Whats the best way to manage the situation where individuals rationalize committing misconduct
A framework used to explain the motivation behind an individual’s decision to commit fraud Show What is the Fraud Triangle?The fraud triangle is a framework commonly used in auditing to explain the reason behind an individual’s decision to commit fraud. The fraud triangle outlines three components that contribute to increasing the risk of fraud: (1) opportunity, (2) incentive, and (3) rationalization. Summary
What is Fraud?The fraud triangle is used to explain the reason behind a fraud. However, what exactly is fraud? Fraud refers to a deception that is intentional and caused by an employee or organization for personal gain. In other words, fraud is a deceitful activity used to gain an advantage or generate an illegal profit. Also, the illegal act benefits the perpetrator and harms other parties involved. For example, an employee that pockets cash from the company’s register is committing fraud. The employee would benefit from getting additional cash at the expense of the company. Below, we discuss the components of the fraud triangle. The Fraud Triangle – OpportunityOpportunity refers to circumstances that allow fraud to occur. In the fraud triangle, it is the only component that a company exercises complete control over. Examples that provide opportunities for committing fraud include: 1. Weak internal controlsInternal controls are processes and procedures implemented to ensure the integrity of accounting and financial information. Weak internal controls such as poor separation of duties, lack of supervision, and poor documentation of processes give rise to opportunities for fraud. 2. Poor tone at the topTone at the top refers to upper management and the board of directors’ commitment to being ethical, showing integrity, and being honest – a poor tone at the top results in a company that is more susceptible to fraud. 3. Inadequate accounting policiesAccounting policies refer to how items on the financial statements are recorded. Poor (inadequate) accounting policies may provide an opportunity for employees to manipulate numbers. The Fraud Triangle – IncentiveIncentive, alternatively called pressure, refers to an employee’s mindset towards committing fraud. Examples of things that provide incentives for committing fraud include: 1. Bonuses based on a financial metricCommon financial metrics used to assess the performance of an employee are revenues and net income. Bonuses that are based on a financial metric create pressure for employees to meet targets, which, in turn, may cause them to commit fraud to achieve the objective. 2. Investor and analyst expectationsThe need to meet or exceed investor and analyst expectations to ensure stock prices are maintained or increased can create pressure to commit fraud. 3. Personal incentivesPersonal incentives may include wanting to earn more money, the need to pay personal bills, a gambling addiction, etc. The Fraud Triangle – RationalizationRationalization refers to an individual’s justification for committing fraud. Examples of common rationalizations that fraud committers use include: 1. “They treated me wrong”An individual may be spiteful towards their manager or employer and believe that committing fraud is a way of getting payback. 2. “Upper management is doing it as well”A poor tone at the top may cause an individual to follow in the footsteps of those higher in the corporate hierarchy. 3. “There is no other solution”An individual may believe that they might lose everything (for example, losing a job) unless they commit fraud. Related ReadingsThank you for reading CFI’s guide to Fraud Traingle. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below:
Unformatted Attachment Preview 12/21/2020 Assessment Review - Corporate Finance Institute Corporate Finance Institute Professional Ethics Below is a scored review of your assessment. All questions are shown. Main Question Set Correct Answer Partially Correct Incorrect Answer 1 Which of the following is NOT true about moral principles? Your Answer Businesses have a set of applied or professional moral principles that are relevant to them. Correct Answer The same moral principles
are always shared among and followed by di erent social groups. Explanation None. 2 Which are desired outcomes when trying to reduce the ethics risks in the workplace? Select ALL correct answers. Your Answer Reduced retaliation for reporting A decrease in observed misconduct Increased pressure for misconduct This study source was downloaded by 100000847950369 from CourseHero.com on 06-08-2022 04:27:00 GMT -05:00 https://cfi.brillium.com//Assess.aspx?guid=F4DFC2B55B404B6F8419D6B8C7ED855A&a=R1
https://www.coursehero.com/file/76825171/Assessment-Review-Corporate-Finance-Institutepdf/ 1/5 12/21/2020 Assessment Review - Corporate Finance Institute Correct Answer Reduced retaliation for reporting A decrease in observed misconduct Explanation None. 3 What’s the best way to manage the situation where individuals rationalize committing misconduct in an organization? Your Answer By communicating corporate values and emphasizing those values Correct Answer By communicating corporate values and
emphasizing those values ... |