Question

Regarding the fraud triangle . Are companies able to control motivation? opportunity? Why or why not?

Answer 1

The fraud triangle theory used in audit during planning stage helps understand the 3 sets of angle-

(a) Incentive

(b) Oppourtunity

(c) Rationalization

Auditors often refer to the fraud triangle while reviewing the risk of fraud in an organization. Fraud means a deception that is intentional and caused by an employee or organization for personal gain.

Oppourtunity- refers to situation/circumstance that facilitates fraud-

i. Weak internal control

ii. Ineffective top management

iii. Accounting policies leave too much to desire

iv. Concentration of power

The Companies has to a very extent able to curtail the oppourtunities to commit fraud. Following are instances-

1. Internal Financial Control audit has become compulsory

2. Most organisations has deployed seggregation of duty

3. Seggregation of maker anc checker

4. GAAP's are converging and accountability boards has asked auditors to report whether financials comply with the GAAPs.

Incentive or pressure is Gain which can be made by committing fraud

i. Gain outweighs cost

ii. Outside pressure- analysts or management

iii. Performance linked bonuses

The Companies have failed in preventing the motivation or incentive to fraud as more and more companies are linking bonusses to performances. Startup culture has aggravated the matter on this front as startups link thier bonuses to purely performance leading to more and more incentive to commit fraud. Further, analysts have become more activist in recent times and begun to put more pressure leading to the pressure to meet expectations thus pressure to commit fraud.