Question

29. Investigating and detecting fraud is not an easy task and requires thorough knowledge about the nature of fraud, how it can be committed and concealed. Various theories have been propounded to explain why people commit fraud. Required a) Explain two of the fraud theories excluding the Fraud Triangle. b) Using the Fraud Triangle theory, discuss how financial statement fraud could be combated? Explain the term 'fraudulent financial reporting', illustrating your explanation with examples.

Answer 1

A. ) Two fraud theories:-

1. Fraud Diamond Theory (FTT)
2. Fraud Triangle Theory (FDT)

The object of both the theory is not to identify the fraud rather to identify the elements that lead the perpetrators to commit fraud.

FDT focuses on the 4 key elements of Fraud i.e incentive, opportunity, rationalization and capability

Two fraud theories:-

1. Fraud Diamond Theory (FDT)
2. Fraud Triangle Theory (FTT)

The object of both the theory is not to identify the fraud rather to identify the elements that lead the perpetrators to commit fraud.

FDT focuses on the 4 key elements of Fraud i.e incentive, opportunity, rationalization and capability

B) Using FTT financial statement fraud can be combated by analysing or rather identifying the opportunity, incentive and the rationalization of any potential fraud or loopholes. This theory can prevent fraud as it is said as identifying a fraud is time consuming than the fraud prevention.

C) Example of fraudulent financial reporting:-

1. Increase in revenue margins without any real income.

2. Changes in the value of closing stock so that the profitability can be manipulated.