Exam (elaborations)
Fraud Triangle - Financial Accounting
- Module
- Accounting And Finance
- Institution
- Loughborough University (LU)
Answer to an exam question about Fraud Triangle in past papers
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Fraud Triangle and its Risk Factors that pertain to accounting-related fraudThe fraud triangle model is a well-known framework for figuring out the factors that lead to fraudulent
behavior in organizations. It is made up of three interconnected parts: opportunity, drive (or stress), and
justification The fraud triangle is a useful tool for understanding the dynamics of fraud, but it also has
some drawbacks and risks that should be taken into consideration. The following are some of the risk
factors that pertain to accounting-related fraud and are associated with the fraud triangle model:
1. Opportunity:
The conditions or circumstances that enable individuals to commit fraud without detection are referred
to as opportunities. Some of the risk factors that are associated with opportunity in the context of
accounting-related fraud include:
- Frail inner controls: It can be possible for people to manipulate financial records and commit fraud if
duties aren't properly divided, there isn't enough oversight, and monitoring isn't effective.
- A lack of openness: Financial frauds like misrepresenting financial statements or concealing
transactions may be facilitated by processes that lack transparency in financial reporting and disclosure.
2. Instability (pressure):
The personal or financial factors that motivate individuals to commit fraud are represented by
motivation or pressure. The following risk factors may contribute to motivation in accounting-related
fraud:
- Financial challenges: Employees may feel compelled to commit fraud in order to alleviate their financial
pressures due to personal debt, financial difficulties, or the need to maintain a particular lifestyle.
- Rewards that are tied to performance: People are more likely to engage in dishonest activities in an
effort to achieve goals or increase their own rewards when they are under pressure to do so because of
high performance targets, unreasonable expectations, or excessive compensation based on financial
metrics.
3. Rationalization:
The cognitive process that people use to justify their dishonesty is referred to as rationalization. Some of
the risk factors associated with rationalization in the context of accounting-related fraud include:
- Erosion of ethics: People may be influenced to justify fraudulent actions as acceptable by a corporate
culture that tolerates unethical practices or disregards integrity.
- A sense of entitlement: As a means of compensating for what they perceive to be a lack of fair
treatment, employees who believe they are not adequately compensated or recognized for the
contributions they have made may justify the act of fraud.
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