Question

You are CEO. Describe how you might use the Fraud Exposure Triangle to encourage your CFO to "manage" financial reporting to acheive earnings targets needed for bonus payouts.

Answer 1

Hey there !!

In this question, we need to describe as to how can the Fraud Exposure Triangle be used to encourage better management of 'financial reporting' requirements to acheive earnings targets needed for bonus payouts.

Let us first understand what the Fraud exposure triangle is.

The Fraud Triangle consists of three conditions when fraud occurs:

• Incentive/Pressure,
• Opportunity
• Attitude

There is always a risk that the management may knowingly or unknowingly fail to appropriately report financial results which may lead to material misstatement.

There could be an intentional misrepresentation of the financial position of an enterprise through misstatement or omission of amounts or disclosures to mislead the stakeholder's of Financial statements.

The CEO is always in the position to make certain decisions without having the need to consult the board of directors or anyone else for that matter. He can get the Financial position 'managed' to achieve earnings targets for bonus payouts or any other targets which he needs to achieve.

He is also in a position to rationalize the same and at the same time put pressure on his juniors to get that done. He might even give certain incentives or put pressure on those who agree to help him get through this.

So this is how a CEO can use the Fraud Exposure triangle, by means of Pressure/ Incentives/ finding opportunities etc.

I hope the solution is now clear to you...do let me know in case of any concerns.

All the best !!
Happy Stuidying :)