Question

Fraud Triangle: Discuss the three components of the fraud triangle. Of what concern are they to the fraud examiner?

Answer 1

Fraud is referred to as an intentional misstatements in financial statememts or intentional deception to get any unfair benefit.

Fraud triangle explains the reasons or we can say the motivation which encourages a person to commit a fraud.

Three components of fraud triangle are

1. Opportunity

2. Incentive

3. Rationalization

Explanation is as follows:

1. Opportunity are those situations or circumstances allowing fraud to take place.

Examples which gives opportunities for committing fraud are:

A) Weak internal control

B) Inadequate accounting policies

2. Incentive refers to the mindset or way of thinking of an employee towards committing a fraud. Examples of factors providing incentives for committing fraud are:

A) Bonuses bases on performance

B) Personal incentives etc.

3. Rationalization is the individual's explanation or justification for committing fraud.

Examples of common justification provided by frauders are:

1. No other solution was available

2. Wrong treatment by Manager

3. Upper management is doing the same.

Fraud triangle helps the fraud examiners in the following ways:

1. Fraud triangle helps companies with how and why fraud is committed so that they can take proactive measures.

2. Fraud triangle knowledge provides the examiners with an understanding of various ways or approches that needs to be incorporated.