Fraud triangle explained

Tutorial on business ethics, the fraud triangle and moral philosophy in a business context. Paradise Papers, Panama Papers, Hercule Poirot and Enron - common roots, common fixes! Using the fraud triangle concept, the Finance Storyteller analyzes the striking similarities of tax evasion and bribery, crime novels and corporate scandals. Recommended for any practicioner in the field of audit and compliance!
There is a concept underlying the Panama Papers, Hercule Poirot novels and movies, and the Enron accounting scandal, and it comes from the world of auditing and internal controls. It is called the fraud triangle. The first element is Incentive or pressure, like having secret gambling debts that your spouse doesn’t know about. The second element is opportunity: when no one counts the money in the safe, there is an opportunity to steal some of it. The third element is attitude or rationalization: coming up with a story as to why it would be OK to do it. Unfortunately, humans are great at this kind of self-delusion.
What is likely to happen after the Panama Papers, is that there will be a public outcry for more and better laws and regulations. Better controls decrease the opportunity. That’s the same thing that happened after the Enron and Worldcom scandals earlier this century. I agree that improvement can be made in this area, but we have to take a balanced approach, and be careful not to move towards control obesity, where it becomes almost impossible to run a company.
An ongoing effort that is underway is to change the pressure and incentives. More alignment in tax rates and tax regimes would be a big step forward. This will take a long time to negotiate and implement, and some countries and corporations might not be very eager to cooperate. Besides, greed has been and will be a common human trait, and there will always be people pushing the boundaries with new schemes and tricks.
A more fundamental and longer term “fix” would be to work in the area of rationalization. Can we change the attitudes of people with positions of power? I propose a mandatory basics of philosophy and ethics course for each and every person in a senior leadership position. It’s about doing things right, and doing the right things!
If you want to make a start on studying moral philosophy, here are 4 names you should know:
Aristotle, the Greek philosopher who inquired into a moral code of conduct for good living
Jeremy Bentham and John Stuart Mill who judged actions by their outcomes
And Immanuel Kant, one of the most influential philosophers of the Enlightenment, who designed a moral framework based on principles.
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: CZcams videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[@TheFinanceStoryteller]

Related topics are GAAP versus non-GAAP financial metrics czcams.com/video/ewzlgnGtfmg/video.html and how to read an annual report czcams.com/video/Kw-1nopchnA/video.html

[@soloman747]

This is less of an explanation (diagnosis) than it is a treatment plan.

[@TheFinanceStoryteller]

Agree. This was the second video I ever made for my channel, and I was yet to find the right "flow". After a quick example, I jumped straight into a longer list of mitigants for each of the sides of the triangle. Hope it helped a bit!