Question

Which of the following is not an element of the fraud triangle? a. Rationalization. c. Segregation of duties. b. Financial pressure. d. Opportunity.

Short answer

Segregation of duties is not an element of the fraud triangle.

Step-by-step solution

Understand the Fraud Triangle

The fraud triangle is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components: 1) Rationalization, 2) Financial Pressure, and 3) Opportunity.

Identify the Options

The given options are a) Rationalization, b) Financial Pressure, c) Segregation of duties, and d) Opportunity. We need to check which of these is not part of the fraud triangle.

Match Options with the Fraud Triangle

Compare each option with the components of the fraud triangle: - Rationalization matches the first component. - Financial Pressure matches the second component. - Opportunity matches the third component.

Determine the Odd Option

The only option left is c) Segregation of duties, which is not a component of the fraud triangle. It is instead a control mechanism to prevent fraud.

Key concepts

Rationalization

Rationalization is one of the three key elements of the fraud triangle. It refers to the justification of dishonest actions by the person committing fraud. Individuals often convince themselves that their fraudulent behavior is acceptable or necessary.
They might think their actions are insignificant, believe that everyone does it, or feel justified because they perceive unfairness in their compensation. This mental process of rationalizing unethical behavior makes it easier for them to ignore the deception involved. Some common rationalizations include:

• "I deserve this because I'm underpaid."
• "I'm just borrowing the money; I’ll return it."
• "Everyone else does this, why can't I?"

Recognizing these thought patterns is crucial in understanding how individuals justify unethical behavior. It highlights the importance of addressing cultural and ethical perspectives in preventing fraud.

Financial Pressure

Financial pressure is the second critical element of the fraud triangle. It represents the motivation or need that drives an individual to commit fraud. This pressure can arise from various personal or professional financial challenges.
Common scenarios may include overwhelming debts, family needs, or desires to maintain a certain lifestyle. Under such conditions, individuals might seek unorthodox means to solve their financial woes, leading to unethical choices. Examples of financial pressures that might lead to fraud include:

• High personal debts or loans that need repayment.
• Sudden job loss or a significant loss of income.
• Expensive lifestyle demands that exceed legitimate earning capabilities.

Understanding the sources of financial pressure can help in taking preventive measures. It also emphasizes the need for support systems within organizations to help employees manage financial stress.

Opportunity

Opportunity is the third element of the fraud triangle, and it refers to circumstances that allow fraud to occur. Without opportunity, neither financial pressure nor rationalization would result in fraudulent activities.
This often involves weaknesses in organizational controls or processes that are exploited by the individual. Opportunities might arise due to lack of supervision, inadequate checks and balances, or failure to implement effective control measures. Factors contributing to opportunities for fraud might include:

• Inefficient control systems that do not detect fraud promptly.
• Poor segregation of duties within the organization.
• Access to confidential or sensitive information without necessary oversight.

Addressing these gaps and strengthening internal controls are vital steps to minimize opportunities for fraud. Ensuring regular audits, cross-checks, and enforcing strict access protocols are essential actions organizations can implement to deter fraud attempts.