DECODING THE FRAUD TRIANGLE: UNRAVELING THE FACTORS BEHIND EARNINGS MANAGEMENT

Abstract

In the world of financial security and audit, the concept of fraud is a pervasive concern. This abstract delves into the complex dynamics of fraud as explained by the Fraud Triangle, a model introduced by Donald R. Cressey in 1953. It focuses on the three primary conditions that underpin any fraudulent activity: pressure, opportunity, and rationalization.

The "pressure" factor encompasses the driving forces behind fraudulent actions, which can range from personal financial difficulties to unchecked greed. "Opportunity" emerges when weak internal controls and inadequate management supervision create an environment conducive to fraudulent activities. The third aspect, "rationalization," pertains to the ethical and psychological mechanisms that individuals employ to justify their fraudulent behavior.

This study also highlights the critical role of auditors in identifying fraudulent financial statements and emphasizes the need for auditors to be vigilant in detecting the signs of potential fraud. Statement on Auditing Standard No. 99 mandates the use of 42 red flags as indicators of fraudulent financial statements.

Understanding the dynamics of the Fraud Triangle and its various components is essential for organizations to protect themselves against financial fraud. By identifying and addressing the key factors driving fraud, companies can proactively implement measures to minimize the risk of fraudulent financial statements.