What is the Fraud Triangle?

The fraud triangle is a framework typically used in auditing to describe the reason behind an individual’s decision come commit fraud. The fraud triangle outlines three contents that add to boosting the threat of fraud: (1) opportunity, (2) incentive, and also (3) rationalization.

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Summary

The fraud triangle is a structure used to describe the factor behind one individual’s decision to commit fraud.The fraud triangle is composed of three components: (1) Opportunity, (2) Incentive, and (3) Rationalization.Fraud describes the deception the is intentional and caused by one employee or company for personal gain.


What is Fraud?

The fraud triangle is supplied to describe the factor behind a fraud. However, what precisely is fraud?

Fraud describes a deception the is intentional and also caused by one employee or organizationTypes that OrganizationsThis post on the different varieties of establishments explores the miscellaneous categories that organizational structures can loss into. Business structures for personal gain. In various other words, fraud is a deceitful task used to gain an benefit or generate an illegal profit. Also, the illegal act services the perpetrator and also harms other parties involved.

For example, an employee the pockets cash indigenous the company’s it is registered is committing fraud. The employee would advantage from getting added cash at the cost of the company.

Below, we discuss the materials of the fraud triangle.

The Fraud Triangle – Opportunity

Opportunity describes circumstances that permit fraud come occur. In the fraud triangle, it is the just component that a firm exercises finish control over. Examples that administer opportunities for committing fraud include:

1. Weak internal controls

Internal controls are processes and also procedures applied to ensure the verity of accountancy and gaue won information. Weak inner controls such as poor separation of duties, absence of supervision, and poor documentation that processes offer rise to opportunities for fraud.

2. Negative tone at the top

ton at the peak Tone at the TopTone at the top, commonly referred to in auditing, is used to define a company"s management and also board that director’s leadership and their commitment to being honest and also ethical. The tone at the height sets forth a company’s social environment and also corporate values.refers to top management and also the plank of directors’ appointment to gift ethical, reflecting integrity, and being honest – a poor tone in ~ the top results in a agency that is much more susceptible to fraud.

3. Inadequate accounting policies

Accounting policies refer to how items top top the jae won statements are recorded. Bad (inadequate) accountancy policies may administer an opportunity for employee to manipulate numbers.

The Fraud Triangle – Incentive

Incentive, conversely called pressure, describes an employee’s perspective towards committing fraud. Instances of points that provide incentives because that committing fraud include:

1. Bonuses based on a financial metric

Common financial metrics supplied to evaluate the performance of one employee room revenues and net incomeNet IncomeNet earnings is a crucial line item, not just in the income statement, however in all three core gaue won statements. While that is arrived on through. Bonuses that are based on a jae won metric develop pressure for employees to fulfill targets, which, in turn, may reason them come commit fraud to attain the objective.

2. Investor and also analyst expectations

The require to fulfill or exceed investor and analyst expectation to ensure share prices are preserved or raised can produce pressure come commit fraud.

3. Personal incentives

Personal incentives may include wanting come earn an ext money, the need to pay personal bills, a gambling addiction, etc.

The Fraud Triangle – Rationalization

Rationalization describes an individual’s justification because that committing fraud. Examples of usual rationalizations the fraud committers use include:

1. “They treated me wrong”

An individual might be spiteful in the direction of their manager or employer and also believe that committing fraud is a method of getting payback.

2. “Upper management is doing it as well”

A poor tone in ~ the top may reason an separation, personal, instance to monitor in the footsteps the those higher in the corporate hierarchyCorporate StructureCorporate structure describes the organization of different departments or business units within a company. Depending upon a company’s goals and also the industry.

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3. “There is no various other solution”

An individual may think that they could lose every little thing (for example, losing a job) uneven they commit fraud.

Related Readings

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