Reference no: EM132381149
Please respond the below statement. 200 words and reference.
Sub: Accounting Theory and concepts.
Question No. 1 (Sue)
Professor Greenfield and classmates,
This week we are asked to discuss the categories of rationalization for fraud: no-harm and no responsibility when an employee is pressured by management to commit a fraudulent act.
Extant criminology-psychology research cites Donald Cressey and Edwin Sutherland as pioneers in the field of fraud theory. Edwin Sutherland developed the Theory of Differential Association. Sutherland believed that fraudsters learned their criminal behavior through social contacts. According to Sutherland's theory, the learning process includes not only methods of committing a crime but attitudes, motives, and rationalizations/justifications for the individual's fraudulent behavior. Sutherland's concepts of opportunity and rationalization predates Cressey's theory of the Fraud Triangle. Cressey was a student of Sutherland and in 1951 they co-authored a paper "Why do trusted persons commit fraud?" According to Cressey's fraud model, three factors must be present for an ordinary person to commit fraud: 1) pressure/incentive, 2) opportunity, and 3) rationalization. Rationalization or justification is an individual means of resolving ethical dissonance from a wrongful act. The study, Ethical dissonance, justifications and moral behavior, (Barkan et al., 2015) finds that justification is a highly effective means of resolving ethical dissonance. The study (Barkan et al., 2015) concludes that justifications may release the psychological tensions of ethic dissonance allow people to behave unethically making their sense of morality a mirage.
In a basic rationalization of "no harm" fraud, the individual resolves their dissonance from the unethical act with the justification that it caused no harm, their action was inconsequential or immaterial. In truth, the employee in our hypothetical situation may not even realize the nature of the fraud although Management clearly understands what it is asking of the employee. The employee may blindly follow a management request to make an insignificant reduction in year-end expenses. In Rest's theory, the employee may have failed to see a moral dilemma and therefore took no moral action. Conversely the employee may recognize the moral dilemma but feel so pressured by management that they lack moral courage and commit the fraudulent act.
Many employees who succumb to pressure will try to rationalize their fraudulent behavior with "no responsibility". Their excuse was that they were just following orders; they are not responsible for any wrong or unethical results.
In Kohlberg's moral development theory the employee is reasoning in the first stage of moral development, preconventional morality. In Phase 1, obedience and punishment, the employee believes they are being obedient in following a direct command from management, in which they are trying to avoid punishment for not following orders. In Phase 2, self-interest, the employee is satisfying their need to remain employed and not be fired for refusing a management order. "At the conventional level, the individual becomes aware of the interests of others and one's duty to society" (Mintz& Morris, 2017). In our hypothetical situation, there was no evidence to support moral development of the employee beyond preconventional morality.
Age of the employee may also be a factor. Studies have shown that younger workers are more tolerant of unethical behavior if they believe it will save their job.
Question No. 2
Please respond the below statement. 200 words and reference.(Jeromy)
Donald Cressey is credited as the founder of fraud theory. His Fraud Triangle model describes the components that must exist for fraud to take place. According to Cressey, three conditions must exist for fraud to occur. They are incentive/pressure, opportunity, and lastly rationalization. While the presence of all three components does not mean that fraud actually exists, it can help show potential red flags in areas where fraud is more likely to occur (Mintz& Morris, 2016).
According to Mintz, fraudulent financial reporting occurs in three ways:
• Manipulation, falsification, or alteration of accounting records
• Intentional omissions
• Intentional misapplication of accounting principles
Management is ultimately tasked with preventing and detecting fraud. By creating fraud prevention techniques, management can significantly reduce fraud opportunities. The organization can combat potential fraud by creating fraud prevention tools and detection controls. Some of these include the following:
• An organizational fraud hotline
• Management promoting fraud training programs
• Continuous internal control evaluations
• Incorporating internal controls to prevent, detect, and investigate fraud
When management operates with greed and corruption fraud is more likely to occur. The employees will be more susceptible to following these corrupt ways. The organization has to promote and produce an ethical culture. When the company is only focused on profits it does little to deter management and employees from committing fraud. During the WorldCom scandal, there were accountants directly involved who stated they bought into management's decisions due to lack of jobs in their community along with growing health-care issues for their family (Mintchik, 2019).
In regards to the employee being directed by management to commit fraud, leadership can often place extreme pressures on their employees to perform certain tasks. Pressures can include the everyday struggles that individuals go through which can lead them towards possibly committing fraud. Pressure, whether internal or external, are the driving forces behind the need and desire to commit fraud.
The rationalization aspect refers to the individual attempting to justify why they felt the need to commit a fraudulent act. The individuals involved in the fraud will equate their behaviors in moral and ethical terms by rationalizing the greater cause, will often blame the victims involved, or will minimize the harm caused. Employees that attempt to justify their actions to the auditors during interviews may state the following reasons for why they committed the fraudulent act:
• I was instructed to do this
• Since so many people were involved, it couldn't have been that bad
• I'll pay it back
• This isn't hurting any actual people just shareholders
• It's not that big of a deal.
• It was below the materiality threshold
When employees rationalize why they committed a fraudulent act, it could fall in line with the "Level 2 -Conventional" tier of Lawrence Kohlberg's Six Stages of Moral Development. In this level individuals will often seek loyalty of management, peers, and organization. The employee wants to maintain a social status throughout the organization and will attempt to please others, specifically leadership (Mintz& Morris, 2016).
Auditors should assess risks of fraud occurring that is significant within the context of the audit objectives. Fraud typically involves obtaining something of values through willful misrepresentation. When any information comes to the auditor's attention indicating that fraud may have occurred, the auditor has to determine whether fraud has likely occurred and what effect the potential fraud has on the audit findings. Creating fraud risk assessments can help identify if the organization is operating in a high-risk fraud environment. Some key areas that should be considered is unethical behavior by management, weak internal controls and oversight, unstable organizational structure and workforce, and high work demands. When investigating fraud, auditors must use professional skepticism when evaluating the interviewee's responses and any evidence obtained or information that brings into question the reliability of the responses or documentation that is to be used as evidence (Mintz& Morris, 2016).
Question No. 3. Sub: Accounting Theory and concepts. 100 words and reference.
Which part of the fraud triangle (opportunity, pressure or rationalization) do you feel is the more important and why?