Question

Identify the most appropriate fraud triangle element in each of the following cases. - The approval of mark-to-market accounting treatment at Enron. A. Opportunity B Incentive - The amount of stock ownership and stock options that top level Enron executives had c Rationalization The purchase manager has not been given a bonus in 3 years in spite of D. Opportunity outstanding performance, thus decided to make fake purchase transactions and transfered the funds to their own bank account because they believed they deserved it. • The complex nature of the business and the need for many complex transactions The company is expected to miss its earnings targets. When asking the CEO why they falsifies financial statements for years, their answer was 'l only did it so that my employees do not lose their jobs - The Enron analysts would make their recommendations based on the insights they receive from Enron managers.

Answer 1

Fraud triangle is a framework which explains the conditions or factors that cause someone to commit a fraud. It consists of three elements - Opportunity, Incentive and Rationalization. Opportunity refers to conditions within an entity that allow an act of fraud such as poor internal control, inadequate segregation of duties etc. Incentive or pressure are reasons that motivate a person to commit fraud such as Personal financial obligations and unrealistic performance targets. Rationalization refers to justification of fraudulent activities such as commiting fraud for the family, claiming that nobody got hurt etc. Accordingly, the appropriate fraud triangle element in the given situations could be identified as follows-

1. The approval of mark to market accounting treatment at Enron - (A)Opportunity. Reason - It is a condition within entity that might aid fraudulent activity.

2. The amount of stock ownerships and stock options top level Enron executives had - (C) Rationalization Reason - It is a justification of committed fraudulent activity.

3. The purchase manager has not been given bonus in 3 years in spite of outstanding performance this decided to make fake purchase transactions and transferred the funds to their own bank account because they believed they deserve it - (C) Rationalization. Reason - It is a justification of fraudulent activity

4. The complex nature of business and the need for many complex transactions - (A) Opportunity Reason - It is a condition within an entity that aids an act of fraud.

5. The company is expected to miss its earning targets - (B) Incentive. Reason - There is pressure to commit fraud owing to non - achievement of target performance.

6. When asking the CEO why they falsifies financial statements for years, their answer was " I only did it so that my employees do not lose their jobs" - (C) Rationalization. Reason - It is a justification of fraudulent act.

7. The Enron analysts would make their recommendations based on the insights they receive from Enron managers - (B) Incentive Reason - It is a situation of pressure to commit fraud. ( It is to be noted that Opportunity and Incentive are closely interrelated. If it is a condition within entity , the most appropriate element would be Opportunity).