

study was gathered through face-to-face semi-structured interviews, which is an

appropriate method when conducting a phenomenology study. Semi-structured

interviews were selected for this study because structured questions allow the scholars to

ask specific questions and unstructured interviews allow participants to speak freely (Van

Manen, 1997). Speaking freely provides more richness and breath, which provides more

richness to the data compared to structured interviews (Van Manen, 1997).

Significance of the Study

Currently, no study was conducted to understand auditors' experiences with fraud

and their perceptions of the of the fraud triangle theory, and if auditors believe that

motivation, integrity, and capability should be added to the fraud theory. Conducting this

study will benefit auditors because it will identify what auditors should look for when

assessing the likelihood of financial statement fraud. This study will also benefit

stakeholders such as investors and creditors because their confidence in the reliability of

financial statements will increase if auditors are able to improve their auditing procedures

to detect financial statement fraud.

If this study was not conducted, auditors may not detect whether fraud exists,

which could cost investors, creditors, and accounting firms billions of dollars. In addition,

legal action can be brought against auditors if fraudulent financial statements are

undetected during an audit (AICPA, 2002). The discoveries from this phenomenological

study will have a significant impact on how auditors assess the likelihood of fraud during

a financial statement audit.

Definition of Key Terms

Understanding the key terms is important to this study; therefore, a list of words

and definitions that are common to this study are included in this section.

Analytical Procedures. Analytical Procedures is a diagnostic sequential and

iterative process involving hypothesis generation, information search, hypothesis

evaluation, and a final judgment (Koonce, 1993).

Audit evidence. Auditors conduct audits to obtain reasonable assurance on

whether the financial statements are free of material misstatements (Kranacher et al.,

2011).

Auditing. Auditing is an examination by auditors to determine if financial

statements fairly present the company’s result and financial position (Kranacher et al.,

2011).

Brainstorming. Brainstorming is a discussion by an audit team to discuss the

probability that material misstatements could exist in a company’s financial statements

(Alon & Dwyer, 2010).

Cressey’s Fraud Triangle. Cressey’s Fraud Triangle Is a theory that identifies

the three conditions that is generally present when fraud occurs. The three conditions are

perceived opportunity, perceived pressure, and rationalization (Kranacher et al., 2011).

Financial Statement Fraud. Financial Statement Fraud is an intentional

misrepresentation of financial or nonfinancial information to mislead others who are

relying on it to make economic decisions (Kranacher et al., 2011).

Fraud. Fraud is “an intentional deception, whether by omission or co-omission,

that causes the victim to suffer an economic loss and/or the perpetrator to realize a gain”

(Kranacher, Wiley, & Wells, 2011, p. 5).

Professional Skepticism. Professional Skepticism is an auditor’s judgment and

decision that reflects a heightened assessment of the risk that an assertion is incorrect or

conditional based on the information available to the auditors (Nelson, 2009).

Risk assessment. In the literature, this refers to an understanding that auditors

conduct audits to obtain reasonable assurance on whether financial statements are free of

material misstatements (Kranacher et al., 2011).

Statement on Auditing Standards 99 (SAS No. 99). Statement on Auditing

Standards 99 (SAS No. 99) is an auditing standard that states that an audit should be

planned and performed to obtain reasonable assurance that financial statements are free

of material misstatements, whether caused by error or fraud (Kranacher et al., 2011).

Summary

SAS No. 99 was implemented December 15, 2002 because of scandals that

occurred at major corporations such as Enron and WorldCom. The underlying principle

of SAS No. 99 is the fraud triangle theory, which is meant to assist auditors in detecting a

company’s vulnerability to financial statement fraud. SAS No. 99 requires auditors to

obtain reasonable assurance on whether the financial statements contain material

misstatements (Casabona & Grego, 2003). To obtain reasonable assurance, auditors rely

on the elements of the fraud triangle theory; the three elements are perceived opportunity,

perceived pressure, and rationalization (Kranacher et al., 2011). Although the fraud

triangle theory is relied upon to detect fraud, many scholars believe that the theory is

inadequate. University Professors Kassem and Higson (2012) suggested that the fraud

triangle is ineffective in detecting fraud and that a new fraud triangle should be

implemented that includes motivation. The problem is the likelihood that auditors’

reliance on the fraud triangle will not detect fraud in an organization, which could cost

investors and creditors billions of dollars. Currently, no study was conducted to

determine auditors’ perceptions of the fraud triangle theory, however. This study was

significant because it will explain auditors’ perceptions of the fraud triangle theory,

which is important when conducting a financial statement audit.

Following is Chapter 2, which is a literature review. The purpose of this literature

review was to establish a framework for the effectiveness of the fraud triangle theory and

to determine if it should be modified to include additional elements. Specifically, this

literature review discussed the fraud triangle theory, the underlying principles of SAS

No.99, analytical procedures, professional skepticism, brainstorming, risk assessment,

and audit evidence.

Chapter 2: Literature Review

The purpose of this phenomenological study is to understand auditors’

perceptions of the effectiveness of the fraud triangle theory and to determine if

motivation, integrity, and capability should be included in the theory. This literature

begins with the identification of fraud triangle theory, which emphasizes opportunity,

pressure, and rationalization, the underlying principles of SAS No. 99. This is followed

by a discussion of the various viewpoints of scholars who conducted extensive research

on the fraud triangle theory. Lastly, analytical procedures, professional skepticism,

brainstorming, risk assessment, and audit evidence, which are necessary to understand

SAS No. 99 and its affects the fraud triangle theory, are explained.

Documentation

Research on SAS No.99 and the fraud triangle theory was conduct utilizing online

resources and key words. The key word search for this study was: the fraud triangle

theory, SAS No.99, brainstorming, Risk Assessment, Analytical Procedures, Professional

Skepticism, Statement on Auditing Standards, internal control, and Professional

Skepticism. To search for the keywords, online libraries were utilized; the online libraries

included EBSCOhost and ProQuest databases. EBSCOhost Business Source is a database

that provides full texts of more than 3,000 journals, including more than 1,500 peer-

reviewed business publications, and full texts of over 10,000 market reports, SWOT

analyses, country and company reports, etc. The ProQuest database contains full-text,

scholarly, peer-reviewed journals, trade publications, magazines, and newspapers in the

areas of business, psychology, and education. In addition to online libraries, professional

accounting websites such as the American Institute of CPAs and the Fraud Examiner

Website were utilized. The information gathered from the online libraries and

professional websites includes scholarly and peer-reviewed documents, professional

journals, periodicals, textbooks, and the American Institute of CPAs.

Fraud Triangle

Fraud is an intentional misstatement attained by manipulation or falsification of

accounting data, misrepresentation or omission of accounting transactions, and

intentional misapplication of accounting principles (Kranacher et al., 2011). SAS No. 99

explains that auditors have a responsibility to detect fraud in an organization and should

rely on the fraud triangle to do so (Kranacher et al., 2011). Donald Cressey developed the

fraud triangle theory in 1953. Cressey identified three conditions that are generally

present when fraud occurs in an organization. The three conditions are perceived

opportunity, perceived pressure, and rationalization (Kranacher et al., 2011; Romney,

Albrecht, & Cherrington, 1980).

Perceived pressure. Perceived pressure is considered a non-observable event and

non-sharable problem. Perceived pressure is considered a non-observable event because

it is difficult for an auditor to observe if an employee is under pressure. Perceived

pressure is categorized as a non-sharable problem because a fraudster may not want to

share his or her financial problems, such as gambling addictions, alcohol addiction, or

work related pressures with family and friends (Dorminey et al., 2010). The four major

categories of pressure are financial pressure, vice pressure, and work related pressures.

Each of these four types of pressure will be discussed in detail.

Financial pressure can occur for various reasons. Fist, financial pressure can occur

if an individual lives beyond their monetary means (Dorminey et al., 2010; Kassem &

Higson, 2012; Kranacher, et al.). Living beyond one’s means can ensue if the individual

purchases items such as a home and or a vehicle and their monthly income are less than

their monthly expenses. As a result, the individual is under financial pressure and may

resort to fraud to meet their monthly expenses. As a previously stated, individuals under

financial pressure generally do not want to share their problems with family or friends;

for these reasons, financial pressure is often classified as a non-sharable event (Dorminey

et al., 2010; Kassem & Higson, 2012; Kranacher et al., 2011). Also, when financial

pressure stems from an individual living beyond their means, it is categorized as an

unobservable event because auditors cannot observe if an individual is living beyond

their means (Dorminey et al., 2010; Kassem & Higson, 2012; Kranacher et al., 2011).

Vices such as gambling or drug addiction can also cause individuals to have

financial pressure (Dorminey et al., 2010; Kassem & Higson, 2012; Kranacher, et al.,

2011). Indeed, vices such as drug addiction or gambling are the worst types of financial

pressures, ones that often spiral out of control (Kassem & Higson, 2011). Because of

addiction, it is very easy for an individual to excuse stealing from their organization.

Again, this type of financial pressure is a non-sharable event that a fraudster would not

want to share with family members because of the fear of being judged or pressured into

seeking medical attention (Kassem & Higson, 2011). In addition, this type of event is

considered a non-observable event because an auditor may not be able to observe

whether an individual has a gambling problem or any other type of addiction. However,

an auditor may be able to observe if an individual has an alcoholic addiction if the

individual comes to work intoxicated during the audit.

In addition, work related pressure can cause and individual to commit financial

statement fraud. Although not as common as financial pressures such as living beyond

one’s means or vices, which include gambling or drug/alcohol addictions, work related

pressures do occur in companies. Work related pressure happens when employees are

disgruntled with their employers so they commit fraud as a form or retaliation.

Employees may become disgruntled because they are passed up for a promotion, did not

receive a raise, or have job dissatisfaction (Kassem & Higson, 2011). This type of

pressure is categorized as a non-observable event because an auditor may not know that

an employee was overlooked for a promotion.

Lastly, management could be under pressure or have an incentive to misstate

financial information because of factors outside their control (Ramos, 2009). Factors

outside of management control are economic and industry circumstances. To illustrate, if

a company is experiencing financial difficulties because the economy is in a recession,

the fraudster may feel compelled to commit fraud. The fraudster could be compelled to

commit fraud so that the company does not incur an operating loss, which could lead to

corporate bankruptcy or a hostile takeover by stakeholders and regulatory agencies

(Ramos, 2009).

In addition, management could be under extreme pressure to meet or exceed the

expectations of current or future stakeholders. Current stakeholders include investors who

expect the stock value to appreciate or creditors who expect the company to be profitable

so that interest and loans can be repaid. Therefore, if management is seeking debt

financing from a bank, management may feel pressured to prepare fraudulent financial

statements (Ramos, 2009). Debt financing includes loans such as bonds payables, notes

payable, or accounts payable that must be repaid. In addition, management may feel

pressured to prepare fraudulent financial statements to meet stock market demands

(Ramos, 2009). This pressure stems from the fact that stockholders analyze a company’s

financial statements prior to investing in a company. Thus, if a company does not appear

profitable, investors will not invest in the company or current shareholders will sell their

stock in the company.

To conclude, management could have a personal incentive to prepare fraudulent

financial statements because most corporations determine management quarterly and

annual bonuses based on the company’s financial statements. Lastly, bonuses that are

connected to a company’s financial performance are an incentive for management to

engage in financial statement fraud ("Section 404(b) of Sarbanes-Oxley Act of 2002").

Perceived Opportunity. Perceived opportunity is considered an observable event

because opportunity relates to an organization’s internal control structure, which can be

observed by auditors (Dorminey et al., 2010). A fraudster’s opportunity could be the

result of poor training, poor supervision, poor policies and procedures, or lack of anti-

fraud programs (Dorminey et al., 2010). For example, if an auditor audits a company’s

cash disbursements and observes that multiple people can disburse cash without

preparing proper documentation of who dispersed the cash, who received the cash, and

the amount of the cash, the company is lacking good internal controls over the cash

disbursements. Because the company lacks good internal control, the employee has the

opportunity to commit fraud. Alexander (2012) states that the laxer a company’s internal

control systems are, the better the opportunity for fraud to occur. However, Alexander

(2012) also states that a secure internal control system does not prevent fraud, but it will

reduce the likelihood of fraud or make it more difficult for a fraudster to commit fraud.

This is an example of how the fraud triangle is ineffective in detecting fraud, and it

supports Dorminey et al.’s (2010) suggestion that a new fraud model be implemented.

Rationalization. Rationalization occurs when the fraudster justifies his or her

behavior before or after committing the act (Dorminey et al., 2010). This is considered a

non-observable event because an auditor cannot observe what a fraudster is thinking. To

illustrate, the fraudster may rationalize stealing cash by saying, “I will pay the cash

back.” Because pressure and rationalization cannot be observed, the fraud triangle is

considered inadequate for deterring, preventing, and detecting fraud (Dorminey et al.,

2010).

Fraud Triangle is Ineffective. The current literature states the fraud triangle is

ineffective in detecting the likelihood of fraud in an organization (Dorminey et al., 2010;

Kassem & Higson, 2012; Kranacher, et al., 2011; Alexander, 2012). Since the fraud

triangle is ineffective in detecting fraud, Kassem and Higson (2012) designed a new

model for use in detecting fraud in an organization. They noted that the new model

should be an extension of Cressey’s fraud triangle to include the fraudster’s motivation,

integrity, and capabilities because these are observable events. Integrity can be observed

by reviewing an individual’s decisions and decision-making process, which help assess

the likelihood that an individual could commit fraud (Kassem & Higson, 2011). To

illustrate, if an individual does not follow the company’s credit policy when extending

credit to customers, that individual lacks integrity. Motivation is also an event that can be

observed by examining an individual’s non-shareable financial problems. The observable

non-sharable financial problems described by Kassem and Higson (2012) include living

beyond one’s means, an overwhelming desire for personal gain, high personal debt, a

close association with customers, and excessive gambling habits. Lastly, Kassem and

Higson (2012) argued that fraud could not occur without the person having the

capabilities to commit fraud. They suggested four observable traits that give the fraudster

the capabilities: an authoritative position or function within the organization, the capacity

to understand and exploit accounting systems, internal control weaknesses, and the

capability to deal with the stress of being caught.

The Pathway that Leads to Fraud. In addition to the Kaseem and Higson (2012)

model, Murphy and Dacin (2011) identified the pathway that leads to fraud. The

psychological pathways focus on individuals who believe that committing fraud is

wrong; the three components of the pathway that lead to fraud are awareness, intuition

coupled with rationalization, and reasoning. The pathway that leads to fraud is helpful

because it explains that individuals may commit fraud without realizing it and rationalize

their acts to avoid the negative affect of their unethical behavior (Murphy & Dacin,

2012). The pathway also states that awareness includes the overpowering situations or

contexts in which the individual makes a decision to commit or not commit the act; the

fraudster is aware of the fraudulent situation and decides whether to commit fraud

(Murphy & Dacin, 2011). In other words, the individual may commit the act and then

rationalize why it is okay to commit the act.

Intuition coupled with rationalization happens when the fraudster is aware that the

conduct in question is fraudulent (Murphy & Dacin, 2011). During this phase, an

individual makes a decision to commit the act or refrain from committing the act based

on his or her feelings. If the individual decides to commit the crime, the fraudster

immediately rationalizes why it is okay.

The third pathway to fraud is reasoning, which occurs when an individual is

aware that the act is fraudulent (Murphy & Dacin, 2011). During this phase, the fraudster

analyzes the situation and applies reasoning to why he or she should or should not

commit the fraud. In addition, the fraudster may analyze the situation. For example, the

fraudster may analyze the situation by performing a cost benefit analysis to determine if

the benefit of the fraud outweighs the cost.

The M.I.C.E. Theory. Another point of view that differs from the traditional

fraud triangle and the pathway that leads to fraud is the M.I.C.E. theory (Kranacher,

2011). The fraud triangle does not explain the motivation of the fraudsters, so to fully

understand motivation it should be expanded to include M.I.C.E. theory (Dorminey et al.,

2012). M.I.C.E is an acronym that identifies what might motivate the fraudster to commit

fraud:

M - Money. This means that an individual may commit fraud for money.

I - Ideological. This means that an individual may commit fraud because he or she

believes it for a greater cause (Dorminey et al., 2012). The fraudster may not

personally benefit, but others will benefit. To illustrate, individuals may commit

fraud by stealing cash and may give the cash to underprivileged citizens. In this

this case, the fraudster committed fraud to benefit a greater cause.

C – Coercion. This occurs when an individual is unwillingly pressured into a

fraud scheme (Dorminey et al., 2012). To illustrate, an accounting manager may

be forced by his or her manager to write checks to a supplier who does not exist.

E – Ego. In these situations, individuals will commit fraud to maintain an image

or lavish lifestyle (Dorminey et al., 2012). For example, an individual may

purchase an expensive automatable on company credit to maintain his or her

image.

Krancher states that money and ego are the main reasons fraudsters are motivated to

commit fraud (Dorminey et al., 2012).

The fraud triangle lacks the ability to detect pressure and rationalization, so

Dorminey et al. (2010) referred to a new fraud triangle consisting of the act, the

concealment, and the conversion (Dorminey et al., 2010). The new fraud triangle should

focus on establishing whether the act committed constitutes fraud, which can be

determined by gathering evidence of the intent to deceive and by proving that the victim

incurred economic damages (Dorminey et al., 2010). Because the fraud triangle was

unable to detect fraud, the fraud scale and the fraud diamond were introduced. The fraud

scale and fraud diamond include additional variables that are not included in Cressey’s

Fraud triangle (Kranacher et al., 2011; Wolfe & Hermanson, 2004).

The Fraud Scale. The fraud scale is applicable to financial statement fraud,

where sources of pressure are observable. The only difference between the fraud triangle

and the fraud diamond is an individual’s capabilities. Capabilities refer to an individual’s

traits and abilities to commit the crime (Wolfe & Hermanson, 2004). Capabilities may

overlap with opportunity, but the two are different because opportunity focuses on

weaknesses in internal control while capabilities focus on whether the employee is

capable of committing the act (Wolfe & Hermanson, 2004). To illustrate, if a company

has cash transactions and there is a weakness in the internal control system, the

opportunity for fraud exists and a capable person may steal the cash. In this example, the

employee’s capabilities coupled with a weak internal control system could lead the

employee to commit fraud. Wolfe and Hermanson (2004) identified five traits that make

an individual capable of committing fraud, as follows:

1. The person(s) must be smart enough to understand internal control weaknesses

and use this knowledge to exploit the system.

2. The right person must have the ego and confidence to believe that he or she will

not be discovered or the confidence to believe that, if discovered, he or she will be

able to talk their way out of trouble.

3. The right person must be able to coerce others to commit or conceal fraud.

4. The right person can lie effectively and consistently.

5. The right person can deal with stress.

Wolfe and Hermanson (2004) believed that auditors must understand the

fraudster’s capabilities when assessing the likelihood of fraud in an organization and that

without such assessment fraud may go undetected. Based on the research of Wolfe and

Hamason (2004), the fraud triangle should include capabilities when determining the

likelihood of fraud in an organization.

Dorminey et al. (2010) disagreed that the fraud triangle is effective in determining

fraud, but Hogan, Rezaee, Riley, and Velury (2008) stated that there is a significant

amount of literature that supports the fraud triangle. The authors explained that red flags

and analytical procedures should be used with the fraud triangle to detect fraud in an

organization (Mcfarland, 2009). They stated that auditors should use a checklist as a

starting point to detect fraud but that it should be used with caution because a checklist is

not indicative of fraud. Some researchers support the use of checklists as decision tools

(Hogan, Rezaee, Riley, & Velury, 2008) and some suggest that the use of checklists

limits the auditors’ ability to increase their thinking beyond the checklist (Pincus, 1989).

For example, Pincus's (1989) findings suggest that the use of a checklist was

dysfunctional for fraud findings because red flags may be low in frequency and minor in

amount in the early stages of fraudulent financial reporting. Wilks and Zimbelman (2004)

agreed with Picus (1989), stating that the checklist inhibits strategic reasons due of the

following:

1. Long checklists tend to be inaccurate in assessing fraud risk;

2. Auditors are insensitive to new evidence;

3. Auditors overweigh clues about management that are likely to be wrong; and

4. Auditors use procedures that are based on prior audits, which make audits

predictable and less effective.

Given the findings of Pincus (1989) and Wilks and Zimbelmam (2004), Hogan’s (2008)

recommendation of the use of a checklist in financial statement audits is a controversial

topic.

Hurley and Boyd (2007) suggested another element for fraud, which is the

perception of impunity. Impunity is the fraudster’s belief that he or she can commit fraud

without the fraud being detected and that he or she is excused from punishment. The

attitude of impunity leads to another element of fraud, which is manipulation (Giroux,

2008; Hurley & Boyd, 2007). Manipulation is the fraudster’s belief that if the fraud is

detected he or she will be able to convince others that he or she is innocent (Giroux,

2008).

Buchholz (2012) conducted research deconstructing the underlying principles of

the fraud triangle, which are opportunity, rationalization, and pressure. Upon

deconstruction, the author identified the pitfalls that auditors encounter when assessing

fraud in an organization. The author concluded by stating that practitioners should not

rely solely on the Cressey’s Fraud triangle as the basis for assessing and detecting

potential fraud in the audit of financial statements. The results of Buchholz’s (2012)

research are consistent with the results of the studies of Dorminey et al. (2010), Kassem

and Higson (2012), and Kranacher et al. (2011), who also stated that the fraud triangle is

ineffective in determining the likelihood of fraud in an organization.

Donald Cressey - Trust Violators. Donald Cressey, a criminologist, was

interested in why people commit fraud, so he conducted a five-month study in which he

interviewed over 250 criminals who had committed financial fraud (Cressey, 1973). The

participants selected for the study was criminals who met the following two criteria

(Cressey, 1973):

1. The fraudster had a job position of trust and good faith; and

2. The individual violated the trust.

Cressey defined a trust violator as follows:

Trusted persons become trust violators when they conceive of themselves as

having a financial problem which is non-shareable, are aware this problem can be

secretly resolved by violation of the position of financial trust, and are able to

apply to their own conduct in that situation verbalizations which enable them to

adjust their conceptions of themselves as trusted persons with their conceptions of

themselves as users of the entrusted funds or property. (Cressey, 1973, p. 30).

Most trust violators have a non-shareable problem (Cressey, 1973). A non-sharable

problem means that the fraudsters believe they cannot share their problem(s) with family

or friends because they would lose respect of family and friends or their prestige in the

community (Cressey, 1973). To illustrate, if a fraudster has the image of being a great

leader, financially successful, and well respected in the community, the fraudster may not

want to share his or her financial problems with family or friends in fear of losing his or

her image of a successful person. To avoid losing this image, the fraudster will not share

his or her financial problems and will resort to illegal activity to resolve them (Clinard,

1954).

A trust violator is an individual with three characteristics: non-sharable problems,

technical knowledge/skills, and verbalization (Cressey, 1973). Non-shareable problems

are problems that a trust violator does not want to share with family or friends. Non-

sharable problems lead to fraud, whereas shareable problems do not lead to fraud

(Cressey, 1973). Shareable problems generally do not lead to fraud because the individual

under pressure is willing to share their problems, which indicates that the individual is

willing to seek help to resolve financial problems.

Another characteristic of a trust violator is that the trust violator must have the

technical knowledge to carry out the fraud. The trust violator believes that their non-

shareable financial problems could be resolved covertly, and no one learns of these

financial problems because of their technical knowledge of the company (Clinard, 1954;

Cressey, 1950). To gain this knowledge to perpetrate the fraud, the fraudster must have

work experience in the company and must understand the work environment (Cressey,

1950). To illustrate, if an individual works in the accounting department and understands

the accounts payable system and the vendor system, he or she could set-up fictitious

vendors and send payments to a bank account that he or she has access to.

The final characteristic of a trust violator is rationalization, which is how the trust

violators mentally justify their actions. Rationalization is necessary for the trust violator

to perform the fraud because, without rationalization, the trust violator will be reluctant to

perform the fraud. To illustrate, if individuals believe that stealing from their company is

wrong, they may not steal unless they can rationalize the stealing. Rationalization could

include such thoughts as, I am not paid enough money, so the company owes me this

money, I will return the money on my next paycheck, or The company will not miss the

money. Lastly, trust violators rationalize their actions to avoid accepting the fact that

their actions are theft and constitute a crime.

The three characteristics of trust violators are known as the fraud triangle theory.

Whenever all three of the characteristics are present, fraud can occur, and if one of the

characteristics is missing, the trust violator will not commit fraud (Cressey, 1973).

Although Cressey’s fraud triangle is embraced by many scholars, some disagree with the

fraud triangle theory because pressure and rationalization cannot be observed. To

illustrate, pressure is an emotion that an individual has, and auditors cannot observe

pressure because it is a state of mind. In addition, rationalization is how a person thinks

about a crime and justifies their actions prior to committing the crime. Again,

rationalization is a state of mind and, therefore, unobservable by auditors. Most trust

violators know their conduct is illegal and wrong, but they convince themselves into

thinking that their actions are not illegal (Cressey, 1973). Because pressure and

rationalization cannot be observed, the fraud triangle theory is flawed and, therefore,

should not be relied upon (Cressey, 1973)

Pressure and rationalization cannot be observed; however, opportunity can be

(Cressey, 1973). Opportunity can be observed because it relates to a company’s internal

control structure, which can be observed by auditors. Internal control is the policy and

procedures that companies have in place to safeguard their assets and to reduce the

probability of a trust violator stealing from their company. The probability of a trust

violator stealing from a company depends on whether the company has a strong or weak

internal control structure. A weak internal control structure generally occurs when a

company has poor training, poor supervision, or lack of anti-fraud programs (Dorminey

et al., 2010).

The Public Accounting Oversight Board states that companies must design

policies and procedures for internal control over financial reporting to provide reasonable

assurance concerning the accuracy of a company’s financial statements. To provide

reasonable assurance that the financial statements are prepared accurately, the financial

statements must meet the following requirements:

1. Financial transactions provide accurate information on the transactions and

disposition of assets;

2. Provide reasonable assurance that accounting transactions such as revenues,

expenses, assets, liabilities, and capital are recorded as necessary and in

accordance with generally accepted accounting principles;

3. Provide reasonable assurance that the company has procedures in place to

prevent or identify any unauthorized purchases of assets, uses of assets, or

disposal of assets that have a material impact on the company’s financial

records (PCAOB, 2007).

Lastly, if managers fail to follow any of the three requirements previously

mentioned when preparing financial statements, the financial statements cannot be relied

upon. As a result, there is a weakness in the internal control structure over financial

reporting that should be reviewed (PCAOB, 2007).

Following is an example of a transaction where there was a weakness in a

company’s internal control structure. If a company has a policy that requires all purchases

over 25,000 to be approved by senior management and a manager makes a purchase for

30,000 without senior management approval, this is an indication that there was a

weakness in the internal control structure and that the transaction violates PCAOB, 2007,

which states that companies must have procedures in place to prevent and identify any

unauthorized purchases of assets, uses of assets, or disposal of assets that have a material

impact on the company’s financial records. Therefore, to prevent unauthorized purchase

from occurring, every purchase should require the signature of at least two mangers,

which helps prevent unauthorized purchases from occurring.

Brainstorming

SAS No. 99 requires auditors to obtain reasonable assurance through

brainstorming that financial statements are free of material misstatements. Brainstorming

in a financial statement audit involves the audit team discussing the probability that

material misstatements due to fraud are present in the financial statements (Alon &

Dwyer, 2010). SAS No. 99 specifically states that the audit team should brainstorm

during the initial audit to assess the probability that material misstatements due to fraud

could be present ("Section 404(b) of Sarbanes-Oxley Act of 2002 "). Brainstorming also

encourages auditors to share client data and experiences to gain a better understanding of

the possibility that fraud could be present in the financial statements (Alon & Dwyer,

2010). Brainstorming is defined as a “generation of ideas by one or more individuals

given a specific task to brainstorm, listing all of the risks that are relevant for a given

case” (Carpenter, Reimers, & Fretwell, 2011).

Although brainstorming is required by SAS No. 99, some critics believe that

brainstorming is not effective. Brainstorming could waste time if procedures are not in

place for conducting brainstorming sessions (Sandberg, 2006). However, some

researchers believe that no matter how well the brainstorming session is planned, group

brainstorming is not as effective as individual brainstorming. For example, Paulus, Larey,

and Ortega (1995) conducted a study on brainstorming in groups and individuals

brainstorming alone. The results of the study indicated that brainstorming in groups was

50% less effective than an individuals’ performing alone (Sandberg, 2006). Interactive

groups (brainstorming groups) provide fewer ideas than nominal groups (Osborn, 1957;

Sandberg, 2006).

In recent years, most of the brainstorming literature has concentrated on the

inferiority of interacting with groups in an effort to understand why productivity losses

occurred in groups. Three characteristics that cause inferiority of interacting in groups are

the following: production blocking, evaluation apprehension, and free riding or social

loafing (Dennis & Valacich, 1993). Production blocking occurs because only one

member can communicate at once (Dennis & Valacich, 1993). For example, if a member

is communicating and other members are listening, the listening members may forget

their ideas before they get the opportunity to speak. Evaluation apprehension involves a

group member’s concern over the appraisal by other members in the group (Dennis &

Valacich, 1993). To illustrate, if a group member has an idea that he or she is not sure of,

the member may be afraid to share that idea because of apprehension of what other group

members may think. Finally, free riding, or social loafing, occurs when group members

are qualified to contribute to the brainstorming session but choose not to contribute

(Dennis & Valacich, 1993). This may occur because individuals are relying on others to

contribute or members are socializing about issues unrelated to the problem.

As previously stated, research indicates that brainstorming in groups was 50%

less effective than an individual who performed brainstorming alone. In addition, groups

provided fewer ideas than did individuals brainstorming alone (Osborn, 1957; Sandberg,

2006). However, other researchers believe that brainstorming groups are effective and

can benefit auditors. Landis and Braswell (2008) noted that brainstorming groups are

useful and can generate better ideas than individuals who brainstorm alone. The

assumption is that brainstorming groups are given an ample amount of time to

brainstorm. Landis and Braswell (2008) argued that if brainstorming groups are allowed

enough time for a given topic, they are capable of generating as many ideas as individuals

who brainstorm alone.

Landis and Braswell (2008) indicated that brainstorming sessions are most

effective when they occur during the beginning of the audit because they allow auditors

to plan and modify the audit as needed. However, SAS No. 99 requires brainstorming

sessions to occur throughout the audit to ensure any potential areas of fraud are identified

and discussed. Brainstorming should be included throughout the audit process and not

just during the initial phase of the audit because auditors may become aware of

information that was not available during the initial audit (Robert & Hahn, 2011).

Although there are contradictions in the literature on brainstorming sessions, Landis and

Braswell (2008) stated that brainstorming sessions could be particularly useful tools for

auditors to provide reasonable assurance that financial statements do not have material

misstatements due to fraud or error.

Professional Skepticism in Fraud Detection

SAS 82 was created to help auditors to detect fraud in an organization; however,

as a result of accounting scandals that occurred with Enron and WorldCom, SAS No. 99

was implemented ("Section 404(b) of Sarbanes-Oxley Act of 2002 "). SAS No. 99 states

that auditors should plan and perform their audits to obtain reasonable assurance that the

financial statements are free of material misstatements caused by error or fraud (Patrick

& Michael, 2003). SAS No. 99 suggests that auditors should use professional skepticism

when conducting a financial statement audit. Professional skepticism means that the

auditor assumes neither that management is dishonest nor assumes unquestioned honesty

(Nelson, 2009).

Professional skepticism relates to auditors’ decisions and judgments that reflect a

valuation of risk that an assertion is conditional or incorrect based on the information

available to the auditors (Nelson, 2009; Payne & Ramsay, 2005). Auditor traits,

knowledge, and sensitivities produce judgments that determine an auditor’s professional

skepticism (Nelson, 2009). Also, given a judgment that reflects some level of

professional skepticism, the judgment combined with auditor knowledge, traits, and

incentives produce actions that reflect professional skepticism; without such, financial

statement fraud could go undetected (Nelson, 2009). The viewpoint of Nelson is shared

by Payne and Ramsay (2005), who held that professional skepticism is important and

insisted that auditors should have ongoing training to ensure that they have the right skills

and professional skepticism to detect fraud in an organization.

To achieve professional skepticism, auditors must consider the following four

categories: skepticism scales, problem-solving ability, ethics/moral reasoning, and

problem-solving ability (Nelson, 2009). Problem solving focuses on raw intelligence and

assists auditors in identifying potential misstatements in financial statements (Nelson,

2009). Ethics or moral reasoning holds that auditors with high moral standards are more

sensitive to information about client competence and integrity and that moral

development increases with time (Nelson, 2009). Nelson (2009) stated that skepticism is

difficult to assess because scales varied by the researcher. To illustrate, Wrightsman

(1974) believed that people are trustworthy and independent; however, Shaub (1996)

found no significant relationship between scores on independence and trustworthiness.

While Nelson (2009) and Payne and Ramsay (2005) argued that professional

skepticism is indicated by auditor judgments and decisions, Hurtt (2010) noted that

auditors’ judgment could result in the auditors becoming too skeptical. Nelson (2009)

acknowledged the Hurtt scale, which states that auditors could become too skeptical and

over audit or too lax and perform inefficient audits.

To illustrate, if an auditor becomes skeptical of the accounting manager, that

auditor may perform additional procedures to ensure the financial statements are not

fraudulent. However, if the auditor is not skeptical, he or she may perform an inefficient

audit, which could potentially result in fraudulent financial statements going undetected.

Because of the possibility of auditors being too skeptical or not skeptical enough, Hurtt

(2010) designed a 30-item psychological scale. The purpose of the psychological scale is

to measure the level of skepticism possessed by an individual auditor to determine if an

auditor will over audit or perform an inefficient audit. The psychological scale is based

on the following six characteristics: a questioning mind, a suspension of judgment, a

search for knowledge, interpersonal understanding, self-esteem, and autonomy (Hurtt,

2010). Following is a brief discussion of the six characteristics to measure an auditor’s

level of skepticism.

The first characteristic requires an ongoing questioning mind on whether the

information and evidence obtained suggests that a material misstatement due to fraud has

occurred ("Section 404(b) of Sarbanes-Oxley Act of 2002"). A questioning mind is not a

lack of belief, but it initiates inquiry and leads to the formation of beliefs (Hurtt, 2010).

The second characteristic is a suspension of judgment, meaning that auditors

should withhold judgment until there is evidence on which to base the judgment (Hurtt,

2010). This means that auditors must evaluate all available evidence before making a

judgment on an organization’s financial statements.

The third characteristic is the search for knowledge, which differs from a

questioning mind because the search for knowledge is determined by an auditor’s

curiosity and urge to develop knowledge whereas a questioning mind is based on an

auditor’s inquiry to form a belief (Hurtt, 2010).

The fourth characteristic is interpersonal understanding, which focuses on the

individuals who provide evidence to auditors (Hurtt, 2010). In other words, individuals

who have committed fraud may provide misleading evidence to the auditor. Therefore,

the auditor must understand the integrity and motivation of the individuals who provide

evidence.

The fifth characteristic is self-esteem, which affects an individual’s ability to rely

on his or her own judgment. Hurtt (2010) stated that individuals with low self-esteem

lack the ability to rely on their own judgments. The sixth and last characteristic is

autonomy, meaning that auditors should thoroughly examine evidence before rendering

an opinion on a company’s financial statements (Hurtt, 2010).

Analytical Procedures

SAS No. 99 requires auditors to obtain information to identify the risk of material

misstatements due to fraud (SAS No. 99). To identify the risk of material misstatements,

auditors must perform analytical procedures. Analytical procedures are diagnostic,

sequential, and iterative processes involving hypothesis generation, information search,

hypothesis evaluation, and a final judgment (Koonce, 1993). Analytical procedures

should be performed during a financial statement audit to determine if there are

transactions that appear to be unreasonably high or low (Hayes, 2011). For example, if

accounts receivables in prior years were three million and the current account receivables

are seven million, this could be an indication that the organization is overstating accounts

receivables and revenue. During this phase, the auditor should perform analytical

procedures to determine if the high account balance is related to controls that could have

been overridden (Hayes, 2011).

As previously stated, Casabona and Grego (2003) agreed with Hayes (2011) that

analytical procedures may be an indication of material misstatements in financial

reporting. However, Casabona and Grego (2003) believed that the information might

only provide a broad indication about whether a material misstatement is present in

financial statements. This occurs because data is gathered at a high level when auditors

initially perform analytical procedures. Casabona and Grego (2003) argued that because

analytical produces are performed at a high level during the planning stage, auditors

should perform reviews that are more detailed and that focus on revenue recognition.

Casabona and Grego (2003) asserted that auditors should focus on revenue

recognition because it is a major focus of SAS No. 99. SAS No. 99 states that auditors

should perform analytical procedures relating revenue to unusual or unexpected

relationships involving revenue accounts ("Section 404(b) of Sarbanes-Oxley Act of

2002"). Patrick and Michael (2003) conducted a study on analytical procedures and

agreed with Casabona and Grego (2003) that auditors should focus on revenue

recognition when performing analytical procedures.

Revenue recognition is of major concern because the Committee of Sponsoring

Organizations Report revealed that 50% of frauds involve overstated revenues, either by

reporting revenues prematurely or by creating fictitious revenue transactions (Hogan,

Rezaee, Riley, & Velury, 2008). As SAS No. 99 explains,

Improper revenue recognition is presumed to be a fraud risk for all industries and

for all companies. Therefore, audit engagement teams should consider how

fraudulent revenue recognition might occur and, based on such assessment, tailor

the audit procedures to address the specific identified risk related to revenue

recognition (SAS No. 99, as cited in Casabona & Grego, 2003).

Alexander (2012) agreed with Casabona and Grego (2003) and noted that during

the audit planning stage and final reporting, the auditor should focus on any material

transactions, such as revenue. Revenue recognition is a major concern during an audit;

however, this area can be very challenging for auditors because it is a relatively new area,

and revenue transactions can be very challenging as well. Revenue recognition is a new

category of fraud risk, one which requires auditors to perform additional procedures to

understand revenue recognition transactions, especially if these are complex and unusual

(Patrick & Michael, 2003).

SAS No. 99 states that if analytical procedures identify improper revenue

recognition, the auditors should plan their audit to identify such risks (Patrick & Michael,

2003). If there is an identified risk of material misstatements due to improper revenue

recognition, the auditor should perform analytical procedures using disaggregated data to

determine if fraud actually exists (Casabona & Grego, 2003). To illustrate, analytical

procedures on revenue are normally performed at a high level; however, if material

misstatements exist, then revenue data should be disaggregated on a month-by-month

basis or a product line basis. Such analytical procedures would allow the audit team to

identify major changes in months or product line, which could be an indication of fraud.

In conclusion, the new requirements of SAS No. 99 and revenue recognition

procedures will have a major effect on the planning of an audit and will require additional

control testing on journal entries involving revenue. In addition, the new requirements

will call for additional procedures to understand how management can override controls.

Patrick and Michael (2003) concluded by stating that the new requirements of SAS No.

99 will change the scope of the audit, as well as the time requirements, and add to the

cost of implementing SAS No. 99. However, the backlash against SAS No. 99 is the

increased cost that auditors charge corporations.

SAS No. 99 and Internal Control

SAS No. 99 requires that auditors rely on the fraud triangle theory to detect a

company’s vulnerability to financial statement fraud (Kranacher et al., 2011). The fraud

theory states that three conditions are present for an individual to commit fraud: pressure,

rationalization, and opportunity (Kranacher et al., 2011; Romney, Albrecht, &

Cherrington, 1980). Pressure relates to an individual’s financial position, rationalization

relates to how an individual thinks about their act of crime, and opportunity relates to a

company’s internal control system (Kranacher et al., 2011; Romney, Albrecht, &

Cherrington, 1980). Opportunity is of importance when understanding the fraud theory

because a company’s management team can control it. An organization’s management

team can control opportunity because it relates to a company’s internal control system,

which is designed, created, and enforced by management (Murphy & Dacin, 2011; Wells,

2011), whereas rationalization and pressure are not designed, created, or enforced by a

company. Internal controls are a system of procedures designed by executive

management to meet the objectives of safeguarding assets (Harrison et al., 2011). To

safeguard assets, a company must design policies that encourage operational efficiency,

ensures that accounting transactions are accurately prepared, and comply with the legal

requirements of the Sarbanes Oxley Act (Harrison et al., 2011)

If a company has a good system of internal controls, the possibility for a fraudster

to commit fraud diminishes (Harrison et al., 2011). The possibility will diminish even if

the fraudster is under financial pressure or can rationalize their actions. This is true

because all three elements of the fraud triangle theory must be present for a fraudster to

commit fraud (Harrison et al., 2011). Since internal control is an important facet of fraud,

it is imperative that a discussion on internal controls is addressed in this literature review.

The following discussion on internal controls will elaborate on the three elements of a

good system of internal control. These three elements are the control environment, risk

assessment, information and communication, control activities, and monitoring (Murphy

& Dacin, 2011; Wells, 2011).

Control Environment

The control environment is the environment in which the business operates. The

control environment is what determines the actions of the employees when deciding

whether to do right or wrong. For example, if a company’s leadership team encourages

employees to follow company’s procedures to record accounting transactions and if there

are consequences for not following procedures, the company is creating a positive control

environment. When management creates a positive control environment and reprimands

employees who do not follow the company’s procedures, the likelihood of employees

committing fraud diminishes for two reasons. First, the employees know that accounting

transactions are reviewed by management. Second, employees understand that there will

be consequences for failure to follow the company’s policies. Also, if a company has a

good control environment, it will improve the auditor’s risk assessment, which is an

easement of how a company safeguards their assets and follows policies and procedures

(Murphy & Dacin, 2011; Wells, 2011).

Risk Assessment Process

The risk assessment process is a systematic process for recognizing and assessing

events that occur within the company. The events can represent risk and opportunists that

could affect a company’s financial statements. The events can be caused by the external

environment or the internal environment. A good system of internal controls does not

wait for risk or opportunism to occur; instead, a company assesses the likelihood of the

events (Murphy & Dacin, 2011; Wells, 2011).

By assessing the likelihood of events, a company can prepare for such events to

minimize the impact of negative risk on financial statements or to maximize events that

could have a positive impact on the company’s financial statements. Risk assessment is

necessary for a company to maximize stakeholder’s investment and to succeed in an

unpredictable economy (Wells, 2011).

Information and Communication

It is vital that auditors gather the necessary information on a company’s financial

statements to ensure that information was properly classified, measured, recorded,

analyzed, and reported on the financial statement data in a timely manner. In addition, it is

important that a company’s financial statements be properly communicated because

information that is not communicated in a timely manner lacks creditability and its

usefulness to stakeholders diminishes (Murphy & Dacin, 2011). To illustrate, if financial

data is prepared three months late, it is not useful to a bank because banks are interested in

a company’s current financial position. In addition, if an organization is unable to produce

timely data, it loses it creditability because potential stakeholders will question a

company’s ability to operate efficiently. For these reasons, it is imperative that financial

information is communicated in a timely manner.

Control Activities

Control activities are designed by management to ensure that financial data is

prepared truthfully and accurately and that the information is reliable. If a company has

good control procedures in place, the likelihood for employees to commit fraud decreases

(Harrison et al., 2011). The control activities that a company has in place can vary by

organization; however, two types of controls can be found in an organization. The two

types are preventive activities and detective activities. Preventive activities are designed

to stop or deter fraud from occurring (Wells, 2012). To illustrate, a bank understands that

it is possible for employees to steal money, so the bank has preventive activities in place.

The preventive activities may include cameras to watch employees, periodic counting of

cash in the drawer, and checking employee’s personal items when leaving work. If a

company has good controls activities in place, fraud decreases (Harrison et al., 2011).

The second type of control to decrease fraud is detective activities. Detective

activities identify fraudulent activities that have already occurred in an organization.

When management identifies fraudulent activities that have already occurred, immediate

actions are taken to prevent the activity from occurring in the future. To illustrate, if

management discovers that inventory is missing from the stockroom, management will

immediately implement a new policy and procedures to prevent further theft. The new

policy could include installing cameras in the storeroom or counting supplies on a routine

or surprise basis. Control activities will deter employees from stealing from their

organization if they know cameras or routine counts of inventory will occur on a regular

basis (Harrison et al., 2011).

Monitoring

The last component that a company needs to have a good system of internal

control is monitoring. Monitoring is a review conducted by management to ensure that

the company’s internal control procedures are operating as planned and to identify any

deficiencies that may exist. Monitoring a company’s internal control can include separate

evaluations or ongoing evaluations (McNally, n.d.). Separate evaluations are conducted

on a routine basis, but are not built into the organization’s internal control structure,

whereas ongoing activities are built into a company’s internal control structure.

Ongoing activities are conducted on a systematic basis and include analyzing

data, reconciling accounts, and other transactions that can verify the credibility and

reliability of the financial data. Ongoing activities and separate activities can be

performed manually with the use of software or a combination of both methods

(McNally, n.d.). However, using software to evaluate internal controls procedures offers

benefits that can be achieved with manual evaluations of internal control (McNally, n.d.).

The use of software allows management to immediately identify and correct control

deficiencies. To illustrate, internal control software immediately identifies transitions that

are not properly recorded or have an unusually high transaction balance.

The Evolution of Statements of Auditing Standards

Financial statement fraud has been in existence since the stock market crash of

1923. As a result of the stock market crash, the federal government stepped in to provide

protection to investors and creditors who rely on financial statements when making

investing decisions. To protect investors and creditors, public companies are required to

have their financial statements audited by accounting firms. The purpose of the audit is to

provide reasonable assurance on whether the financial statements are free from material

misstatements. To ensure financial statements are free from material misstatements,

auditors exercise due professional care during an audit. To provide due professional care,

auditors must follow specific guidelines that are set forth by the Statement of Auditing

Standards (SAS).

The Statement of Auditing Standards has evolved over time, and so have the

responsibilities of auditors. The first auditing standard to protect investors and creditors

was SAS No. 53. SAS No 53, which explains that the auditor’s responsibility is to

identify and report irregularities (Mancino, 1997). Since the issuance of SAS No. 53, the

subject of fraud has continued to draw the interest of ever-growing constituencies, and

independent auditors have been the target of litigation and criticism. Independent auditors

were the target of litigation and criticism because there was a misconception regarding

the public view on the level of responsibilities that auditors have in detecting financial

statement fraud and what auditors can do to detect fraud. Because of these

misconceptions, the SEC developed SAS No. 82 (Dezoort & Thomas, 1998; Mancino,

1997).

The most important difference between SAS No 53 and SAS No. 82 were changes

made to the auditor’s responsibility to detect fraud (Dezoort & Thomas, 1998; Mancino,

1997). The first difference is SAS No. 82, which does not use the term irregularities;

instead, it uses the term fraud and it emphasizes that auditors have a responsibility to

detect fraud during the planning stage of the audit and during the performance of the

audit (Dezoort & Thomas, 1998; Mancino, 1997). However, SAS No. 53 used the term

errors, which are defined as unintentional misstatements or omissions in financial

statements (Dezoort & Thomas, 1998; Mancino, 1997). Another important difference

between SAS No. 53 and SAS No. 82 is that SAS No. 82 required auditors to assess and

document the risk or likelihood of misstatements in the financial statements (Dezoort &

Thomas, 1998; Mancino, 1997). The purpose of this documentation was to serve as proof

that auditors had done their due diligence in assessing and detecting the possibility of

financial statement fraud, whereas SAS No. 53 did not require auditors to assess or

document the risk or the likelihood of misstatements in the financial statements (Dezoort

& Thomas, 1998; Mancino, 1997).

The purpose of the assessment and documentation of SAS No. 82 is to protect

auditors in the event of a lawsuit from financial statement users. Lastly, the accounting

standard board believed that the implementation of SAS No. 82 would force auditors to

increase their audits procedures in regards to testing and reviewing financial statement

accounts (Dezoort & Thomas, 1998; Mancino, 1997). Testing and reviewing accounts is

important because it reduces the time it takes auditors to detect fraud. Without testing and

reviewing accounts, it could take auditors up to five years to determine if fraud exists in

an account.

Due to the accounting scandals that occurred at major corporations such as

Enron and WorldCom, a major change in the Statement of Auditing Standards occurred

(Labaton, 2006). The new standard requires auditors to obtain reasonable assurance

through brainstorming that financial statements are free of material misstatements

(Labaton, 2006). The new standard is termed SAS No. 99 and it is more detailed than

SAS No. 82 because it requires that auditors document activities that occur during the

audit (Ramos, 2003). First, auditors must document when brainstorming meetings

occurred and who attended them (Ramos, 2003). Second, SAS No. 99 requires that

auditors document the steps they performed to gather information to assess if fraud could

exist in the financial statements (Ramos, 2003). Third, auditors must include a discussion

on revenue recognition and whether there is a possibility that fraud could exist in the

financial statements (Ramos, 2003). If fraud does exist, auditors must estimate the

amount of the possible misstatement.

Other important components of SAS No. 99 are the likelihood that management

could override internal controls (Alexander, 2012; Dorminey et al., 2010). Internal

controls are the policies and procedures companies have in place to prevent fraud from

occurring (Dorminey et al., 2010). SAS No. 99 also focuses on the analytical procedures

that auditors perform to determine if additional auditors would be necessary to conduct

the audit (Ramos, 2003). Analytical procedures are a diagnostic sequential and iterative

process involving hypothesis generation, information search, hypothesis evaluation, and a

final judgment (Hayes, 2011). Lastly, management must discuss any issues of fraud with

management. It is important that management communicate the information to the right

individuals within the organization.

Auditors’ responsibility to detect errors refers to material unintentional

transactions or the omission of transactions that are or are not recorded in the financial

statements. Errors could occur in the following cases (Hayes, 2011):

1. Accounting data is incorrectly gathered or processed when the transaction was

recorded. To illustrate, an accountant to could fail to gather accounts payable data

and a payment to a creditor could be omitted from the financial statements. This

type of error would cause net income or liabilities to be over stated.

2. Miscalculations of accounting estimates because of oversight or misinterpretation

of facts. To illustrate, if an accountant does not adequately determine the amount

of the depreciation expense, it would affect the income statement, which could be

overstated or understated. Income could be overstated if the transaction was not

recorded or if the amount of the deprecation was too low. Lastly, the income

statement could be overstated if the amount of the depreciation expense was too

low.

3. Misrepresentation in applying generally accepted accounting principles for the

classification or presentation of an asset, liability, equity, revenue, or expense. To

illustrate, generally accepted accounting principles require that a company record

any contingent liability in the financial statements if it is probable that a loss will

be incurred and if the amount of the contingent loss can be determined. If

management fails to record a contingency, the company has misrepresented the

application of generally accepted accounting principles.

Unfortunately, there have been misconceptions from stakeholders, such as investors and

creditors, in regards to these errors. Stakeholders believe that auditors should be

responsible to detect all errors; however, in reality, it is not possible to detect all errors

because auditors do not verify every transaction that occurs in a company’s financial

statements. However, if the amount is material, then auditors have a responsibility to

detect the error.

The term irregularities differ from the term errors because errors are

unintentional, whereas irregularities are considered intentional misstatements or

omissions in financial statements. Irregularities occur when financial statements are

deliberately misstated and the misstatements are generally initiated by management

(Bariyima & Akenbor, 2008). Financial statements irregularities are also named

management fraud, defalcations, or asset misappropriations, and they may involve the

following types of transactions:

1. Manipulation, falsification, or alteration of accounting records or supporting

documents from which financial statements are prepared.

2. Misrepresentation or intentional omission of events, transactions, or other

significant information.

3. Intentional misapplication of accounting principles relating to amounts,

classification, manner of presentation, or disclosure. (Bariyima & Akenbor,

2008)

To illustrate, if an accountant records a $1,000 transaction for $1,000,000, it should be

detected by the auditor because auditors have a responsibility to verify all material

transactions and a $1,000,000 transaction is a material amount. However, not all errors in

financial statement will be detected, even if the amount is material, because of

management override of internal controls. Management override of internal controls

occurs because management has access to accounting data and computer passwords to

change or modify transactions without anyone’s approval (Dorminey et al., 2010;

Kassem & Higson, 2012). To illustrate, because of management’s ability to a enter a

transaction without the approval of another manager, a manager could enter a $5,000,000

revenue transaction in the financial statements without the approval of another manager

The three components of the fraud triangle theory are rationalization, opportunity,

and pressure, and all three must be present for an individual to commit fraud (Cressey,

1953). However, the opportunity for an individual to commit fraud can be controlled,

managed, or monitored if a company has a good system of internal control (Alexander,

2012; Harrison et al., 2011) A good system of internal control is determined by an

organization, whereas rationalization and pressure cannot be controlled by an

organization.

Rationalization is based on how an individual thinks, which cannot be controlled

by an organization, and pressure is an emotion that individuals have and that cannot be

controlled by a company (Dorminey et al., 2010; Kassem & Higson, 2012; Kranacher, et

al., 2011). Therefore, corporations should focus their efforts on opportunities to reduce

fraud; this can be accomplished by developing a good system of internal control

(Alexander, 2012; Harrison et al., 2011). As previously stated, all three components of

the fraud triangle theory must be present for an individual to commit fraud. Thus, if a

company can eliminate one of the components of the fraud triangle theory, the possibility

for an individual to commit fraud decreases dramatically (Murphy & Dacin, 2011; Wells,

2011). The component that companies should focus on to reduce fraud is opportunity,

because it relates to a company’s internal control structure, which can be controlled by an

organization (Murphy & Dacin, 2011; Wells, 2011).

Risk Assessment

Management can mitigate fraud at their organization if they focus their efforts on

internal control; this can be accomplished by performing a risk assessment and designing

a risk model for their organization (Edward, 2010; Harris, 2011; Wells, 2011). A

company’s risk assessment should include an understanding of the company’s assets,

which includes employees, property, equipment, and company software. Understanding a

company’s assets is the first and most critical step when an assessing a company’s risk

because assets cannot be protected if they are not identified (Edward, 2010).

Identifying assets allows management to categorize the assets according to the

likelihood of fraud occurring. If a company can identify and describes the responsibilities

of employees who work in the accounting department, management could predict the

likelihood of fraud by assessing the company’s internal control structure (Edward, 2010;

Harris, 2011; Wells, 2011). To illustrate, if an employee in the accounting department is

responsible for handling cash, there is a possibility that the employee could steal cash. In

this example, the risk assessment should be set high because there is a possibility that the

employee could steal cash. However, the possibility does not result in fraud if the

employee does not have financial pressure or cannot rationalize the opportunity to steal

cash (Dorminey et al., 2010; Kassem & Higson, 2012; Kranacher et al., 2011).

A risk assessment of property, plant, and equipment includes an assessment of

inherent risk and fraud risk (Tabuena, 2015). Inherent risk is the risk that information in

the financial statements is misstated before an auditor considers the internal control

structure (Ruhnke & Schmidt, 2014). Inherent risk in financial statements includes

misstatements in assets, liabilities, revenues, expenses, and equity accounts (Ruhnke &

Schmidt, 2014). Inherent risk can also result from management’s failure to disclose

information on the accounting method used to determine the most rational method to

record accounting transactions (Ruhnke, & Schmidt, 2014; Tabuena, 2015). For example,

a company may not disclose how assets were depreciated and accounted for in the

financial statements.

Another type of risk related to fixed assets is management failure to disclose the

ownership of an asset. This occurs when a company leases fixed assets. To further

explain, when fixed assets are leased, it can be classified as an operating lease or a capital

lease. The difference is imperative because it determines whether the fixed asset should

be recorded on the balance sheet as an asset (Cohen, Krishnamoorthy, Peytcheva, &

Wright, 2013). For example, if a company purchased machinery worth $50,000 and the

lease is classified as a capital lease, the company would record the lease on the balance

sheet as an asset and a liability. However, if the transaction did not meet the requirements

of a capital lease, the equipment would be classified as an operating lease (Cohen,

Krishnamoorthy, Peytcheva, & Wright, 2013). Because of the inherent risk associated

with classifying fixed assets, auditors must review company’s documentation and lease

agreements to ensure that leased assets are properly recorded (Cohen, Krishnamoorthy,

Peytcheva, & Wright, 2013). Auditors have a responsibility to detect and disclose any

type of fraud that could have a material impact on a company’s financial statements

(Kranacher et al., 2011). Therefore, auditors should review a company’s fixed assets,

policies, and procedures on leased assets (Kranacher et al., 2011). Next, some companies

may not disclose leased assets or report them on their financial statements; however,

auditors have a responsibility to conduct the necessary due diligence to ensure that all

leased assets are reflected in a company’s financial statements. Lastly, although a

company’s failure to disclose leased assets is a violation of generally accepted accounting

principles, auditors still have a responsibility to detect this type of fraud (Bratten,

Choudhary, & Schipper, 2013; Cohen, Krishnamoorthy, Peytcheva, & Wright, 2013).

The next major step in performing a risk assessment is identifying the

vulnerabilities and threats of an organization (Christensen, Kumar, Meh, & Zorn, 2015;

Power, 2013; Wells, 2011). This step can be difficult because vulnerabilities and threats

are not as obvious as inherent risk and fraud risk (Christensen, Kumar, Meh, & Zorn,

2015; Wells, 2011). Criminal threats, accidental threats, and terrorist threats are all

considered unpredictable events.

Since threats are unpredictable, it is important that companies determine the

likelihood of threats. They can be determined by examining a company’s historical data.

Examining a company’s historical data provides insight into the frequency and types of

threats that have occurred in the past. However, if there is no historical data available on

historical threats, auditors should consider the environment in which the company

operates (Wells, 2011). If a company provides goods or services to the federal

government, the company’s risk assessment for terrorist threat should be high. The risk

assessment should be high because historical data proves that terrorist threats are likely to

occur in companies that provide goods or service to the federal government. Therefore, a

company that provides good or services to the federal government should have good

internal control procedures in place to prevent terrorist attacks. The likelihood of threats

in a company is reduced if a company has a good system of internal control (Dorminey et

al., 2010; Kassem & Higson, 2012; Kranacher et al., 2011).

Good internal control for companies that are at risk for terrorist attacks begin with

good internal controls on computer systems to prevent confidential data from being

compromised (Edwards, 2010; Power, 2013). Secondly, good internal control should

include protecting physical property, such as buildings. This can be accomplished by

hiring security guards to secure the entrances of buildings. Although companies can

secure their property to combat terrorist attacks, it is impossible for auditors to quantify

terrorist threats in the financial statements. Terrorist threats cannot be quantified because

the acts are random, so management must perform a thorough risk assessment to

determine the types of terrorist attacks that could occur and how such attacks can be

prevented or how companies can reduce the amount of damage (Power, 2013). To

illustrate, if a company manufactures military aircraft, the risk of terrorist attacking the

manufacturing facility is high, so management should implement a plan to reduce the

likelihood of a terrorist attack (Harris, 2011; Power, 2013).

Once the threats of accounting systems and assets are identified, a vulnerability

assessment should be executed (Harris, 2011; Power, 2013; Wells, 2011). The

vulnerability assessment should include an assessment of the company’s computer

systems and fixed assets to quantify the potential impact that a successful attack would

have on the company’s accounting systems and fixed assets. In addition, during the audit

it important that auditors review the policies and procedures on vulnerabilities to ensure

that they are valid and that the processes have not been tampered with (Wells, 2011).

Reviewing a company’s policies and procedures and performing a risk assessment of

threats and vulnerabilities is beneficial to a company because it could save a company

time, money, damages, and, most importantly, it could reduce the possibility of

employees committing fraud (Wells, 2011). A risk assessment reduces the possibility of

employee’s opportunity to commit fraud because it identifies and closes any gaps and

weaknesses in a company’s internal control structure (Kassem & Higson, 2012).

Upon successful completion of a risk assessment, companies should design a risk

model. Risk modeling is also referred to as risk categorization and is the most

challenging and burdensome aspect of a risk assessment (Edwards, 2010; Powers, 2013;

Wells, 2011). The purpose of risk modeling is to quantify the risk identified by auditors

and to manage the overall risk during the planning stage of an audit (Edwards, 2010;

Wells, 2011). Thus, during the risk modeling process, auditors should review the

company’s audit risk and inherent risk to help them understand the company and to

assess the type of fraud that could occur (Edwards, 2010; Powers, 2013; Wells, 2011).

While designing the risk model, auditors should focus on the level of risk that is

involved because it will determine the amount of testing that auditors will perform to

determine if fraud exists (Edwards, 2010, Powers, 2013; Wells, 2011). First, if auditors

determine that the inherent risk and control risk is high, the auditor will set a lower level

of detecting risk. The detection risk is the risk an auditor takes. A lower level detection

risk indicates that auditors will increase the sample size during the audit, whereas, if

control risk and inherent risk are low, the auditors will have a higher detection risk; this

indicates that the auditors will decrease the sample size.

Understanding the level of detection risk is important during the planning stage of

an audit because an inaccurate assessment could lead to auditors failing to recognize

fraud during an audit (Wells, 2011). To illustrate, if the risk model claims that the

detection risk is high, auditors may not audit enough transactions, which could lead to a

false conclusion that fraud does not exist in a financial statement audit, when in fact fraud

does exist (Powers, 2013).

Also, flawed risk models and over emphasis on historical data can cause auditors

to inaccurately determine the level of detection risk. Flawed risk models and manager’s

contentment with current risk models led to demise of Enron and WorldCom (Wells,

2011). However, to overcome flawed risk models, auditors should create risk models that

identify the likelihood of fraud that could occur during an audit and mitigate those risks

(Wells, 2011).

There are five strategies that auditors can use to mitigate risk (Wells, 2011). First,

auditors could disregard the risk altogether, which is not wise unless the possibility of the

threat is unlikely (Powers, 2013; Wells, 2011). However, if auditors chose to disregard

the threat, the auditors should perform a cost benefit analysis to ensure the risk was

properly classified as an unlikely threat (Powers, 2013; Wells, 2011). Next, if the threat

might occur occasionally, auditors could increase their audit efforts in the risk area to

determine if fraud exists in the financial statements (Powers, 2013; Wells, 2011).

Third, auditors could take steps to mitigate the risk by identifying and closing any

gaps or loopholes that could exist during the audit engagement (Powers, 2013; Wells,

2011). Closing gaps and loopholes is considered the most reliable method if the risk can

be identified and remediated within a reasonable amount of time and at a reasonable cost

(Wells, 2011). Fourth, auditors may decide to accept the audit risk and any consequences

that could occur if audit threats are not identified or mitigated (Powers, 2013; Wells,

2011). Auditors generally assume this type of risk if they believe that the threat is

unlikely to occur or that, if the audit threat does occur, the cost would be minimal. In

addition, auditors could apply any of the mitigation options mentioned to determine the

best approach during an audit. To conclude, if the risk model is properly classified and

the types of risk that could occur during an audit are identified, the audit team will not

have any issues resourcing, classifying, or remediating critical threats during an audit

(Wells, 2011).

Audit Evidence

Auditors conduct audits to obtain reasonable assurance on whether financial

statements are free of material misstatements (Arens, Elder, & Beasley, 2012; "Auditing

Standard No. 14 Evaluating," 2015). To obtain reasonable assurance that financial

statements are free of material misstatements, auditors must exercise professional

skepticism and professional care. Professional skepticism relates to auditors’ decisions

and judgments that reflect a valuation of risk that an assertion is conditional or incorrect

based on the information available to the auditors (Nelson, 2009; Payne & Ramsay,

2005), whereas judgment helps guide auditors when determining the quality of audit

evidence that is necessary to ensure the financial statements are free of material error

during an audit (Arens, Elder, & Beasley, 2012; "Auditing Standard No. 14 Evaluating,"

2015).

Audit evidence is information that auditors gather to determine if a company’s

financial statements are free of material misstatement. When gathering evidence, auditors

search for evidence that is persuasive rather than conclusive. Persuasive evidence is

evidence from various sources, whereas conclusive evidence does not examine all of the

information available for one financial statement assertion (Arens, Elder, & Beasley,

2012; "Auditing Standard No. 14 Evaluating," 2015). To exercise professional judgment

when collecting audit evidence, auditors must ensure that the combined weight of the

audit evidence is pervasive (Budescu, Peecher, & Solomon, 2012). This means a

reasonable person could be persuaded that the audit evidence supports a financial

statement assertion and the decisions of the auditor are valid and appropriate. Therefore,

audit evidence should be constructed by its relevance and reliability (Budescu, Peecher,

& Solomon, 2012).

Relevance during an audit engagement refers to the connection of evidence used

to prove or disprove a financial statement assertion (Arens, Elder, & Beasley, 2012;

Budescu, Peecher, & Solomon, 2012). For example, an auditor could prove that a

company’s inventory is properly accounted for and the inventory does exist. This is

possible because the auditor can physically count the inventory to verify its existence and

to confirm that the numbers disclosed in the financial statements are accurate. Lastly,

when determining what evidence is relevant, auditors should select information that is

logical and sensible. Hence, if the evidence is not logical or sensible, it is irrelevant and

therefore cannot be used as evidence during an audit (Arens, Elder, & Beasley, 2012;

Budescu, Peecher, & Solomon, 2012).

Reliability during an audit indicates that the same results will occur for a financial

statement assertion if a different individual has verified the evidence. Reliability also

indicates that a financial statement assertion would produce the same results if audit

evidence were obtained from a different source. To determine if a financial statement

assertion is valid, auditors rely on various types of audit evidence, which should come

from multiple sources. Audit evidence should come from multiple sources because a

single source does not provide adequate evidence for auditors to drawn the conclusion

that a financial statement assertion is valid (Arens, Elder, & Beasley, 2012; Budescu,

Peecher, & Solomon, 2012; Karavardar, 2012).

Audit evidence is data collected by auditors to determine if a financial statement

assertion is correct (Arens, Elder, & Beasley, 2012; Budescu, Peecher, & Solomon, 2012;

Karavardar, 2012). To illustrate, if a financial statement assertion states that inventory is

$50,000, auditors must obtain audit evidence to corroborate with the $50,000 assertion.

To obtain audit evidence about the $50,000 assertion, auditors can use one or more of the

following techniques as evidence.

Physical evidence is a form of verification whereby the auditor inspects or counts

the financial statement assertion (Arens, Elder, & Beasley, 2012; Budescu, Peecher, &

Solomon, 2012; Karavardar, 2012). In the example of the $50,000 inventory, the auditor

would inspect the inventory and perform a physical count of the inventory to verify that

the company actually has $50,000 worth of inventory. The physical count verifies the

accuracy of the number, but it does not verify that the company owns the inventory. To

determine if the company owns the inventory, the auditor should mail out confirmations

(Budescu, Peecher, & Solomon, 2012; Karavardar, 2012).

Confirmations are a form of evidence that is verified by sending out a written

request to third parties to verify a financial statement assertion (Arens, Elder, & Beasley,

2012; Budescu, Peecher & Solomon, 2012; Karavardar, 2012). In the inventory example,

the auditors could ask third parties to verify that the inventory was sold to the company

and not consigned to the company. This is important because a company often holds

inventory that is not owned by the company but is consigned. According to generally

accepted accounting principles, consigned inventory should not be included in a

company’s inventory balance (Karavardar, 2014).

Other types of evidence that auditors can rely on to determine if a financial

statement assertion is accurate include documentation, analytical procedures, inquires of

clients, observations, and re-performance (Arens, Elder, & Beasley, 2012; Budescu,

Peecher & Solomon, 2012; Karavardar, 2012). As previously stated, auditors should use

multiple types of audit evidence to verify a financial statement assertion (Arens, Elder, &

Beasley, 2012; Budescu, Peecher, & Solomon, 2012; Karavardar, 2012). After an auditor

has used multiple types of audit evidence and is confident that all the financial statement

assertions are valid, the auditor can than render an opinion on a company’s financial

statements (Arens, Elder, & Beasley, 2012; Budescu, Peecher, & Solomon, 2012).

Following, in Figure 1, is a conceptual framework to guide this study. The

purpose of the conceptual framework is to graphically explain the main ideas to be

studied, the key concepts, and the relationships among them (Miles & Huberman, 1994).

The Graphic Conceptual Framework also serves as the foundation for the Preliminary

List of Start Codes, which can be found in appendix C.

Figure 1: Graphic Conceptual Framework

Brainstorming Analytical Procedures Risk

Assessment

SAS No. 99 and Audit Evidence Internal

Professional Skepticism in

Fraud Detection

Audit Evidence

The Evolution of Statements of

Auditing Standards

The fraud Triangle Theory

The Underpinning of SAS No. 99

Summary

According to Saksena (2010), undetected fraud has increased from 5% to 7%,

and each year a company loses 5% of its revenue to fraud (Nations on Occupational

Fraud & Abuse, 2016). This number is staggering because 5% translates to a potential

projected global fraud loss of nearly $3.7 trillion (Nations on Occupational Fraud &

Abuse, 2016). Because of these massive losses due to fraud, fraud is a major concern and

auditors have a responsibility to deter and detect it. Currently, to deter and detect fraud

auditors are required to rely on the fraud triangle theory, which identifies three critical

elements that must be present for a typical individual to engage in fraud (Kranacher et al.,

2011). The three elements are perceived opportunity, perceived pressure, and

rationalization fraud (Kranacher et al., 2011).

The purpose of this phenomenological study was to understand and describe U.S.

auditors’ perceptions of the utility of fraud triangle theory and to determine if motivation,

integrity, and capability should be included in the fraud theory. Currently, there are

contradictions in the literature on the effectiveness of the fraud triangle theory. First,

Donald Cressey identified three conditions that are generally present when fraud occurs

in an organization: perceived opportunity, perceived pressure, and rationalization

(Kranacher et al., 2011; Romney, Albrecht, & Cherrington, 1980). However, the current

literature states that the fraud triangle is ineffective in detecting the likelihood of fraud in

an organization and suggests that a new model should be implemented (Alexander, 2012;

Dorminey et al., 2010; Kassem & Higson, 2012; Kranacher, et al., 2011). Some scholars

noted that the new model should be an extension of Cressey’s fraud triangle theory and

should include the fraudster’s motivation, integrity, and capabilities because these are

observable (Kassem & Higson, 2012)

The fraud triangle is the underpinning principle of SAS No. 99, which also

suggests that auditors should use professional skepticism when conducting a financial

statement audit. Professional skepticism indicates that the auditor assumes neither that

management is dishonest or honest (Nelson, 2009). Accordingly, professional skepticism

relates to auditors’ decisions and judgments and reflects a valuation of risk that an

assertion is conditional or incorrect based on the information available to the auditors

(Nelson, 2009; Payne & Ramsay, 2005). While Nelson (2009) and Payne and Ramsay

(2005) argued that professional skepticism is indicated by auditor judgments and

decisions, Hurtt (2010) noted that auditors’ judgment could result in the auditors

becoming too skeptical. Accordingly, as Nelson (2009) acknowledged, the Hurtt scale

states that auditors could become too skeptical and over-audit or be too lax and perform

inefficient audits.

Although SAS No. 99 requires brainstorming, some critics believe that

brainstorming is not effective. It could waste time if procedures are not in place for

conducting brainstorming sessions (Sandberg, 2006). However, some researchers believe

that no matter how well the brainstorming session is planned, group brainstorming is not

as effective as individual brainstorming. During brainstorming sessions, auditors also

consider analytical procedures.

Analytical procedures are diagnostic sequential and iterative processes involving

hypothesis generation, information searches, hypothesis evaluation, and a final judgment

(Koonce, 1993). Analytical procedures should be performed during a financial statement

audit to determine if there are any types of transactions that appear to be unreasonably

high or low (Hayes, 2011). Although auditors use analytical procedures to determine if a

transaction appears unreasonable, they must also verify the amount that is present in the

financial statements. To verify financial statement transactions, auditors must use audit

evidence.

Finally, auditors should use their best efforts to mitigate fraud in an organization.

To accomplish these goals, auditors should perform a risk assessment and design a risk

model for their organization (Edward, 2010; Harris, 2011; Wells, 2011). To conclude

whether the risk model is properly classified and the types of risk that could occur during

an audit are identified, the audit team will not have issues resourcing, classifying, or

remediating critical threats during an audit (Wells, 2011). Findings from this study may

help auditors in performing their duty to deter and detect financial statement fraud in an

organization. Following is Chapter 3, which discusses the research methods to be used

for this phenomenological study. The chapter will discuss the study’s population, data

collection, data processing, data analysis, assumptions, limitations, delimitations, and

ethical assurance.

Chapter 3: Research Method

The fraud triangle theory is the underpinning principle of SAS No. 99 and it is

utilized by auditors to detect a company’s vulnerability to financial statement fraud

during a financial statement audit. Although the fraud triangle theory is relied upon to

detect a company’s vulnerability to fraud, many scholars believe that it is inadequate to

detect fraud. Buchholz (2012) explained that the fraud triangle has importance in

detecting fraud in a financial statement audit but that it also has deficiencies and should

not be solely relied upon. Kassem and Higson (2012) suggested that the fraud triangle is

ineffective for use in detecting fraud and that a new fraud triangle should be implemented

that includes motivation, integrity, and capability as additional factors. Current evidence

proves that undetected financial statement fraud has increased from 5% to 7% (Saksena,

2010). Because of this increase, it is evident that a new fraud triangle should be

implemented (Kassem & Higson, 2012).

Currently, no study was conducted to understand auditors' perceptions of the

fraud triangle or if auditors believe that motivation, integrity, and capability should be

added to the fraud theory. This study was important because it identified what auditors

think that they should look for when determining the likelihood of fraud in an

organization. The purpose of this qualitative phenomenological study was to understand

and describe U.S. auditors’ perceptions of the effectiveness of fraud triangle theory and

to explore whether the addition of new elements—motivation, integrity, and capability—

would offer additional explanatory value to understanding why fraud occurs. To conduct

research on this topic, the following research questions were addressed:

Q1. How do auditors perceive and describe their experiences with fraud and the

use of the fraud triangle theory?

Q2. Do you think motivation, integrity, and capability should be included in the

fraud triangle theory? If so, why?

Q3. Do you think there are other elements that auditors should be include in the

fraud theory? If so, why?

This chapter provides an understanding of how the research was conducted. It

included a description of the research methods and designs, a description of the

population, the sample method, the materials/instruments and data collection, and of the

processing/analysis. The chapter concluded with a discussion on the assumptions of the

population, the limitations of the study, delimitations and ethical assurance, which

provides details on the consent procedures, and how confidentiality will be maintained

for participants.

Research Methods and Design(s)

A qualitative method was chosen because it allowed a holistic view of the

phenomena with interviews conducted in a natural setting. Merriam (1988) explained that

a qualitative study represents “an intensive, holistic description and analysis of a single

entity, phenomenon, or social unit” (p. 10). Qualitative research includes the collection of

a variety of case studies, personal experiences, empirical materials, introspection, and

visual texts that describe routine and problematic movements and meaning in individual

lives (Denzin & Lincoln, 1994). The purpose of this study was to understand the meaning

that people have constructed—that is, how people make sense of their world and the

experiences they have in the world (Merriam, 1998). The qualitative methodology

employed will seek to understand, from the perspective of auditors, the gaps that are

inherent in Cressey’s fraud triangle.

In conducting qualitative research, the methods that can be utilized include

phenomenology, narrative analysis, case study approaches, inductive thematic analysis

and grounded theory, discourse-conversation analysis, and ethnography (Merriam, 1998).

Of the various methods mentioned, a phenomenological method was selected. The goal

of this phenomenological study is to describe the lived experiences of auditors’

perceptions of the fraud triangle theory. Other designs were considered, including using a

multiple case study to investigate an individual or group of people or events. In the end, it

was determined that a phenomenological design is most appropriate. A

phenomenological study was appropriate for this study because it described the

phenomenon accurately while remaining true to the facts and understanding the

phenomenon from the perspective of the participants involved in the study (Husserl,

1938; Moustakas, 1994)

In conducting a phenomenological study, the first consideration is an open mind

and receptiveness to the participants. To accomplish this, any preconceptions about the

fraud triangle theory should be eliminated. This allowed the responses of the

participants to determine the outcome of the study. Phenomenological researchers must

silence their own voices and listen to responses of the participants this process is defined

as epoché (Moustakas, 1994).

Population

The target population for this study was auditors who are certified public

accountants that work in various accounting firms. Senior level auditors are individuals

who have worked in auditing firms for a minimum of five years. Upon approval of

Northcentral University and the IRB, participants will be selected by applying one of the

following three methods. The first method is to recruit participants from the Georgia

Society of CPAs. If enough participants are not recruited from the Georgia Society of

CPAs, participants will be recruited from the Linked-in group “Trendline.” The last

method to recruit participants will be from the researcher’s prior experience working with

CPAs for ten years.

The Georgia Society of CPAs meetings allows individuals to introduce

themselves and offer their products and services or ask questions. During that time, there

will be an announcement that participants are needed to participate in a study on the fraud

triangle theory. The announcement included a statement that, to participate in the study,

the individual must be a certified public accountant with five or more years of auditing

experience. If an individual was willing to participate in the study, their email address

and phone number will be recorded. When participants agree to participate in the study,

they will receive an introduction letter explaining the purpose of the study and

information on how the interviews will be conducted. The introduction letter is included

in the appendix. Finally, the six certified public accountants who were worked within a

sixty-mile radius of Atlanta to allow for the meetings and interviewing participants.

Sample

The sample size for this phenomenological study was six certified public

accountants who work in public accounting firms. Additional participants will be

included in the study until data saturation is achieved. An acceptable sample size for

phenomenological research is generally 2 to 10 participants (Boyd, 2001; Giorgi, 2009).

This study included a non-probability sampling method, which is referred to as

purposive sampling (Patton, 2002). Purposive sampling has been selected because it

allows the population to be based on the characteristics that are needed for the study

(Patton, 2002). The purposive sample for this study is CPAs with five years of public

accounting experience who have experienced at least one fraud case. In addition to

purposive sampling, a convenience sampling method will be utilized in the event that a

sufficient number of participants are not recruited at the Georgia Society of CPAs or data

saturation does not occur.

A convenience sample is a method that identifies participants because of their

availability and because they are easy to reach (Miles & Huberman, 1994; Patton, 2002).

The convenience sample for this study will come from Linked-in, and the specific name

of the Linked-in group is “the Trendlines group.” Information will be posted in the

Trendlines group that research is being conducted on the fraud triangle theory and

participants are needed. The post will state that participants must be senior level CPAs

who work in public accounting firms and have five or more years of auditing experience.

Linked-in is a website where professionals post their resumes, look for jobs, or

share business news and trends. Trendlines is a specific group in Linked-in that consists

of CPAs and accountants. When participants are interviewed, they will be asked for

referrals to other individuals who meet the requirements for the study; this method is

called snowball sampling (Miles & Huberman, 1994; Patton, 2002).

The exclusion criteria are accountants who work in public accounting firms who

are certified public accountants but do not have five years of accounting experience.

Another exclusion criterion is accountants who work in public accounting who are

certified public accountants but do not have five years accounting experience. The

characteristics mentioned are necessary for the participants to plausibly answer the

research questions.

In qualitative research, data saturation varies according to the scholars and is a

matter of opinion; however, there is a belief that data saturation occurs when the

collection of data is repetitive and nothing new can be gathered from the interviews

(Giorgi, 2008; Glasser & Strauss, 1967; Strauss & Corbin, 1998). In qualitative studies,

the sample size should allow the researcher to uncover enough facts to draw a conclusion

on the study, but it should not be too large because the interviews would become

repetitive and redundant (Glasser & Strauss, 1967). As a result, a larger sample is not

necessary to achieve data saturation because repetition and redundancy will occur with a

smaller number of participants. Meeting with six participants is acceptable in purposive

sampling because the objective of purposive sampling is not to make generalizations,

which is common in quantitative research designs (Yin, 2013).

Materials/Instruments

The primary instruments used for this study was pre-interview questions and the

interview guide. A researcher can conduct one-on-one interviews or focus group

interviews. Focus groups are used to generate an understanding of participants'

experiences, beliefs, and collective views (Morgan, 1998). Because there is no interest in

collective views, one-on-one interviews will be utilized for this study. In this

phenomenological study, one-on-one interviews will be utilized because the goals of the

study are to learn about each auditor’s perception of the fraud triangle theory. The study

is to learn auditors’ perceptions on an individual and not on a collective basis; therefore,

focus group interviews are not appropriate for this study (Morgan, 1998). To effectively

conduct the interviews the researcher utilized the first two interview techniques designed

by Seidman. The first interview technique focused on the history of the participants and

the second interview technique focused on the details of the lived experience of the

auditors.

The first instrument was the pre-interview questions. The pre-interview questions

were purposive, purposive questions were asked to ensure that participants meet the

qualifications for the study (Patton, 2002). The second instrument was the interview

guide, which is sent to participants who met the qualifications for the study. The

interview guide is designed to ask opened ended probing questions, such as “how,”

“what,” or “describe.” Asking open-ended probing questions is based on the critical

incident report (CIT) (Flanagan, 1954).

The critical incident report was designed by Flanagan (1954). The report is a set

of procedures used to collect observations of human behavior, which are essential to

understanding a phenomenon. Using the CIT to develop the interview questions allows

for the discovery of new evidence to understand the lived experiences of auditors

utilizing the fraud triangle theory to detect fraud (Flanagan, 1954). To illustrate,

participants will be asked the following question: “Describe your high point using the

fraud triangle.” Asking participants to describe an event allows the researcher to gather

data that is needed to understand the phenomenon that is being studied (Flanagan, 1954).

Refer to Appendix A for the pre-interview questions and appendix B for the interview

guide.

Data Collection, Processing, and Analysis

To draw a conclusion on a study, data from the interviews was collected,

processed, and analyzed. First, data collection was the process of gathering data from

interviews, which was transcribed and uploaded to NVIVO 10. The data was then

processed, which included organizing it, verifying it, and transforming the results so that

it could be analyzed. Lastly, data analysis is implemented to describe facts, detect

patterns, develop explanations, and interpret results (Miles & Huberman, 1994).

Data Collection. The most common types of data collection in qualitative studies

are interviews and focus groups. However, interviews are suitable in phenomenological

studies because they allow the researcher to understand the views and lived experiences

of the participants (Silverman, 2000). The interviews in this study focused on the

effectiveness of the fraud triangle theory and it focused on if the theory should be

modified to include motivation, integrity, and capability. The inclusion criteria for this

study was senior level auditors with state of Georgia CPA license who have worked in

public accounting firms with a minimum of five years of auditing experience. Data was

collected by interviewing six certified public accountants. This study utilized a purposive

sampling method and potential participants will be recruited from the Georgia Society of

CPAs, the Linked-in group “Trendline” or potential participants was recruited from

colleagues who fit the inclusion criteria. This study implemented variety of sampling

methods, including purposive sampling, convenience sampling and snowballing.

Purposive sampling was utilized and the six participants provided enough information

for data saturation. Therefore, the snowballing technique was not necessary for this study

Potential participants were mailed a pre-interview questionnaire to ensure that the

participant meets the criteria for the study (Patton, 2002). Upon receipt of the pre-

interviews questionnaires, participants for the study will be selected. The individuals

selected for the study will be emailed an invitation to participate, an informed consent

document, the interview guide, and information on the location of the interviews. The

face-to-face interviews will be conducted at a public location such as Starbucks. Face-to-

face interviews are the preferred method because they include a higher response rate, a

high degree of accuracy, and the opportunity to discover underlying motivations,

feelings, values, attitudes, and perceptions about fraud detection (Yin, 2013).

Upon receipt of the informed consent document, interviews were scheduled and

participants were emailed the time and location of the interviews. With permission of the

participants, the interviews will be recorded to capture their responses (Yin, 2014)

utilizing a Sony recorder. The recorded data will later be transcribed using Dragon, which

is a transcription software. The transcribed data will be sent back to the participants for a

member check of accuracy. Finally, the transcribed data will be uploaded into NVIVO.

Following is a data collection flowchart, which graphically explains how data will be

collected in this study.

Figure 1

Data Processing. The interviews were not recorded. To ensure the accuracy of

the transcribed data, each participant will be emailed a copy of their transcribed interview

to review. Upon confirmation from the participants that the information is accurate, or

after any modifications are made, the transcriptions and the preliminary list of start codes

were uploaded into NVIVO 10, where all the data will be stored. NVivo 10 is a

qualitative data analysis (QDA) computer software package designed for qualitative

researchers. NVivo 10 allows users to organize, analyze, and find insights from

• Invitation to participate

• Informed consent document

• Interview guide

• Information on the location of the interviews.

Recruit Participants

• Email participants time and locations of interviews

Email Potential Participants

• Invitation to participate

• Informed consent document, Interview guide and Information on the location of the interviews

Email Participants Selected for the Study

• Email participants time and locations of interviews

Schedule Interviews in Microsoft Office

• Interviews will be recorded utilizing a Sony RecorderConduct Interviews

• Interviews will be transcribed verbatim utilizing Dragon

Transcribe Interviews

• Participants will be emailed their transcribed interview to ensure data was accurately transcribed

Member Check

• Transcribed data will be uploaded into NIVIO 10Upload data into NVivo 10

Data Collection Flowchart

unstructured or qualitative data such as interviews, open-ended survey responses, articles,

social media, and web content. Additionally, NVivo 10 accommodates a wide range of

research methods, including grounded theory, ethnography, literature reviews, and

phenomenology (what-is-nvivo 10, 2016).

Data Analysis. Information from the interviews was coded based on a

preliminary list of start codes. The start codes were based on the literature review and

research questions (Miles & Huberman, 1994). In this study, the preliminary codes began

with auditor’s perceptions of the elements of the fraud triangle theory and their

perceptions on modifying the fraud triangle theory to include motivation, integrity, and

capability. These codes were not considered the final codes, but are the beginning of the

process (Miles & Huberman, 1994). In this study, data from the interviews was entered

into NVIVO 10, a qualitative data analysis software package. The data that was entered

into NVIVO 10 was constantly reduced through coding until themes and categories were

identified. After the information was coded and themes evolve, the data was further

grouped to determine the frequency of the number of responses. Since the data was

constantly grouped and regrouped, the start list was be left open and not finalized until

the dissertation was complete. A code list should not be interpreted as final and it should

be left open so that groupings and regroupings can occur as new data emerges (Miles &

Huberman, 1994).

The data that was entered into NVIVO 10 was interpreted to understand the

phenomenon. Researchers must transform qualitative data by developing codes, phrases,

or words to identify themes and to understand the phenomenon (Boyatzis, 1998). An

inductive approach was utilized to convert the raw data into meaningful information. An

inductive approach was selected because it is useful in qualitative research and it will

allow the theory to emerge based on the raw data (Strauss & Corbin, 1990).

The four-step process of analysis involved the use of epoché, phenomenological

reduction, imaginative variation, and the synthesis of meanings and essences (Moustakas,

1994). Epoché, a Greek word defined by Moustakas (1994), is interpreted as a suspension

of judgment. It is the process of setting aside preconceived beliefs, prejudgments, and

biases in order to capture the intended meanings of the qualitative interview (Moustakas,

1994). This foundational stage of data analysis is important because it is employed to

provide objectivity; the beliefs that the researcher held are set aside during the

interpretation (Husserl, 1938; Moustakas, 1994). Epoché is a suspension of judgment; it

is the process of setting aside personal beliefs, prejudgments, and biases during the

interpretation process.

The second step involved the process of reduction (Moustakas, 1994). Reduction,

or bracketing of data gathered by phenomenological designs, allows units of meaning to

emerge when the researcher reads each interview transcript to identify participants’

perceptions of the fraud triangle theory (Husserl, 1938; Moustakas, 1994). The units of

meaning from the transcripts were grouped into themes and used to ensure consistency of

data and to identify differing data (Husserl, 1938; Moustakas, 1994). The data from the

interviews were sorted and analyzed so that bracketing of themes can be created.

Phenomenological reduction is an effort to focus and listen to the central, dominant, and

recurring themes and describe them in textual language (Moustakas, 1994).

Imaginative variation was the third step of analysis for a phenomenological study.

In this stage, themes will be created based on the names and codes derived during the

reduction process. Specifically, the data will be organized using open coding, axial

coding, and selective coding. Each of the coding methods has a different purpose. First,

open coding was utilized to generate categories, which helped to identify themes,

patterns, concepts, perceptions, and anecdotes. The next type of coding was axial coding;

the purpose of axial coding was to link the responses to a subcategory in order to identify

similarities and differences in the data (Husserl, 1938; Moustakas, 1994). Lastly,

selective coding was implemented to integrate and process each category in order to

make sense of the data and organize the data for efficiency and accuracy (Husserl, 1938;

Moustakas, 1994).

The last step in this phenomenological study was a synthesis of meanings and

essences. In this stage of the analysis, the themes generated were used to create a

coherent narrative that represented the experience of the population. To illustrate, if

participants were asked if motivation should be included in the fraud triangle theory and

four auditors say that motivation might be difficult to observe, this would be an

indication that motivation should not be included in the fraud triangle theory because it is

difficult to observe. Studying the data for themes allowed for the discovery of variables

relevant to auditors’ perceptions of the fraud triangle theory. In addition, studying themes

allowed the opportunity to determine if motivation should be included in the fraud

theory.

Upon successful analysis of the data, the next step was interpretation.

Interpretation identified the lessons learned from the researcher’s interpretation of the

research findings. To illustrate, the researcher interpreted data from the research findings

to understand if the research was successful and to determine if the researcher could

identify ways for improvement in future research. In addition, the researcher interpreted

the data to corroborate the results of the study with the results of other studies to

determine if the results were consistent.

Trustworthiness was one of the last steps that were conducted. Trustworthiness is

necessary to support the argument that the inquiry’s findings are “worth paying attention

to” (Lincoln & Guba, 1985). To ensure the findings are worth paying attention to,

trustworthiness is built on the following four principles: credibility, transferability,

dependability, and conformability (Lincoln & Guba, 1985). Following is a brief

explanation of the four components of trustworthiness. The first is credibility, which is

important to support the findings because it provides the confidence in the truth of the

research (Lincoln & Guba, 1985). Next is transferability, which is important to research

because it shows how the findings can be applicable in other contexts (Lincoln & Guba,

1985). Dependability is also important because it ensures that the findings are consistent

and can be repeated (Lincoln & Guba, 1985). Lastly, conformability ensured that the

findings were not biased (Lincoln & Guba, 1985).

Assumptions

The following four assumptions were identified prior to conducting the research.

The first assumption was the participants selected for the study would be authentic and

respond to the survey questions honestly. Second, it was assumed that the participants

had current and relevant auditing experience, were familiar with the fraud triangle theory,

and utilized the fraud triangle theory when assessing a company’s vulnerability to fraud.

Third, the participant’s responses to the interview questions were freely given and the

participants were not influenced. Lastly, it was assumed that face-to-face interviews

would enhance the credibility of the participants’ responses (Yin, 2013).

Limitations

This phenomenological study included six senior auditors who work in public

accounting firms. An acceptable number for phenomenological study is 2 to 10

participants (Boyd, 2001). Although 6 is an acceptable number, there are limitations

associated with a phenomenological study’s sample size. The size of the study was a

limitation because generalizations cannot be based on the results of such a study (Yin,

2013). To mitigate the risk of generalization, there was a statement in the dissertation that

states the results from the study cannot be applied to the general population. A second

limitation of this study was that auditors may be reluctant to answer the questions

honestly in fear that it could jeopardize their careers or the respect of their firms. Thus, to

reduce the reluctance of participants, the participants were assured that their identities

would remain anonymous and that the responses from the questionnaires would be kept

confidential (Yin, 2013).

Delimitations

Geographic location, the participants, and work experience were the delimitations

for this study. Delimitations are deliberate limitations on the research design (Kozlowski

et al., 2013). For this study, the participants were auditors who have lived in the

metropolitan Atlanta area who had five or more years of auditing experience in public

accounting firms. Five or more years of auditing experience was necessary to ensure that

the participants had the necessary knowledge to understand the effectiveness of the fraud

triangle theory. Another delimitation was the focus on auditors who work in public

accounting firms opposed to auditors who worked in corporations. If the study did not

establish work experience delimitations, the participants would not have had the

necessary work experience for this study. Finally, the research was limited to the metro

Atlanta area. This geographical delimitation allowed the research to be conducted with

easy access to participants for the interviews.

Ethical Assurances

In this phenomenological study, the standards set forth by the Institutional Review

Board (IRB) and Northcentral University was fulfilled. No interviews or emails were sent

to participants until approval of the IRB was received. Upon approval by the IRB and

Northcentral University, emails were sent to the six certified public accountants who

agreed to participate in the study. The email explained the purpose of the study and the

requirements of the study. The letter stated that participation was voluntary and that there

will not be any form of compensation for participating in the study. Upon agreement by

the participants, the interviewing process began.

Participants were informed that their identities would not be disclosed and that the

information they provide will be kept in a secured, password protected database. Upon

completion of the interviews, the participants will be given a copy of their transcripts to

solicit their feedback regarding content validity. In addition, participants will be notified

upon successful approval of the dissertation and given a free copy of the dissertation

manuscript.

Lastly, the participants were informed that the results of the study could benefit

them because they would have a better understanding of what to look for during an audit

to determine if fraud exists in a company’s financial statements. The results of this study

could also benefit corporations because an auditor’s knowledge and ability to detect fraud

in financial statements improves the reliability of those financial statements. The

reliability of financial statements improves investors’ and creditors’ confidence in a

company’s financial statements; as a result, investors and creditors are willing to invest in

a company that has reliable financial statements.

Summary

The purpose of this qualitative phenomenological study was to understand and

describe U.S. auditors’ perceptions of the effectiveness of fraud triangle theory and to

determine if motivation, integrity, and capability should be included in the fraud triangle

theory. The fraud triangle theory is the underlying principle of SAS No. 99, which exists

to assist auditors in the detection of fraud. SAS No. 99 requires auditors to obtain

reasonable assurance on whether financial statements contain material misstatements

(Casabona & Grego, 2003). To obtain reasonable assurance, auditors rely on the three

elements of fraud triangle theory; these three elements are perceived opportunity,

perceived pressure, and rationalization (Kranacher et al., 2011). Although the fraud

triangle theory is relied upon to detect fraud, many scholars believe the fraud triangle

theory is inadequate. Kassem and Higson (2012) suggested that the fraud triangle is

ineffective in detecting fraud and that a new fraud triangle should be implemented that

includes motivation.

The extent of this problem was the likelihood that auditors’ reliance on the fraud

triangle theory will not detect fraud in an organization, which could cost investors and

creditors billions of dollars. Currently, no study was conducted to determine auditors’

perceptions of the fraud triangle theory. This study was significant because it explained

auditors’ perceptions of the fraud triangle theory, which is important when conducting a

financial statement audit.

Chapter 4: Findings

The purpose of this qualitative phenomenological study was to understand and

describe U.S. auditors’ perceptions of the effectiveness of fraud triangle theory and to

explore whether the addition of new elements, such as motivation, integrity, and

capability, would offer additional explanatory value to understanding why fraud occurs.

The study interviewed certified public accountants to gain in-depth knowledge of

auditors' lived experiences with fraud and their perceptions of the of the fraud triangle

theory. The study determined if motivation, integrity, and capability should be added to

the fraud theory.

The sample for this study was a non-probability sampling method, which is

referred to as purposive sampling (Patton, 2002). Purposive sampling was selected

because it allowed the data to be gathered from a specific group individuals. Specifically,

the individuals for this purposive sample was CPAs with five or more years of public

accounting experience with CPA licenses from the state of Georgia, who lived in a 60-

mile radius of Atlanta, Georgia.

Chapter three discussed the research methods and designs, a description of the

population, the sampling method, the materials/instruments, data collection, and of the

data processing and analysis. The research method from chapter 3 were utilized and

implemented to report the findings for chapter four. Chapter four discussed the

recruitment technique used to obtain the sample. Additionally, chapter four included a

brief description of field test of the interview guides. The results of the interviews were

presented in this chapter with the findings from the themes that emerged from the

interview questions. The chapter ended with a summary of the research findings.

This chapter presented the detailed analysis of the interview questions from six

interviews with certified public accountants who work in public accounting firms. The

data was analyzed to develop emerging themes to describe and decipher the vast

experiences that auditors experienced utilizing the fraud triangle theory. This chapter

addressed the results of the phenomenological study and evaluation of the findings. Three

research questions were developed for this study:

Q1. How do auditors perceive and describe their experiences with fraud and the

use of the fraud triangle theory?

Q2. Do you think motivation, integrity, and capability should be included in the

fraud triangle theory? If so, why?

Q3. Do you think there are other elements that auditors should be include in the

fraud theory? If so, why?

Research method and design description. A phenomenological design was used

in this study. The interview questions were structured to follow the procedures outlined in

the critical incident report (Flanagan, 1954). Specifically, the interview questions asked

opening ending probing questions that asked participants the “how, what,” or “describe”

(Flanagan, 1954). To effectively conduct the interviews the researcher utilized the first

two interview technique methods designed by Seidman. The first interview technique

focused on the history of the participants and the second interview technique focused on

the details of the lived experience of the auditors (Seidman, 1991). During interview one,

participants were asked to tell as much about him or herself in relations to the study

(Seidman, 1991). During the interview, two participants were asked to ponder on the

details of their lived experience of utilizing the fraud triangle theory (Seidman, 1991).

Specifically, participants were asked to reconstruct their lived experiences when

performing an audit.

Description of field test. The interview guide was field tested with two Certified

Public Accountants. The first certified public accountant is a senior manager with 15

years of auditing experience. The second certified public accountant is an accountant

with five years of auditing experience. The two CPAs were selected because of their

years of auditing experience. The CPA with 15 years was selected to ensure the research

questions were appropriate to understand the fraud triangle theory and possible

modifications to the theory. The CPA with five years of experience was selected to

ensure that the research questions were appropriate and easy to understand.

The results of the field test indicated that three of the questions were unsuitable

and confusing for the study. Question number 18 asked participants to describe their

highpoint using the fraud triangle theory and question number 19 asked participants to

describe a low point using the fraud triangle theory. This question was inappropriate for

the study because it implied that participants were to identify scenarios when the fraud

triangle provided the most benefit or the least benefit.

Since auditors are required by the AICPA to adhere to specific guidelines of the

fraud triangle theory the likelihood of identifying high and low points were unsuitable for

the study. Also, question 21 asked auditors to explain what confuses them most about the

fraud triangle theory this question was unsuitable for the study. Question 21 was

unsuitable because participants are required by the AICPA to possess the necessary skills

to understand and utilize the fraud triangle theory during every audit.

Results

Study participants met the following the criteria: Certified public accountants

who currently work as an auditor with five or more years of auditing experience and hold

a current certified public accountant license in the state of Georgia. Each of the

participants for the study was sent a welcome letter and the pre-interview questions. The

letters were created in MS Word and were addressed to each individual. The pre-

interview questions were emailed to the potential participants. Emails were sent to 17

potential participants of the seventeen participants 13 responded and 8 met the criteria for

the study. The 5 participants who did not meet the study were sent a follow-up email

explaining the reasons they did not meet the criteria for the study. The reason why

participants did not meet the study was because their work experience was not for five

consecutive years. Of the 8 participants who met the criteria four came from the

researchers prior professional relationships and two came from referrals from students

and colleagues. Of the 8 pre-interview questionnaires five were returned and follow-up

emails were sent to remind the three to return their pre-interview questions;

unfortunately, three did not return their pre-interview questionnaires.

As a result an additional participant was recruited using the snowballing

technique. The snowballing techniques occurs when a participant for a study recommend

other participants that meet the criteria for the study (Patton, 2002). The additional

participant was recommended from P5, who owns an accounting firm. Participant 5

recommenced P6 who also owns an accounting firm. Participant 6 was contacted via

phone and the pre-interview questionnaire was sent to the participant. Upon finalization

of the six participants, interviews for the study were scheduled and occurred via phone

and at Starbucks.

All six of the participants were certified public accountants which were a

requirement for the study. A certified public accountant is an individual who has taken a

comprehensive examination. To qualify to take the examination in the state of Georgia an

individual must have earned the minimum of a bachelor degree and must have obtained a

minimum of 24 semester hours in accounting. The examination consists of four-parts and

a candidate must pass all four parts with a minimum grade of 75 within 18 months to

qualify for the license. After an individual passes the certified public accountant

examination, he or she must meet work experience requirements to obtain their license.

The work experience requirements are one year of public accounting, two years in a

corporation, or two years as a professor. Lastly, none of the participants had their

certified public accountant license revolved. A revoked license generally is the result of a

CPA failing to take continued professional educational requirements, failing to follow

ethical requirements, or preparing fraudulent financial data.

Description of participants. The population for this study was six certified

public accountants who are senior level auditors with five or more years of auditing

experience. The six participants for the study included two senior auditors, each had at least

six years of auditing expense. One senior manager with eight years of auditing experience

and three of the participants had 10 or more years of auditing experience. All of the

participants work in public accounting and provide auditing services corporations.

Analyzing the participants perceptions of the of the fraud triangle theory helped allowed the

researcher to gain an understanding of the effectiveness of the theory and how it can be

improved to reduce the likelihood of financial statement fraud.

Demographics. The demographics for this study was collected during the

interview process and it included information on the participants job title, years of

accounting experience, years of auditing experience, years of current and prior auditing

experience. A summary of the participants of demographic information was displayed in

table one. The demographic information was listed by years of auditing experience.

Job titles and years of auditing experience. The interview guide asked

participants their job title and the results were: of the six participants for the study two were

senior level auditors and one had six years of auditing experience and the other had five

years of auditing experience. One of the participants was a senior level manager with eight

years of auditing experience and three of the participants had 10 or more years of auditing

experience and had their own accounting firm. The following table summarizes the

participants accounting experience, current job title, and their years of public accounting

experience.

Table 1

Description of Participants

Participant

Type of

Accounting

Experience

Total Years

Accounting

Experience

Corporate

and Public

Current Title Total Years

of Public

Accounting

Experience

P1 Corporate/Public 5 Senior Auditor 6 P2 Corporate/Public 5 Senior Auditor 6 P3 Public 6 Senior Auditor 8 P4 Public 8 Senior Manager 11

P5 Corporate/Public 11 Owns Firm 11 P6 Public 14 Owns Firm 13

Participant one (P1). Participant one has corporate accounting and public

accounting work experience. P1 worked in corporate accounting for three years and for

the last five years, P1 has worked in public accounting. Participant one title is a senior

auditor at an accounting firm. Participant one stated “my prior work experience in

corporate accounting gives me a better insight on how corporations operate and areas that

are susceptible to fraud.” Participant one believes the fraud triangle is effective in

detecting fraud, but it needs modifications. Participant one stated, “The fraud triangle

should be modified, and greed should become a requirement of the fraud triangle.”

Participant two (P2). Participant two has public accounting work experience.

Participant two started working in the accounting firm directly out of college. Participant

two is a senior auditor at an accounting firm with five and a half years of public

accounting experience. Participant two stated “SAS No. 99 is important because it

stresses the importance of the fraud triangle theory.” However, participant two believes

the fraud triangle theory should be modified. Participant two believe that peer pressure is

an important factor that could contribute to fraud and it should be included in the fraud

triangle theory.

Participant three (P3). Participant three has public accounting work experience

Participant three began working at the accounting firm directly from college. Participant

three is a senior level manager, with eight years of public auditing experience. Participant

three stated, “the fraud triangle theory is an important tool to use during an audit, but the

theory should be modified.” In addition, participant three stated, “SAS No. 99 should

require auditors to utilize the theory, but other things should be considered.” Participant

three believes internal control should be considered. Participant three states, “The more

lax a company’s internal control the more time-consuming and costly to perform an

audit.”

Participant four (P4). Participant four has public accounting work experience.

Participant four has a total of 11 years of auditing experience. Participant four worked in

a public accounting firm for two years. Participant four left the accounting firm to start

their firm, which has been in operations for nine years. Participant four stated “pressure,

opportunity and rationalization are important in fraud detection.” However, participant

four stated the fraud triangle should be modified to include the element of integrity.

Participant four stated integrity should be included in the theory because the longer you

know a client the easier it is to determine if the client has integrity “if you know your

client’s management style you can make a good assessment on their integrity.”

Participant five (P5). Participant five has corporate accounting and public

accounting work experience. Participant five has a total of 12 years of corporate

accounting and auditing experience. Participant five worked in corporate accounting for

two years, and then transitioned to public accounting. Participant five worked in public

accounting for three years. Participant five left the public accounting firm after three

years to start their own firm, which has been in operating for seven years. Participant five

believes that pressure and opportunity are important to fraud detection, but believes that

rationalization is not necessary to detect fraud. Participants five approves of SAS No. 99

and the fraud triangle theory. Participant five stated “SAS No. 99 is good because it

provides standards and provides guidance when planning an audit.”

Participant six (P6). Participant six has public accounting experience. .

Participant six has 13 years of public accounting experience. Participant six worked for a

public accounting firm for seven years. Participant six left the accounting firm to start

their firm, which has been in operations for six years. Participant six stated, “All three

elements of the fraud triangle are necessary for fraud detection; however, “there are other

elements that should be considered in fraud detection.” Participant six stated, “Integrity

should be included in the theory and further states “I know my clients, and I know if they

have integrity by observing their management style.”

Evaluation of Analysis

A phenomenological methodology was used to understand the lived experiences

of certified public accountants perception of the fraud triangle theory and modification to

the theory. To effectively conduct the interviews the researcher utilized the first two

interview techniques designed by Seidman. The first interview technique focused on the

history of the participants and the second interview technique focused on the details of

the lived experience of the auditors. Open-ended questions were conducted with senior

level auditors with public accounting experience. Descriptive data on auditor’s

experience with the fraud triangle theory and modifications to the theory was analyzed

according to a rigorous set of steps aimed at phenomenological reductions. The following

sections provide the information on the data collection and data analysis for this

qualitative phenomenological study.

Data collection. On June 23rd, 2016 an email was received from NCU stating that

the IRB application was approved and that recruitment and data collection can begin. On

June 27th the recruitment process began, and a recruitment letter was emailed to potential

participants. On June 29th, four participants agreed to respond to the pre-interview

questions. Three of the participants returned their responses by July 7th and the fourth

participant returned their pre-interview questions on July 11th. The fifth participant

returned their pre-interview questionnaire on July 14th, and I received the six participant

pre-interview questionnaire on July 19th. The Informed consent document, Interview

guide and Information on the location of the interviews were sent to the six participants.

The interviews were conducted via phone and two were conducted in person at

Starbucks, 4 of the participants did not want to be recorded. The interviews that were

recorded were transcribed using Dragon software. The transcribed data was reviewed by

the researcher to ensure there were no errors in the transcription process. The participants

were given copies of the transcripts for member checking; as a result, no modifications

were necessary. Lastly, the data was formatted into a word document and uploaded into

Nvivo10.

Data analysis. To draw conclusions on the study, data from the interviews was

collected, processed, and analyzed. First, data from the interviews were typed into an MS

Word template that was formatted so that it could be uploaded and auto coded in Nvivo

10. The start codes from the chapter three were also uploaded into Nvivo prior to the auto

coding. Next, the data was auto coded by interview questions and then parent and child

nodes were create. The coded data was analyzed utilizing the word frequency and text

frequency tool in Nvivo. The purpose of the word frequency and text frequency was to

allow the researcher to identify commonalities and identify trends that could become

themes.

Summary of findings. A total of six participants were interviewed for the study.

The participants answered 17 interview questions, which were linked to the three

research questions. The interviews process took two weeks, and each interview was

scheduled for one hour; however, the interviews lasted 45-minutes to 90-minutes. Each

participant was given a copy of their interview to ensure that data was properly

transcribed. As a result of member checking no misleading or inaccurate data was

transcribed

Findings and themes from the interview questions. The purpose of this

qualitative phenomenological study was to understand and describe U.S. auditors’

perceptions of the effectiveness of fraud triangle theory and to explore whether the

addition of new elements, such as motivation, integrity, and capability, would offer

additional explanatory value to understanding why fraud occurs. Findings from the

research questions may help auditors in performing their duties to detect whether

financial statement fraud exists in an organization. The proposed study aimed to

interview certified public accountants to gain in-depth knowledge of auditors' lived

experiences with fraud and their perceptions of the of the fraud triangle theory. The study

also determined if motivation, integrity, and capability should be added to the fraud

theory. The following table identifies the themes that emerged from the study and the

information that follows the table describes

Table 2

Themes Evidenced From The Study

Category of response Frequency # Of Participants

Fraud Triangle 6 100%

Modifications 6 100% SAS No. 99 6 100%

The first category to be discussed is the fraud triangle. The fraud triangle has

three themes. The three themes are: Opportunity, Pressure, and Rationalization.

Table 3

Theme – fraud triangle

Theme Frequency # Of Participants

Opportunity, 6 100%

Pressure 6 100%

Rationalization 6 100%

Opportunity. Opportunity is the method by which crime can be committed.

Opportunity relates to a company’s internal control structure, if a company has a good

system of internal control, it would be difficult for an employee to commit fraud. The

following table identifies sub-themes associated with the opportunity. Six out of six

(100%) of the participants believed that opportunity was important to detect financial

statement fraud. The six participants believed opportunity is a necessary component of

the fraud triangle and it should be included in the theory. The following table identifies

the sub-themes for opportunity.

Table 4

Theme One – Sub-theme One: Opportunity

Category of Response Frequency # Of

Participants

Opportunity is effective in detecting fraud 6 100% Internal Control 6 100% Perform additional steps 5 83% Professional Skepticism 4 66% Time 2 33%

Participant one. Participant one stated opportunity is very important in detecting

financial statement fraud. ‘If the internal control is weak, the opportunity to commit fraud

is high.” Therefore, I become very skeptical, and I perform additional steps to ensure that

fraud does not exist.

Participant two. Participant two agreed with Participant one and stated,

“Yes,” opportunity is important in detecting fraud. Participant one stated “If a company’s

internal control is not strong, my radar that fraud exist goes up.” As a result, I perform an

additional test of controls to determine if fraud exists.”

Participant three. Participant three is a senior level auditor with eight years of

auditing experience. Because of Participant three extensive work experience, Participant

three is involved in the planning stage of an audit and is responsible for the cost and time

forecast of an audit. Participant three stated,

I always begin an audit by testing a company’s internal control, and I use testing

as a parameter to determine the cost and time frame to complete an audit. The

more lax a company’s internal control the more time-consuming and costly to

perform an audit.

Participant four. Participant four acknowledge that a good system of internal

control is the determining factor of the likelihood of fraud. Participant four stated,

“Yes, opportunity should be considered when determining if financial statement fraud

exists. Participant four stated, “Heck, if a company’s has good internal control the

likelihood of fraud diminishes drastically and our confidence improves.”

Participant five. Participant five viewpoint was the same as participant one and

participant two and stated,

Internal control is necessary, participant 5 stated, in my firm; we rely on a

company’s internal control to assess the likelihood of fraud. Our perspective is to

perform additional test of controls whenever a company has a weak internal

control structure. This is especially true when we have a new client the reason is

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auditors cannot observe rationalization or pressure without doing extensive

investigation.

Participant six. Participant six believes internal control is a good indicator of

fraud. Participant six stated,

If internal control is weak, I spend more time analyzing accounts because the

opportunity to commit fraud is high. Participant six recalled an example of how

the observation of a company’s internal control helped detect fraud. I had a client

that did not review his bank statement because he trusted his accountant. That

trust was a good indication of a weak internal control structure, so I performed

additional test of controls. The result was the accountant was using the company

funds to pay personal bills.

Pressure. Pressure it what motivates an individual to commit a financial crime.

This occurs when an employee has financial problems that cannot be solved through

legitimate means. As a result, the employee considers stealing from the company.

Pressure can be personal meaning an employee is unable to meet their persona debt, such

as mortgage, car note, etc. Pressure can be professional, meaning an individual job is in

jeopardy if certain revenues numbers are not met. Six out of six (100%) of the

participants believed that pressure was useful in fraud detection and should remain a

component of the fraud triangle theory. The following table identifies the subthemes for

pressure.

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Table 5

Theme One - Sub-theme Two: Pressure

Category Of Response Frequency # Of Participants

Pressure is effective in detecting fraud 6 100%

Professional Skepticism 5 83%

Review Financial Statements 4 66%

Time 2 33%

Participant one. Participant one stated, “Yes, when it comes to assessing

financial pressure it’s more difficult to detect pressure because it cannot be observed or

tested.”

Participant two. Participant two stated, I focus my attention on individuals in the

company such as directors and supervisors because they could be under financial

pressure. Participant two stated, “Since directors and supervisors are responsible for a

company’s earnings, they are often under financial pressure, which could lead to

manipulation of financial data.”

Participant three. Participant three agreed with Participant two in regards to

financial pressure but adds, if a company has material variances in revenue accounts and

liability accounts, it is an indication that financial pressure could exist. Participant two

stated, “My director is a firm believer that a company with material variances – are trying

to hide something.” My manager insists that auditors perform additional work whenever

material variances occur in revenue and liability accounts.

Participant four. Participant four stated, “Yes, pressure is hard to detect but an

indication that fraud could exist can be detected by reviewing a company’s financial

statements or looking at key employee’s credit report.”

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Participant five. Participant five stated, “Yes pressure should be included in the

fraud triangle. Individuals can be under personal pressure or company pressure,

“Therefore, I use professional skepticism whenever I am on an audit.”

Participant six. Participant six stated, yes. If individuals are in a position of

authority and power, their credit report should be reviewed to determine if they are under

personal financial pressure. A company’s financial statement should also be reviewed to

determine if the company is under financial pressure. Participant six stated, “I also review

a company debt, profit, and current market conditions to determine if a company is under

financial pressure.” All of these matters should be considered when analyzing pressure.

Rationalization. Rationalization is the ability to persuade yourself that something

you otherwise know is wrong is ok. Employees may steal money from their organization

and rationalize their actions by saying “I will put the money back when I receive my

paycheck.” Auditor’s perceptions of rationalization were a 50% split. Three of three

participants (50%) believed that rationalization is an important component of the fraud

triangle and three of three participants (50%) believed that rationalization is not an

important component of the fraud triangle. The following table identifies the subthemes

for rationalization.

Table 6

Theme One - Sub-theme Three - Rationalization

Category Of Response Frequency # Of

Participants

Rationalization is effective in detecting fraud 3 50%

Rationalization is not effective in detecting fraud 3 50%

Difficult to detect 3 50%

Analytical Procedures 3 50%

Professional Skepticism 1 16%

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Participant one. Participant one believes, rationalization is important, and it can

be assessed by understanding an employee’s attitude, character, and integrity. Participant

one stated, “In my annual training I spent three days learning about the fraud triangle

theory.” The training discussed what auditors should look for when assessing if an

employee has rationalized their thoughts to commit fraud.

Participant two. Participant two stated, “Rationalization is difficult to detect, as

it is impossible to read the mind of a fraudster.” However, I do utilize a questionnaire that

is designed to understand how an employee could rationalize their behavior to commit

fraud. The questionnaire asks employees about their job satisfaction, work environment,

and their satisfaction with their managers. Answers to those questions are a good

indication of an employee’s ability to rationalize their behavior.

Participant three. Participant three stated, rationalization is difficult to detect and

“I have never been able to determine how or if an employee rationalized their way into

committing fraud.”

Participant four. Participant four stated, “Yes, rationalization can be important

during an audit especially when performing analytical procedures because if something

looks unreasonable, I can investigate the variance.” A variance could be an indication

that an employee may have rationalized their reason for committing fraud. Participant 4

gave an example by saying “An employee may say if I don’t adjust revenue the company

will have a difficult time obtaining a loan, I don’t want that to happen because I want to

protect my job and the job of other employees.”

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Participant five. Participant five stated, “I never consider rationalization during

an audit because it is too difficult to understand.” Participant five focuses on internal

control and analytical procedures to determine if fraud exists.

Participant six. Participant six stated, “Rationalization is important, and it helped

me during an audit.” “I had a client that was headed to bankruptcy; however, profit

improved drastically when compared to the prior year.” I used professional skepticism to

analyze how the company’s profit made a drastic improvement. My professional

skepticism caused me to perform additional test of control and analytical procedures. As

a result, the employee did commit fraud.

Modification. Modifications pertain to how the fraud triangle could be improved;

participants were asked how the fraud triangle could be improved. Modifications are

theme two, and there are four themes identified in the modification category. The four

themes are motivation, capability, integrity and greed.

Table 7 Modifications – Themes

Category of response Frequency # Of Participants

Motivation 6 100% Capability 6 100% Integrity 6 100%

Motivation. Motivation is the reason or reasons why an employee commits fraud

against their employer. Employees can be motivated to commit fraud because of

ideology, coercion, or ego. Ideology occurs when employees commit fraud because they

believe it is for the greater good and cause. Coercion occurs when employees are

unwilling forced into a fraud scheme. Lastly, some fraudsters are motivated to commit

fraud because of their ego or reputation in the community. Four of six participants (66%)

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believe that motivation should be an element of the fraud triangle and two of six

participants (33%) believed that motivation should not be an element of the fraud triangle

theory. Following are the responses of the participants.

Table 8

Theme Two – Sub-theme One: Motivation

Category of Response Frequency # Of

Participants

Motivation should not be included in the Fraud Triangle 4 66%

Motivation should be included in the Fraud Triangle 2 33%

Questionnaire 1 16%

Analytical procedures 1 16%

Internal control 1 16

Participant one. Participant one stated, motivation is similar to pressure, and it

should be included with pressure. However, Participant two, Participant three and

Participant four all believe that motivation should not be included. Participant two stated

it should not be included because it would add additional responsibility that cannot be

observed. Participant two further stated, “Motivation is similar to rationalization, and it

cannot be observed.” Participant two stated, “How can I determine what motivates a

person and how can I determine if an individual rationalizes their actions before

committing fraud.” Participant three said motivation should not be included in the fraud

triangle because auditors are under enough pressure to detect fraud. Participant one said

motivation should be included in the theory because it is similar to pressure and the two

should be considered together.

Participant two. Participant two said motivation should not be included because

it would be another requirement for auditors to understand. Participant two stated, “It

would be difficult for me to determine what motivates an individual. Even if I used the

106

questionnaire, it would be difficult to detect because criminals are good at hiding their

fraudulent activity”.

Participant three. Participant three stated motivation should not be included “if a

company has a good system of internal control, it would prevent a motivated person from

committing fraud.”

Participant four. Participant four, said motivation should not be included.

Participant four adamantly stated, “I have no way of knowing what motivates a person to

commit a crime”. Therefore motivation should be included in the theory.

Participant five. Participant five said “Yes” motivation should become part of

the fraud triangle. Participant five stated, “If I perform analytical procedures and the

analysis does not appear reasonable, that can be an indication that an individual is

motivated to commit fraud.”

Participant six. Participant six said “no” motivation should not become part of

the fraud triangle because auditors have enough things to look for during an audit.

Integrity. Integrity is a signal on whether an individual will perform their jobs in

an ethical, morale, and honest manner. Individuals who lack integrity are more likely to

commit financial statement fraud. The results of the study indicate that two of six

participants (33%) believed that integrity should be included in the theory and four of six

participants (66%) believed integrity should not be included in the theory. The following

table identifies the responses of the participants.

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Table 9

Theme Two –Sub-theme Two: Integrity

Category Of Response Frequency # Of

Participants

Integrity should not be included in the Fraud Triangle 4 66%

Client 3 50%

Integrity should be included in the fraud triangle theory 2 33%

Management Style 2 33%

Red Flags 1 16%

Checklist 1 16%

Participant four. Participant four said, “Yes” integrity should be included in the

theory because the longer you know a client the easier it is to determine if the client has

integrity. Participant four stated “If you know your client’s management style you can

make a good assessment of their integrity.”

Participant six. Participant six stated, integrity should be included in the theory,

and further states “I know my clients and I know if they have integrity by observing their

management style.” The remaining four participants believe that integrity should not be

included in the theory. Participant one and Participant four reason were similar to why

the integrity should not be included in the theory. Participant two said “no”, integrity can

only be measured if you know your client, and since I switch clients frequently, and it is

difficult for me to determine if management has integrity. Participant one agreed with

Participant two and stated I have no way of knowing if an individual has integrity.

Participant three. Participant three associated integrity with rationalization by

stating, “Integrity is similar to rationalization and I cannot determine if an individual has

integrity nor can I determine how an individual rationalizes their behavior.” Participant

three stated, I do believe that over time I could assess if a client has integrity. Participant

three final comment on integrity was, “I don’t thing integrity should be added to the

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triangle because auditors have enough red flags that can help determine if fraud exist.” I

don’t want anything else added to my checklist of things to do.

Participant five. Participant five was adamant about not adding integrity to the

fraud triangle theory, and states “Integrity should not be included in the theory because I

don’t want to judge anyone and the only way to determine if someone has integrity is

through observation and assessing their character .”

Capability. Capability is the extent of someone’s ability, power, or potential to

commit fraud. If an individual is motivated to commit fraud and lacks integrity the

employee may not be able to commit fraud if they are not capable. If an individual lacks

the capability but have the other characteristics that are common in a fraudster, they will

not be successful in committing fraud. The results of the study indicates that four of six

participants (66%) agreed that capability should be included in the theory and two of the

six participants (33%) of the participants did not believe capability should be included in

the theory. The two who believed that capability should be included in the theory, stated

they could determine if a client is capable of committing fraud. The following table

identifies the responses of the participants.

Table 10

Theme Two –Sub-theme Three: Capability

Category Of Response Frequency # Of Participants

Capability should be included in the Fraud Triangle

4 66%

Capability should not be included in the Fraud Triangle

2 33%

Responsibility 2 33%

Professional Skepticism 1 16% Opportunity 1 16%

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Participant one, Participant two, Participant five and Participant six believe

that capability should be included in the fraud theory. Participant one stated, “Yes,

capability is important, and it is easy to evaluate if a person is capable of committing

fraud.” Participant one further stated, “When I interview clients I inquire about their job

duties and their education background that information helps me assess if an employee is

capable of committing fraud. Participant two said “Yes” capability should be included in

the fraud theory; however, auditors should exercise professional skepticism when

determining if an individual is capable of committing fraud.” Professional skepticism

should be exercised because it may appear that an individual is not capable of committing

fraud, but the individual is capable of committing fraud. Participant two provided an

example and stated, “I was on an audit, and the accountant stole 75,000 from their

employer.” One would think the person was not capable of fraud because she was the

accounting clerk.

Participant five. Participant five agreed that capability should be included in the

fraud theory and that it should be a subcomponent of opportunity. Participant five

believes if a person has the opportunity to commit fraud he or she may not commit fraud

if he or she is not capable of concealing the fraud. Participant three and Participant four

said capability should not be included in the fraud theory because it places too much

responsibility on the auditor.

Greed. Greed is a desire to acquire money or power in a corporation in a selfish

and excessive manner. Three of six participants (50%) believed that the fraud triangle

should be modified and greed should become a requirement of the fraud triangle. Two of

six participants (33%) believed that a background check should become a requirement of

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the fraud triangle. Lastly, one of the six participants (16%) believed that peer pressure

would enhance the effectiveness of the fraud triangle theory. The following table

identifies the responses of the participants.

Table 11

Theme Two – Sub-theme Four: Greed

Category Of Response Frequency # Of Participants

Greed 3 50% Criminal Past 2 33% Peer Pressure 1 17%

Participant one. Participant one stated, “Greed should be included the fraud

triangle because an individual may not had financial pressure, but may commit fraud

because of greed.” Participant three and Participant six agreed with Participant one and

stated greed should be included in the fraud triangle theory.

Participant two. Participant two believe that peer pressure was an important

factor that could contribute to fraud and it should be included in the fraud triangle theory.

Participant four. Participant four believed a personal background check would

be helpful in determining the likelihood of financial statement fraud.

Participant five. Participant five believed that a criminal background check

should be required of key employees.

Participant six. Participant six believed that greed should be included in the

fraud triangle theory. Participant 6 stated, “If individuals have greed and they have the

opportunity and rationalization to justify their actions, there is a possibility that the

individual could commit fraud.”

SAS No. 99. SAS No. 99 is the consideration of fraud in a financial statement

audit. The underlying principle of SAS No. 99 is the fraud triangle theory, which is the

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framework that assists auditors in analyzing a company’s vulnerability to fraud there are

four sub-themes under the SAS No. 99. The four sub-themes are fraud detection, work

ethics audit engagement, SAS No. 99. The following table identifies the responses of the

participants

Table 12

Theme Three – SAS No. 99

Category Of Response Frequency # Of Participants

Fraud detection 6 100% Work ethics 6 100% Audit engagement 6 100% SAS No. 99. 6 100%

Fraud detection. Fraud detection is the discovery of fraud during a financial

statement audit. Auditors have a responsibility to detect if fraud exists in a company’s

financial statements. To detect if fraud exist auditors must plan and perform the audit to

obtain reasonable assurance about whether the financial statements are free of material

misstatement, whether caused by error or fraud. Five of six participants (83%) have never

detected fraud utilizing the fraud triangle and one of six participants (16 %) has detected

fraud. The following table identifies the responses of the participants.

Table 13

Theme Three – Sub-theme One: Fraud Detection

Category of Response Frequency # Of Participants

Fraud was not detected 5 83% Errors detection 2 33% Accounting adjustments 2 33% Pressure 2 33% Opportunity 2 33% Professional skepticism 1 16% Fraud was detected 1 16%

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Participant three. Participant three stated “I have never detected fraud during an

audit.” However, “I have identified some major errors that were detected during an audit.

Nonetheless, the errors were not classified as fraud.”

Participant six. Participant six stated, I detected fraud in one instance, and yes,

the fraud triangle was helpful in detecting fraud. The component of the fraud triangle that

was helpful was pressure and opportunity. “The company was small so the opportunity to

commit fraud was high.” Secondly, the “company had two bad years, so the pressure to

commit fraud was high.” The specific fraud identified was an overstatement of revenue

and unreported expenses. This is a situation where I used professional skepticism

throughout the audit process.

Participant one, Participant two, Participant four, and Participant five have

never detected fraud during an audit. Participant two worked on an audit where the client

had to make a $3 million adjustment. The client was hesitant about writing the

adjustment; however, if the client did not make the adjustment it would have been

classified as fraud.

Work Ethics. Work ethics includes how individuals feel about their career and

how individuals perform their job responsibilities. The characteristics that determine an

individual work ethics include their attitude, their communication skills, their behavior

and their respect. Six of six participants (100%) believe that auditors work too hard to

meet the requirements of SAS No. 99. The following table identifies the responses of the

participants.

Table 14

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Theme Three – Sub-theme Two: Work Ethics

Category Of Response Frequency # Of Participants

Auditors work too hard 6 100% Accountable 2 33% Client fees increase 2 33% Auditors have too much responsibility 2 33% Clients incur unnecessary fees 1 17%

Participant one. Participant one stated, auditors work very hard and

should not be held accountable for all instances of fraud. Participant one stated, “In my

career I have not experienced a situation where fraud was undetected and it caused

investors or creditors harm. Participant two and Participant three had the same responses.

Participant two. Participant two stated auditors work very hard and

should not be held accountable for all instances of undetected fraud.

Participant three. Participant three stated auditors work extremely hard

and are extremely stressed out because they don’t want to be sued for failing to detect

fraud.

Participant four. Participant four stated, auditors have too much

responsibility and SAS No. 99 requirements make the job very stressful in detecting

fraud, so why add more responsibility.

Participant five. Participant five stated, auditors work extremely hard

and when I bill clients for hours worked, clients believe I am overcharging them. So, I

explain to my clients that I am required to perform additional test of controls to ensure

that fraud does not exist. Participant five stated, “If SAS No. 99 adds additional

requirements I will need to charge my clients more.”

Participant six. Participant six stated auditors work hard to ensure

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that financial statements are prepared accurately. Unfortunately my hard work has cost

me money, “I had to take a client to court who refused to pay because he believed he was

over charged. Participant six stated, “I only received a portion of my money, so, my hard

work cost me more time and money.”Two: Work Ethics

Auditing Engagement. An audit engagement is legal relationship between the

corporation and the accounting firm. The audit engagement identifies the scope of the

audit, the auditor’s responsibility the duties of both parties and the scope of the audit. The

following information identifies the various responsibilities of auditor’s when conducting

an audit. Four of six (66%) participants reviewed an organization’s internal control

structure when performing an audit engagement. Three of six participants (50%) held a

meeting when performing an audit engagement. Three of six participants (50%) design

the audit plan when performing an audit engagement. Two of six participants (33%) spent

their time performing analytical procedures while on an audit engagement. The following

table identifies the responses of the participants.

Table 15

Theme Three -Sub-theme Three: Audit Engagement

Category Of Response Frequency # Of Participants

Internal control structures 3 66% Meetings 4 50% Audit plan 3 50% Analytical procedures 2 33% Working papers 2 33%

Although the responsibilities of auditors varied by accounting firms there were

some commonalities amongst Participant one, Participant two, and Participant three. The

commonalities amongst the participants were analytical procedures and internal control.

Participant one. Participant one stated an audit begins with an understanding of

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a company’s internal control structure. Participant on stated, “During an audit, I review a

company’s internal control structure, perform analytical procedures, and assessing the

likelihood of fraud.’

Participant two. Participant two statement was similar to Participant one, “My

typical audit engagement includes meeting with clients, designing audit procedures,

performing the audit, and reporting the findings.

Participant three. Participant three responsibilities were similar to Participant

two. Participant three stated, “I perform analytical procedure on financial statement

assertions, assess if the assertions are reasonable, and perform test of controls as

necessary.”

Participant five and Participant six. Participant five and Participant six

responsibilities included meeting with the CEO and CFO to discuss audit plan and or

reviewing the working papers of the senior audit manager.

SAS No. 99. SAS No. 99 is the consideration of fraud in a financial statement

audit. The underlying principle of SAS No. 99 is the fraud triangle theory, which is the

framework that assists auditors in analyzing a company’s vulnerability to fraud. SAS No.

99 explains the steps that auditors use to gather information to identify material

misstatements and assess the risk of fraud. Five of six participants (83%) believe that the

fraud triangle theory should remain the underlying principle of SAS No. 99. Three of six

participants (50%) stated fraud is difficult to detect, although they follow the requirement

of SAS No. 99 and three of six participants (50%) believe that analytical procedures are

more important than following SAS No. 99. The following table identifies the responses

of the participants.

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Table 16

Theme Three – Sub-theme Four: SAS No.99

Category Of Response Number Of

Participants

# Of Participants

The fraud triangle should be the underlying principle of SAS No.99

5 83%

Difficult to detect 3 50% Analytical procedures 3 50% Professional skepticism 1 16% The fraud triangle should not be the underlying principle of SAS No. 99

1 16%

Participant one and participant three. Participant one stated, “SAS No. 99 not

only requires auditors to be reasonably sure that financial statements are free of material

misstatements, whether caused by error or fraud, but it gives them focus and guidance on

their responsibilities to uncover fraud.” Participant three agrees with participant one and

further states, other things should be taken into account, such as motivation.

Participant two. Participant two stated, SAS No. 99 reiterates the importance of

exercising professional skepticism throughout the audit. “The auditor must maintain a

questioning mind and critically assess the feedback from the reporting entity’s

management and other requirements of SAS No. 99 to identify the possibility of financial

statement fraud.”

Participant four. Participant four stated, “the fraud triangle should be the

underlying principle of SAS No. 99 because it helps auditors identify methods and

procedures that should be utilized when performing an audit.” Participant four believes

that SAS No.99 “Gives my firm a sense of security because if we follow SAS No. 99 the

possibility of undetected fraud decreases drastically.”

Participant five. Participant five believes that SAS No. 99 is important for the

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same reasons as participant four. Participant five stated,

The standards and procedures of SAS No. 99 provide guidance to auditors on

how to plan the audit, so fraud does not go undetected. Therefore, the fraud

triangle serves as a guiding light on what auditors should look for when

performing a financial statement audit.

Participant six. Participant six had a different perspective than the other

participants. Participant six stated,

SAS No. 99 places too much pressure on auditors to detect fraud and adhering to

the fraud triangle adds to the pressure. Participant six believes there should be

different standards that auditors should follow. The standards should be based on

the size of the company.

Evaluation of Findings

This section provided an evaluation of the findings from this study. The

evaluation began with a brief review of the main findings from this study. Next, the

findings were reviewed in the context of the conceptual framework for this study and

lastly, the practical applicability of the results from the study was described.

Review of findings. The findings from this study and the themes that emerged

from the analyses of the participants interviews. Three themes emerged from the analysis

of the interviews.

1. Fraud Triangle

2. Modifications

3. SAS No. 99

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Findings in the context of the theoretical framework. The conceptual

framework for this study was described in chapter one. In this study, the theoretical

framework was based on the Fraud Triangle Theory. In the context of this qualitative

phenomenological study, the findings related to auditors perceptions of the fraud triangle

theory and modifications to the theory.

The results of this study indicate that auditors working in public accounting firms

believe the fraud triangle theory is not effective in detecting fraud and that modifications

need to happen to resolve the issue of undetected fraud. The participants stated the theory

is not effective because it is difficult to ascertain rationalization and the participants

further suggested that motivation should be a part of the modifications that need to occur.

The study participants acknowledged that the fraud triangle theory should be a

component of SAS No. 99, but it should not be the only the thing when looking for

financial statement fraud. Lastly, the findings from this study are an accurate lenses to

understand the lived experiences of auditors working in public accounting firms.

Practical application of the results for the results of this study. The results

from this study have practical application. Exploring the lived experiences of auditors

working in public accounting firms could assist auditors in fraud detection. In addition,

potential modifications to study could improve investors and creditors confidence in a

company’s financial statements.

Summary

This qualitative phenomenological study consisted of interviews for the data

collection process. The findings of this phenomenological study addressed the research

questions by identifying multiple categories and subthemes that were factors in

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understanding U.S. auditors’ perceptions of the effectiveness of fraud triangle theory and

to explore whether the addition of new elements, such as motivation, integrity, and

capability, would offer additional explanatory value to understanding why fraud occurs.

The findings of this study align with multiple portions of the theoretical framework of

researchers in reference to SAS No. 99 and the fraud triangle theory. Following is chapter

5 which discuss the implications of the study, the results of the study and the conclusion

from this research.

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Chapter 5: Implications, Recommendations, and Conclusions

Although the fraud triangle theory is relied upon to detect a company’s

vulnerability to fraud, many scholars believe that it is inadequate to detect fraud.

Buchholz (2012) explained that the fraud triangle has importance in detecting fraud in a

financial statement audit but that it also has deficiencies and should not be solely relied

upon. Kassem and Higson (2012) suggested that the fraud triangle is ineffective for use in

detecting fraud and that a new fraud triangle should be implemented that includes

motivation, integrity, and capability as additional factors. The problem is the fraud

triangle is ineffective for detecting fraud and a new fraud triangle should be implemented

that includes motivation, integrity, and capability. The purpose of this qualitative

phenomenological study is to understand and describe U.S. auditors’ perceptions of the

effectiveness of fraud triangle theory and to explore whether the addition of new

elements, such as motivation, integrity, and capability would offer additional explanatory

value to understand why fraud occurs.

Implications

This phenomenological study included six senior auditors who work in public

accounting firms. An acceptable number for a phenomenological study is 2 to 10

participants (Boyd, 2001). Although 6 is an acceptable number, there are limitations

associated with a phenomenological study’s sample size. The size of the study was a

limitation because generalizations cannot be made based on the results of such a study

(Yin, 2013). To mitigate the risk of generalization, there is a statement in this dissertation

that explains the results of the study cannot be applied to the general population. A

second limitation of this study was auditors were reluctant to answer the questions

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honestly in fear that it could jeopardize their careers or the respect of their firms. To

reduce the reluctance of participants, the participants were assured that their identities

will remain anonymous and that the responses from the questionnaires will be kept

confidential (Yin, 2013).

The results of each of the three research questions are reviewed within this

section. The effects of the limitations of this study are noted following the research

question results. These results are then placed into the context of the existing literature

described in Chapter 2. This section concludes with the practical use of the results before

specifying the recommendation for organizational change purposes.

Research question one: How do auditors perceive and describe their

experiences with fraud and the use of the fraud triangle theory? The original

preliminary start codes (See Appendix C), the responses related to this research question,

along with whether the theme and preliminary code breakdown were expected or

emerged from the data is summarized in table 17.

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Table 17

Research Question One Themes

Theme Literature/Emerging # Of Participants

Sub Theme: Opportunity Literature

Opportunity is effective in detecting fraud

Emerging 100%

Internal control Expected 100% Perform additional steps Emerging 83% Professional skepticism Expected 66% Time Emerging 33%

Sub Theme: Pressure Pressure should be included in the fraud triangle theory

Emerging 100%

Professional skepticism Expected 83% Review financial statements

Emerging 66%

Time Emerging 33%

Sub Theme:

Rationalization

Rationalization is effective in detecting fraud

Emerging 50%

Rationalization is not effective in detecting fraud

Emerging 50%

Analytical procedures Expected 50% Difficult to detect Emerging 50% Professional skepticism Expected 16%

Opportunity. Under the sub-theme opportunity, two themes were expected (40%)

and three themes (60%) emerged from the data. Six out of six (100%) of the participants

believed that opportunity was important to detect financial statement fraud. The six

participants believed that opportunity is a necessary component of the fraud triangle and

it should be included in the theory. Participant one stated,

Opportunity is very important in detecting financial statement fraud. ‘If the

internal control is weak, the opportunity to commit fraud is high. Therefore, I

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become very skeptical and I perform additional steps to ensure that fraud does not

exist.

Another important sub-theme that was mentioned in the last statement and

included in the preliminary list of start codes was internal control. Six out of six (100%)

of the participants believed that a company’s internal control structure has a direct

influence on an employee’s opportunity to commit fraud. Alexander (2012) stated,

opportunity relates to a company’s internal control structure, if a company has a good

system of internal control, it would be difficult for an employee to commit fraud.

Participant four acknowledge that a good system of internal control is the determining

factor of the likelihood of fraud. Participant four stated, “If a company has good internal

control the likelihood of fraud diminishes drastically and our confidence improves.”

The three emerging sub-themes are additional steps, time, and opportunity is

effective in detecting fraud. Five of six participants (83%) of the participants believed

that performing additional steps would help detect fraud. Participant two stated, “If a

company’s internal control is not strong, my radar that fraud exist goes up.” As a result, I

perform an additional test of controls to determine if fraud exists.” Two of six

participants (33%) believe if a company has a weak internal control system the

opportunity to commit fraud increases, so more time is needed to conduct the audit.

Participant three stated, “I always begin an audit by testing a company’s internal control

and the company’s internal control the more time-consuming and costly to perform an

audit.

Pressure. Under the sub-theme pressure, one theme was expected (25%) and

three themes (75%) emerged from the data. Of the themes emerged 100% of the

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participants believed that pressure should remain a component of the fraud triangle

theory. According to Buchholz (2012), individuals can be pressured financially for many

reasons, such as poor credit, living beyond one’s means, gambling, and drugs, hence,

Individuals may attempt to relieve financial pressure by stealing from their organization.

Participant two stated,

I focus my attention on individuals in the company such as directors and

supervisors because they could be under financial pressure. Participant two stated,

“Since directors and supervisors are responsible for a company’s earnings, they

are often under financial pressure, which could lead to manipulation of financial

data.”

Professional Skepticism was expected, and 83% of the participants believed that

professional skepticism helps detect financial statement fraud. Professional Skepticism is

an auditor’s judgment and decision that reflects a heightened assessment of the risk that

an assertion is incorrect or conditional based on the information available to the auditors

(Nelson, 2009). Participant five stated, yes pressure should be included in the fraud

triangle. Individuals can be under personal pressure or company pressure, “Therefore, I

use professional skepticism whenever I conduct an audit.”

Review financial statements was an emerging theme, and 66% of the participants

believed a review of financial statements would assist auditors in determining if an

employee is under pressure. Participant six stated,

If individuals are in a position of authority and power, their credit report should

be reviewed to determine if they are under personal financial pressure. A company’s

financial statement should also be reviewed to determine if the company is under

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financial pressure. Participant six stated, “I also review a company debt, profit, and

current market conditions to determine if a company is under financial pressure.” All of

these matters should be considered when analyzing pressure.

Rationalization. Under the sub-theme rationalization, two themes were expected

(40%), and three themes (60%) emerged from the data. Three out of three participants

(50%) believed that rationalization was an important component of the fraud triangle

theory and three out of three participants (50%) believed that rationalization was not an

important component of the fraud triangle theory. Participant one stated,

Rationalization is important, and it can be assessed by understanding an

employee’s attitude, character, and integrity. “In my annual training, I spent three

days learning about the fraud triangle theory.” The training discussed what

auditors should look for when assessing if an employee has rationalized their

thoughts to commit fraud.

Participant five did not believe that rationalization was an important component of the

fraud triangle theory and stated,

I never consider rationalization during an audit because it is too difficult to detect

and understand.” I rather focus on internal control and analytical procedures to

determine if fraud exists.

An expected theme under rationalization was analytical procedures. Analytical

procedures are a diagnostic sequential and iterative process involving hypothesis

generation, information search, hypothesis evaluation, and a final judgment (Koonce,

1993). According to Hayes (2011), analytical procedures should be performed during a

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financial statement audit to determine if there are transactions that appear to be

unreasonably high or low.

Participant four stated,

“Yes, rationalization can be important during an audit especially when performing

analytical procedures because if something looks unreasonable, I can investigate

the variance.” A variance could be an indication that an employee may have

rationalized their reason for committing fraud. Participant 4 gave an example by

saying “An employee may say if I don’t adjust revenue the company will have a

difficult time obtaining a loan, I don’t want that to happen because I want to

protect my job and the job of other employees.”

The emerging theme from rationalization was “difficult to detect.” Three of the

participants (50%) did not believe rationalization should be included in the fraud triangle

theory because rationalization was difficult to detect, unlike opportunity or pressure,

which are observable events. Participant three stated, rationalization is difficult to detect

and “I have never been able to determine how or if an employee rationalized their way

into committing fraud.”

Summary of Research Question one: How do auditors perceive and describe

their experiences with fraud and the use of the fraud triangle theory. Auditor’s

responses to the interviews lead to the answer to this research question by identifying and

explaining each component of the fraud triangle theory, which includes opportunity,

pressure, and rationalization. Six of six (100%) of participants believed that opportunity

was effective in detecting fraud. Auditors believed that opportunity was effective because

auditors can determine if fraud occurred or could occur by examining a company’s

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internal control structure. Also, six of six (100%) of the participants believed that

pressure was effective in fraud detection. Auditors believed that pressure was effective in

fraud detection because auditors can determine if fraud occurred or could occur by

analyzing whether the company or employees are under financial pressure. Analysis to

determine if employees or the company was under pressure includes performing

analytical procedures on financial information.

Three of six (50%) of participants believed that rationalization was effective in

fraud detection and fifty percent believed rationalization was not important. Auditors who

did not believe rationalization was effective in fraud detection explained that

rationalization was not effective because auditors cannot determine how individuals

rationalize their thoughts. However, three of six (50%) of participants believed that

rationalization was important because it could be determined by understanding an

employee’s attitude, character, and integrity. Lastly, auditors believe that opportunity,

and pressure is effective in fraud detection. However, three of six participants do not

believe rationalization is effective in fraud detection.

Research questions two: Do you think motivation, integrity, and capability

should be included in the fraud triangle theory? If so, why? The original preliminary

start codes (See Appendix C), the responses related to this research question, along with

whether the theme and the preliminary code breakdown was expected or emerged from

the data is summarized in Table 18.

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Table 18 Research Question 2 themes that emerged from data collection methods

Sub Theme: Motivation Literature/Emerging # Of Participants

Motivation should not be included in the Fraud Triangle

Expected 66%

Motivation should be included in the Fraud Triangle

Expected 33%

Analytical Procedures Expected 16%

Internal Control Expected 16%

Questionnaire Emerging 16%

Sub Theme: Integrity

Integrity should not be included in the Fraud Triangle

Expected 66%

Client Expected 50%

Integrity should be included in the Fraud Triangle

Emerging 33%

Management Style Emerging 16%

Check list Emerging 16%

Sub Theme: Capability

Capability should be included in the Fraud Triangle

Expected 66%

Capability should not be included in the Fraud Triangle

Expected 33%

Responsibility Emerging 33%

Professional Skepticism Expected 16%

Opportunity Emerging 16%

Motivation. Under the subtheme motivation, four themes were expected (80 %)

and one theme (20%) emerged from the data. Four out of six (66%) of the participants

stated that motivation should not be included in the fraud triangle theory. Participant four

stated “Motivation should not be included, “I have no way of knowing what motivates a

person to commit a crime, and therefore motivation should be included in the theory.”

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Two out of six (33%) of the participant’s stated motivation should be included in

the fraud triangle theory. Participant on stated, motivation is similar to pressure, and it

should be included with in the fraud triangle theory.

Another theme that was expected from the study was analytical procedures, one

participant (16%) believed that analytical procedures should become part of the fraud

triangle theory. Participant five stated, “If I perform analytical procedures and the

analysis does not appear reasonable, that can be an indication that an individual is

motivated to commit fraud.”

One participant (16%) acknowledged that internal control, an expecting code was

participant three stated, “if a company has a good system of internal control, it will

prevent a motivated person from committing fraud.”

Lastly, an emerging theme from the interviews questions on motivation was

“questionnaire (checklist).” According to Hogan, Rezaee, Riley, & Velury, (2008)

auditors should use a checklist as a starting point to detect fraud but that it should be used

with caution because a checklist is not indicative of fraud. Some researchers support the

use of checklists as decision tools. Participant two said, “It would be difficult for me to

determine what motivates an individual. Even if I used the questionnaire, it would be

difficult to detect because criminals are good at hiding their fraudulent activity”.

Integrity. Under the sub-theme integrity, two themes were expected (40%), and

three themes (60%) emerged from the data. Four out of six (66%) of the participants

stated that integrity should not be included in the fraud triangle theory. Participant five

was adamant about not adding integrity to the fraud triangle theory and states, “Integrity

should not be included in the theory because I don’t want to judge anyone and the only

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way to determine if someone has integrity is through observation and assessing their

character.” Two out of six (33%) of the participant’s stated integrity should be included

in the fraud triangle theory. Participant six stated integrity should be included in the fraud

triangle theory, “I know my clients, and I know if they have integrity by observing their

management style.” Participant two said Participant two said “no”, integrity can only be

measured if you know your client, and since I switch clients frequently, and it is difficult

for me to determine if management has integrity. According to Kassem and Higson

(2011), Integrity can be observed by reviewing an individual’s decisions and decision-

making process, which help assess the likelihood that an individual could commit fraud.

Two emerging themes that were derived from the interviews on integrity were

“Clients and management style.” Participant four stated, yes integrity should be included

in the fraud triangle theory, “The longer you know a client the easier it is to determine if

the client has integrity.” Participant four also mentioned management style, “If you know

your client’s management styles you can make a good assessment of their integrity.”

Capability. Under the sub-theme capability three themes were expected (60%)

and two themes (40%) emerged from the data. Four of six (66%) of the participant’s

stated capability should be included in the fraud triangle theory. Participant one stated,

“Yes, capability is important, and it is easy to evaluate if a person is capable of

committing fraud.” Participant one further stated, “When I interview clients I inquire

about their job duties and their education background that information helps me assess if

an employee is capable of committing fraud. Two out of six participant’s (33%) stated

capability should not be included in the fraud triangle theory. Participant three said

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capability should not be included in the fraud theory because it places too much

responsibility on auditors, who already have enough items to look for during an audit.

An emerging theme that was derived from the interviews was responsibility.

According to participant three and participant four, capability places too much

responsibility on the auditor, therefore it should not be included in the fraud triangle

theory.

The theme of professional skepticism was expected from the literature review.

Participant two stated, auditors should exercise professional skepticism when determining

if an individual is capable of committing fraud.

Lastly, another emerging theme that was derived from the interviews on

capability was the opportunity to commit fraud. According to participant five, if a person

has the opportunity to commit fraud he or she may not commit fraud if he or she is not

capable of concealing the fraud.

Summary of Research Question Two: Do you think motivation, integrity, and

capability should be included in the fraud triangle theory? If so, why”. Participant’s

responses varied in regards to each component of the question. Following is a brief

summary of auditor’s responses to research the interviews that led to the answer to

question two. Four of six participants believed that motivation should not be included in

the fraud triangle theory. Four of six participants believed that motivation should not be

included because it is difficult for an auditor to determine what motivates an individual to

commit fraud. However, two of six participants believed motivation should be included

because auditors can determine what motivates an employee to commit fraud by

performing analytical procedures.

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Four of six participants (67%) believed integrity should not be included in the

fraud triangle theory. The four participants believed that integrity should not be included

because it is difficult for an auditor to determine if an employee has integrity. However,

two of six participants believed integrity should be included because auditors can

determine if an employee has integrity by observing their management style and by

knowing clients through the passage of time.

Four of six participants (67%) believed capability should be included in the fraud

triangle theory. The four participants believed capability should be included because

auditors can determine if an employee is capable of committing fraud by reviewing their

educational background and job duties. However, two of six participants believed

capability should not be included. One of the participants stated capability should not be

included because determining if an employee is capable of committing fraud puts too

much responsibility on the auditor. .

Research question three: Do you think there are other elements that

should be include in the fraud theory? If so, why? The original preliminary start codes

(See Appendix C), the responses related to this research question, along with whether the

theme and the preliminary code breakdown was expected or emerged from the data is

summarized in Table 19.

Table 19

Research question 3 - themes that emerged from data collection methods

Theme Literature/Emerging # Of Participants

Work Ethics Emerging 100% SAS No. 99. Emerging 83% Auditing Engagement Emerging 66% Greed Emerging 50%

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Work Ethics. The emerging theme work ethics includes how individuals felt

about their career and how individuals performed their job responsibilities. The

characteristics that determine an individual work ethics include their attitude, their

communication skills, their behavior and their respect of others. Six out of six

participants (100%) believe that auditors work too hard to meet the requirements of SAS

No. 99. Participant one stated, auditors work very hard and should not be held

accountable for all instances of fraud.

SAS No. 99. The emerging theme SAS No. 99 is the consideration of fraud in a

financial statement audit. The underlying principle of SAS No. 99 is the fraud triangle

theory, which is the framework that assists auditors in analyzing a company’s

vulnerability to fraud. Five out of six participants (83%), believed that SAS No. 99 is

important during the audit process. Participant two stated SAS No. 99 reiterates the

importance of exercising professional skepticism throughout the audit. In addition

participant two stated, “The auditor must maintain a questioning mind and critically

assess the feedback from the reporting entity’s management and other requirements of

SAS No. 99 to identify the possibility of financial statement fraud.”

Auditing Engagement. The emerging theme audit engagement is the legal

relationship between the corporation and the accounting firm. The audit engagement

identifies the scope of the audit, the auditor’s responsibility and the duties of both parties.

Four out of six participants (66%) believed internal control was a major concern during

an audit engagement. Participant one stated an audit begins with an understanding of a

company’s internal control structure. Participant on stated, “During an audit, I review a

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company’s internal control structure, perform analytical procedures, and assess the

likelihood of fraud.”

Greed. The emerging theme greed is a desire to acquire money or power in a

corporation in a selfish and excessive manner. Three of six participants (50%) believed

that the fraud triangle should be modified and greed should become a requirement of the

fraud triangle. Participant six stated, “If individuals have greed and they have the

opportunity and rationalization to justify their actions there is a possibility that the

individual could commit fraud.”

Summary of research question three: Do you think there are other elements

that auditors should be include in the fraud theory? If so, why? Participant’s responses

varied in respects to other elements that should be included in the fraud triangle theory.

Following is a brief summary of auditor’s responses to other elements that should be

included in the fraud triangle theory.

Six of six auditors (100%) believed that work ethics should be included in the

fraud triangle theory because if auditors have work ethics their ability to detect fraud is

improved. Three of six participants believed greed should be included in the fraud

triangle because if an employee has greed they are capable of committing fraud. Lastly,

five of six participants believed that SAS No. 99 is an important element and should be

included in the fraud triangle theory because SAS No. 99 gives auditors a guideline to

following went conducting a financial statement audit.

Effects of the limitations of this study on the results. This phenomenological

study included six senior auditors. The findings from this study illuminate the lived

135

experiences of auditors who work in public accounting firms. As previously noted, two

limitations were presented in this study.

First, the findings of this study cannot be generalized to the general population.

To provide a measure against this limitation purposive sampling was conducted based on

the inclusion and exclusion criteria for participation. The inclusion and exclusion criteria

confirmed that those who were certified public accountants with at least five years of

public accounting experience were suitable to provide substantive feedback to the

research questions. This was important as the interviews were the sole method to collect

the data. Because the study was a phenomenological study the size of the study was a

limitation; therefore, the results cannot be generalized (Yin, 2013). To mitigate the risk of

generalization, there was a statement in the dissertation that states the results of the study

cannot be applied to the general population.

A second limitation of this study was that auditors would be reluctant to answer

the research questions honestly in fear that it could jeopardize their careers or the respect

of their firms. Thus, to reduce the reluctance of participants, participants were informed

that their identities will not be disclosed and that the information they provided will be

kept in a secure, password protected database (Yin, 2013).

Lastly, in conducting this phenomenological study, the researcher first

consideration is to have an open mind and to be receptiveness to the participants. To

accomplish this, any preconceptions about the fraud triangle theory were eliminated. As a

certified public accountant conducting this research, I have prior experience in the field

of accounting. Therefore my accounting experiences may be similar to the participant’s

experiences, which could have resulted in researcher bias. However, to eliminate

136

researcher bias, any preconceptions about the fraud triangle theory was eliminated, this

allows the responses of the participants to determine the outcome of the study. According

to Moustakas (1994), Phenomenological researchers must silence their voices and listen

to responses of the participants.

Results in the context of past research. The literature review for this study was

to establish a framework for the effectiveness of the fraud triangle theory. The fraud

triangle theory states that fraud occurs when an employee has the opportunity, pressure

and rationalization. However, current literature suggests the fraud triangle theory should

be modified to include motivation, integrity, and capability or other components that

could be useful in fraud detection. Following is a discussion of the finding from the

research.

Past research suggests that opportunity is an element of the fraud triangle that is

effective in detecting fraud in an organization. According to Buchholz (2012) opportunity

is effective in detecting fraud and it is an element that companies have the most control

over (Buchholz, 2012). Companies have control over opportunity because the opportunity

to commit fraud is determined by a company’s internal control structure. Therefore, if a

company creates a secure internal control structure, it will reduce the opportunity for

fraud to occur. According to Buchholz (2012) if a company’s internal controls are not

properly designed, the possibility of fraud decreases. The findings from the research are

consistent with the research conducted by Buchholz (2012). Six out of six (100%) of the

participants stated that opportunity was important to detect financial statement fraud. The

six participants believed opportunity is a necessary component of the fraud triangle and it

should be included in the theory.

137

Also, in understanding opportunity auditors must also consider a company’s

internal control structure. According to Alexander (2012), the more lax a company’s

internal control systems, the higher the likelihood for fraud to occur. This statement is

consistent with the research, six out of six (100%) of the participants believed that if a

company had a good system of internal control the likelihood of fraud decreases.

However, Alexander (2012), stated that a secure internal control system does not prevent

fraud, but it will reduce the likelihood of fraud or make it more difficult for a fraudster to

commit fraud.

Past research suggests that pressure is a deficiency in respect to the fraud triangle.

According to Kassem and Higson (2012), the fraud triangle lacks objective criteria for

identifying pressure; therefore, pressure is not effective in determining fraud and it

should not be relied upon. According to Kassem and Higson (2012), pressure it what

motivates an individual to commit a financial crime, and it occurs when an employee has

financial problems that cannot be solved through legitimate means. The results from the

research indicate that six out of six (100%) of the participants believed that pressure was

useful in fraud detection and it should remain a component of the fraud triangle theory.

Past research suggested that rationalization is a deficiency in respect to the fraud

triangle theory and therefore should not be relied upon (Dorminey et al., 2010 Kranacher

et al., 2011). According to Kranacher et al., (2011) rationalization lacks objective criteria

and should not be relied upon because it cannot be observed, meaning an auditor cannot

observe how a person rationalizes their actions. The current research has a 50% split on

rationalization, three of three participants (50%) believed that rationalization is an

138

important component of the fraud triangle and three of three participants (50%) believed

that rationalization is not an important component of the fraud triangle.

The current literature suggests the fraud triangle is ineffective in detecting the

likelihood of fraud in an organization Dorminey et al., 2010; Kassem & Higson, 2012;

Kranacher, et al., 2011; Alexander, 2012). Since the fraud triangle is ineffective in

detecting fraud, Kassem and Higson (2012) designed a new model for use in detecting

fraud in an organization. They noted that the new model should be an extension of

Cressey’s fraud triangle to include motivation, integrity, and capabilities. Kassem and

Higson (2012) suggest motivation, integrity, and capabilities are observable events,

therefore it would help in fraud detection.

Integrity can be observed by reviewing an individual’s decisions and decision-

making process, which help assess the likelihood that an individual could commit fraud

(Kassem & Higson, 2011). Motivation is also an event that can be observed by examining

an individual’s non-shareable financial problems. The observable non-sharable financial

problems described by Kassem and Higson (2012) includes living beyond one’s means,

an overwhelming desire for personal gain, high personal debt, a close association with

customers, and excessive gambling habits. Lastly, Kassem and Higson (2012) argued that

fraud could not occur without the person having the capabilities to commit fraud. Kassem

and Higson (2012) identified four observable traits; the traits are an authoritative position

or function within the organization, the capacity to understand and exploit accounting

systems, internal control weaknesses, and the capability to deal with the stress of being

caught. Following is a discussion of past research and current research on motivation,

integrity, and capability.

139

Kassem and Higson (2012) suggested a new fraud triangle should be designed to

detect financial statement fraud. The new model should be an extension of Cressey’s

fraud triangle, and it should include motivation because motivation is an observable event

(Kassem and Higson, 2012). Four out of six participants (66%) believed that motivation

should be included in the fraud triangle and two out of six participants (33%) believed

that motivation should not be an element of the fraud triangle theory. Following are the

responses of the participants. Participant five said “Yes” motivation should become part

of the fraud triangle. Participant five stated, “If I perform analytical procedures and the

analysis do not appear reasonable, that can be an indication that an individual is

motivated to commit fraud.” Participant three stated motivation should not be included

“if a company has a good system of internal control, it would prevent a motivated person

from committing fraud.”

According to Kassem & Higson (2011), integrity should be included in the fraud

triangle because it is an observable event. According to Kassem & Higson (2011),

integrity is an observable event and fraud can be detected by observing an individual’s

decision-making process, which helps assess the likelihood that an individual could

commit fraud. The conclusion from the research indicates that four of six (66%) of the

participants believed that integrity should not be included in the fraud triangle theory and

two of six (33%) believed that integrity should be included in the fraud triangle.

Participant four stated, “Yes” integrity should be included in the fraud triangle theory

because the longer you know a client the easier it is to determine if the client has

integrity. Participant five stated Integrity should not be included in the fraud triangle

140

theory. Participant five stated, “I don’t want to judge anyone and the only way to

determine if someone has integrity is through observation and assessing their character.”

Kassem and Higson (2012) suggested a new fraud triangle should be designed to

include motivation, which is an observable event. . Four out of six participants (66%)

believe that motivation should be included in the fraud triangle and two out of six

participants (33%) believed that motivation should not be included in the fraud triangle

theory. Following are the responses of the participants. Participant five said “Yes”

motivation should become part of the fraud triangle. Participant five stated, “If I perform

analytical procedures and the analysis does not appear reasonable, that can be an

indication that an individual is motivated to commit fraud.” Participant three stated

motivation should not be included “if a company has a good system of internal control, it

would prevent a motivated person from committing fraud.”

Recommendations

In this section, recommendations based on the methodology and results from the

study is presented. First, recommendations on how the fraud triangle should be improved

to detect fraud are discussed. Second, recommendation for future research is discussed

that will build on the results from the current study.

Recommendations for this study.

The purpose of this qualitative phenomenological study was to understand and

describe U.S. auditors’ perceptions of the effectiveness of fraud triangle theory and to

explore whether the addition of new elements, such as motivation, integrity, and

capability, would offer additional explanatory value to understanding why fraud occurs.

SAS No. 99 requires that auditors utilize the fraud triangle theory to detect fraud during

141

an audit. The recommendations are, auditors should continue to consider opportunity

when conducting and audit, however, a company’s internal control structure should be

considered in conjunction with opportunity. Auditors should include motivation when

looking for fraud in an organization, and it should be considered in conjunction pressure.

However, auditors should place less emphasis on rationalization and auditors should

consider capability because it is an observable event, unlike rationalization which is not

observable. A visual representation of these recommendations along with supporting

statements from specific participants can be found in Figure 2.

Recommendation for future research

Based on the results of the current study, two recommendations for future

research were developed. First, future research should focus on how to determine if an

Auditors should continue to consider opportunity when conducting an audit, however, a company’s internal control structure should be consider in conjunction with opportunity

Fraud Triangle Theory and Modifications

Auditors should include motivation when looking for fraud

Auditors should place less emphasis on rationalization when looking for fraud

142

employee has rationalized their actions to commit financial fraud. Current research

suggests that auditors are unable to detect rationalization because it is an unobservable

event. Future research on rationalization is important because rationalization is a

component of the fraud triangle theory and auditors are required to rely on the fraud

triangle theory when conducting a financial statement audit. Lastly, if auditors are unable

to identify if a fraudster has rationalized their actions, undetected financial statement

fraud will continue to occur.

The second recommendation is for future researchers to conduct a study on

modifying SAS No. 99 and the fraud triangle theory. Currently the underlying principle

of SAS No. 99 is the fraud triangle theory, however the theory is lacking some critical

components that are preventing auditors from detecting fraud. The future study should

focus on revising the underlying principles of SAS No. 99 by modifying the fraud

triangle theory to include motivation and capability and removing rationalization from

the theory. This research could provide insight on how modifying SAS No. 99 could

improve fraud detection during a financial statement audit.

Conclusion

This chapter discussed the results of this phenomenological study which focused

on U.S. auditors’ perceptions of the effectiveness of the fraud triangle theory and the

exploration of new elements, such as motivation, integrity, and capability. This chapter

focused on the limitations of the study, past research and recommendations for future

research. The conclusion is consistent with past research which suggests the fraud

triangle should be modified because it is ineffective in fraud detection. The current

research suggests that the modifications to the fraud triangle should include motivation

143

and capability which is observable events and rationalization should be removed because

it is not an observable event.

144

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Appendix A:

Pre Interview Questionnaire

My name is Walfyette Powell and I am a doctoral student at Northcentral University. I

am conducting a research study on the fraud triangle theory. The purpose of the study is

determining if the fraud theory is effective in determining if fraud exist. I am completing

this research as part of my doctoral degree. To conduct this research, I am looking for

individuals who fit a specific criterion. I am contacting you because you may fit the

criteria for this study. Could I please ask you to take 15 minutes of your valuable time to

complete this questionnaire? Upon completion of the questionnaire, please return it to me

via email at [email protected]. If you have any questions, feel free to contact me

at 678.778.1246.

Do you currently work in a public accounting firm?

Yes

Are you a Certified Public Accountant (CPA)?

Yes

How many years of work experience do you have as an auditor in a public accounting firm?

____________

What state(s) are you licensed as a certified public accountant? ______________________

Have you ever had your CPA license revoked? _____________________________

Yes

I will contact you via email in regards to this questionnaire. Thank you for time!

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Appendix B:

Interview Guide

Date of Interview:

Time of Interview:

My name is Walfyette and I am conducting a phenomenological study on the fraud

triangle. A phenomenological study is a study to understand people's perceptions,

perspectives and understandings of a particular situation. In this study I will not be using

your name nor collecting any data that might reveal personally sensitive information. All

interview data will be coded in a way that it cannot be connected to you. In fact, if you

feel threatened in any way during our conversation you are free to end participation in the

research and all notes will be destroyed.

Background and Demographic Questions (Engaging Epoché Process):

1. Job title of interviewee:

2. Years of accounting experience:

3. Years of auditing experience:

4. Years of experience at current accounting firm:

5. Years of experience at prior accounting firm:

6. What do think of the SAS No. 99 requiring that auditors utilize the fraud triangle

theory to detect fraud?

7. Do you think the element of opportunity is effective detecting if financial

statement fraud exist?

If yes, explain why opportunity is effective to detect fraud.

If no, explain why opportunity is not effective to detect fraud.

8. Do you think the element of pressure is effective detecting if financial statement

fraud exist?

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If yes, explain why pressure is effective to detect fraud.

If no, explain why pressure is not effective to detect fraud.

9. Do you think the element of rationalization is effective in detecting if financial

statement fraud exist?

If yes, explain why rationalization is effective to detect fraud.

If no, explain why rationalization is not effective to detect fraud.

10. Do you think the element of motivation should be included in the fraud triangle

theory?

If yes, explain why the element of motivation should be included in the

fraud triangle theory?

If no, explain why the element of motivation should not be included in the

fraud triangle theory?

11. Do you think the element of integrity should be included in the fraud triangle

theory?

If yes, explain why the element of integrity should be included in the fraud

triangle theory?

If no, explain why the element of integrity should not be included in the

fraud triangle theory?

12. Do you think the element of capability should be included in the fraud triangle

theory?

If yes, explain why the element of capability should be included in the

fraud triangle theory?

If no, explain why the element of capability should not be included in the

fraud triangle theory?

13. What other elements do you believe would be helpful to determine if financial

statement fraud exist.

14. Can you think of a couple of examples from the past two years when you detected fraud during an audit? Of the situations you mentioned:

Did the fraud triangle help you in detecting fraud existed?

What other elements did use to identify the fraud?

15. What other elements do you believe would be helpful to determine if financial statement fraud exist.

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16. Some people think that auditors don’t work hard enough to detect financial statement fraud. Do you agree or disagree with this idea? Can you tell me a specific personal example from your own working life which backs up your interpretation of this idea?

17. Can you walk me through a typical audit?

18. Describe your high point using the fraud tringle?

19. Describe your low point using the fraud triangle?

20. What surprises you must about the fraud triangle?

21. What confuses you most about the fraud triangle?

Questions Regarding Perceptions and Experiences (ask additional questions Spontaneously throughout the interview for clarification and fuller descriptions): Are there any additional comments you would like to add, or experiences you feel relevant to the study that we have not addressed? Conclusion of interview: Appreciation of time and participation, review of options to Withdraw from study, contact information of researcher, possibility of request for follow- up interview, plans for implementing member-checking to ensure accuracy of Information and analysis.

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Appendix C:

Preliminary Start Code List

General Categories Code Research Questions

FRAUD TRIANGLE

FT: Opportunity FT-OPPOR Q1

FT: Rationalization FT-RATIONAL Q1

FT: Pressure FT-PRESS Q1

SAS NO. 99

SAS: Brainstorming SAS-BRAIN Q1

SAS: Professional Skepticism SAS-PROF Q1

SAS: Analytical Procedures SAS=ANPR Q1

SAS: Internal Control SAS-INCTRL Q1

SAS: Risk Assessment SAS-RISAS Q1

SAS: Audit Evidence SAS-AUDEV Q1

Fraud Triangle - New Elements

NE - Motivation NE-MOT Q1

NE - Integrity NE-INT Q2

NE: Capability NE-CAP Q2