The Fraud Diamond Framework was an improvement on the earlier ‘Fraud Triangle’ used by forensic accountants to detect accounting fraud. David Wolfe and Dana Hermanson proposed the change to the Fraud Triangle by adding a fourth element of ‘capability,’ rechristening it “The Fraud Diamond.” The first element in the framework is ‘Incentive’ which arises from the greed to commit fraud. The second element of ‘Opportunity’ could be a potential weakness in the system that the precise person could exploit. The third element of ‘rationalization’ happens when a perpetrator convinces his/her own self that such deceitful behaviour is worth with the risk taken.The fourth element is the ‘capability’ of a person with the necessary traits and abilities to be the ‘right’ person recognizes the prospect of fraud and executes it. (Wolfe and Hermanson, 39)
The Crundwell case is a typical illustration. Rita’s incentive for performing this fraud was to finance her own quarter horse breeding operations, and to build an elite image of herself in the community. Her opportunity came in 1983 when she got the position appointed the comptroller, and she could retain her position as long as required since there was no election to the post. Rita convinced herself that the risk taken was well worth it, and probably believed that this was her due for the long years put at the City of Dixon (rationalization). Further, Rita’s senior position in the City Office, her ability to conceal the fraud for as long as she did in the absence of proper audits, her ability to understand and control systemic weaknesses combined with her confidence contributed to the fourth element of capability. Thus, the Rita Crudwell case perfectly fits the Fraud Diamond Framework.
In order to prevent frauds, the City of Dixon should put certain controls in place. The position of comptroller should be an elected position, and not appointed, which would prevent one employee becoming too familiar with the system. The City of Dixon must strengthen the city reporting system, so that opportunities should not arise for further systemic frauds. The City should place a more open system of accounting where other employees, as well as the general public activities should have revenue and expenditure visibility internally. The City should have better communication with the banks where it holds the City accounts, so that any irregular activities, not in line with the books of accounts get reported preferably to one or more Senior Executives within the City. The City should also employ a proper external auditor instead of a cheaper option such as a Third Party Auditor since this fraud occurred partly because the auditor too did not blow the whistle. In addition, the City should also consider the formation of an audit committee to enhance the audit quality, and encourage transparency in financial reporting. (Nashwa) These controls should effectively plug most of the loopholes present in the system. Further weaknesses can be identified and resolved by the audit committee.
Works Cited
Nashwa, George. “The Role of Audit Committees in the Public Sector.” CPA Journal Online. Aug 2005. Web. 23 Jun 2014
Smith, Bryan. “Rita Crundwell and the Dixon Embezzlement.” Chicago Magazine. Chicago Mag Online 24 Sep 2012. Web. 23 Jun 2014
Wolfe, David T., and Dana R. Hermanson. "The Fraud Diamond: Considering the Four Elements of Fraud." CPA Journal 74.12 (2004): 38-42. Print.
