An Examination of the Fraud Triangle Model: Implications for External Auditors and Audit Regulators

This study explores external auditors’ views on the importance of fraud factors in the assessment of financial reporting fraud risk. The study also sheds light on the root causes for auditors’ bias in fraud risk assessment and proposes an alternative fraud triangle model that could be more suitable for audit professionals in the assessment of financial reporting fraud risk. The proposed auditors’ fraud triangle model was designed after careful consideration of external auditors’ views on what matters in the assessment of financial reporting fraud risk. While the traditional fraud triangle model assumes that all fraud factors have the same importance, the auditors in this study perceived management motivations as the most important fraud factor because management motivations are key antecedents to fraud. They also believe that management integrity comes second in terms of importance and that rationalisation of fraud should be viewed as a red flag for low management integrity rather than a separate fraud factor. The traditional fraud triangle did not include fraud perpetrators’ capabilities while the auditors in this study believe that not every person is capable of exploiting existing opportunities for fraud and therefore auditors need to consider fraud perpetrators’ capabilities in the assessment of fraud risk. From the auditors’ perspective, power in the organisation, knowledge of the accounting system, and good understanding of internal control weaknesses are the main traits that enhance perpetrators’ capabilities to commit financial reporting fraud. This study has implications for auditors and audit regulators, and suggest new directions for future research.