Fraud Triangle Explained With Examples | Auditing Course | CPA Exam скачать в хорошем качестве

Fraud Triangle Explained With Examples | Auditing Course | CPA Exam

In this session, we explain the fraud triangle. Start your free trial: 👉 https://farhatlectures.com/ Understanding the Fraud Triangle The Fraud Triangle is a theoretical framework designed to explain the reasoning behind an individual’s decision to commit fraud. Developed by criminologist Donald Cressey, the model outlines three elements that, when combined, increase the likelihood of fraudulent behavior. These factors are: Pressure (or Motivation), Opportunity, and Rationalization. Understanding these components helps organizations identify and mitigate the risk of fraud. 1. Pressure (Motivation) Definition: Pressure or motivation refers to the personal need felt by the individual committing the fraud. This need is often financial but can also be driven by other pressures, such as the desire for social status, personal financial problems, or workplace challenges. Examples: Financial stress from debt, medical expenses, or lifestyle expectations. Unrealistic performance targets or compensation structures that directly tie to financial rewards. 2. Opportunity Definition: Opportunity is the element of the Fraud Triangle that provides the means for fraud to be committed. It typically stems from weaknesses in the internal controls or processes that an individual believes they can exploit without being caught. Examples: Inadequate segregation of duties, where one person controls multiple aspects of financial transactions or data management. Lack of oversight or ineffective monitoring systems that fail to catch inconsistencies or irregular activities. 3. Rationalization Definition: Rationalization is the internal justification that fraudsters use to convince themselves that their fraudulent action is acceptable. This factor is about aligning the act of fraud with the individual’s self-image without feeling significant guilt or self-reproach. Examples: Believing the fraud is a temporary loan that they’ll pay back once personal financial conditions improve. Feeling underappreciated or underpaid, thinking, "I deserve more," or "The company won’t miss it." Justifying the act by blaming poor management or claiming the system is unfair. Application in Preventive Measures Pressure: Companies can reduce pressure by setting realistic performance goals, maintaining open lines of communication about employee hardships, and offering support programs for personal or financial problems. Opportunity: Strengthening internal controls is crucial. This includes implementing robust checks and balances, regular audits, effective oversight, and clear segregation of duties. Rationalization: Fostering an ethical corporate culture and promoting an environment where employees feel valued and compensated fairly can mitigate rationalization. Education about the consequences of fraud and visible enforcement of policies also plays a crucial role. Importance in Fraud Detection and Prevention Understanding the Fraud Triangle provides valuable insights into why fraud is committed and what can be done to prevent it. By addressing the underlying factors that contribute to fraud, companies can better safeguard their assets and maintain integrity within their operations. This model is not only used to combat fraud after it happens but is also a preventive tool, guiding policy development and internal control systems to deter potential fraudsters. #cpaexam #accountingtutorial #fraud