Assignment 3-1: Week Three Discussion

In chapter eight of the textbook, the interview with fraudster Walt Pavlo presented many insights into his fraudulent activities. Please apply the fraud triangle in analyzing his motives/reasons, opportunities, and rationalizations. Describe each part and provide examples from his interview.

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In order for a fraudster to commit fraud, Dr. Donald Cressey determined there were three essential elements that needed to be present: motive, opportunity, and rationalization. If one of these elements are missing the fraudster will not commit a fraudulent act. Each element of the fraud triangle was present when Walt Pavlo was committing his fraud. The first element that was present in Pavlo’s fraud was motive/reasons to commit the fraud. There were a few reasons that Pavlo turned to fraud. The first was he couldn’t believe how the company’s (MCI) customers acted and how unethical it was. He “was convinced that the only way to get ahead in telecommunications was to learn how to cheat.”(Biegelman & Bartow, 2012, P. 177) The second reason for committing the fraudulent activity was to please management.

Pavlo explained that MCI’s management tone was to “meet the numbers.” Management did ask any questions if the numbers were met. The second element of opportunity was also present in Pavlo’s execution of his fraud scheme. The main opportunities for Pavlo were lack of internal controls and that fact that no one within the company ever questioned good news. First, Pavlo was in charge of both collection activity and accounts receivable management. This allowed him to cook the books very easily. “Being in charge of both put me in a position where I was in charge of meeting collection goals while at the same time assuring those posting were accurate. When times got difficult, the more dominant goals of meeting the numbers trumped accuracy.” (Biegelman & Bartow, 2012, P. 177) Also, due to the fact the company had many temporary employees, password not being changed on a regular basis and could be passedto individuals who should have access to certain information.

Pavlo stated, “If one were to combine high employee turnover, loose audit controls, and aggressive financial goals for the department, it may create a unique situation in which fraud could occur.” (Biegelman &Bartow, 2012, P. 175) Those elements “created a growing opportunity to commit fraud later even though we were not aware of it at the beginning.” (Biegelman & Bartow, 2012, P. 175)Another lack of internal control was MCI was not properly utilizing a fraud prevention program. Pavlo was sure the company had one, but never heard of it or received any documentation on such a program. Finally, the fact that no one in the company questioned good news, allowed Pavlo’s scheme to continue. Pavlo explained:

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