SW-Fraud Triangle

Auditing Theory, 1st sem SY 2020-2021

Each of the following scenarios is based on facts in actual fraud. Categorize each scenario as primarily
indicating (1) an incentive to commit fraud (2) an opportunity to commit fraud or (3) a rationalization for
committing fraud. Also state your reasoning for each scenario.
a. There was intense pressure to keep the corporation’s stock from declining further. This pressure
came from investors, analysts and the CEO, whose financial well-being was significantly
dependent on the corporation’s stock price.
b. A group of top-level management was compensated (mostly in the form of stock options) well in
excess of what would be considered normal for their positions in the industry.
c. Top management of the company closely guards internal financial information, to the extent
that even some employees on a “need to know basis” are denied full access.
d. Managing specific financial ratios is very important to the company, and both management and
analysts are keenly observant of variability in key ratios. Key ratios for the company changed
very little even though the ratios for the overall industry were quite volatile during the time
period.
e. In an effort to reduce certain accrued expenses to meet budget targets, the CFO directs the
general accounting department to reallocate a division’s expenses by a significant amount. The
general accounting department refuses to acquiesce to the request, but the journal entry is
made through the corporate office. An accountant in the general accounting department is
uncomfortable with the journal entries required to reallocate divisional expenses. He brings his
concerns to the CFO, who assures him that everything will be fine and that the entries are
necessary. The accountant considers resigning, but he does not have another job lined up and is
worried about supporting his family. Therefore, he never voices his concerns to either the
internal or external auditors.
f. Accounting records were either nonexistent or in a state of such disorganization that significant
effort was required to locate or compile them.