Fraud Triangle / Fraud Diamond.

Corporate fraud is a major concern that can have a devastating impact on an organization's revenue, reputation and even continuity. Therefore, companies must take vigilant measures to address, combat and mitigate the risk of fraud in their organization.

Good governance practices can significantly impact an organization's ability to reduce the risk of fraud and corruption. Having clear, written policies, procedures and protocols help ensure that all individuals within an organization understand what is expected of them with regard to financial reporting and compliance.

Good governance practices can prevent fraudulent or corrupt activities from occurring in the first place by clearly delineating roles, creating vigilant oversight and eliminating opportunities for abuse. Furthermore, such practices provide transparency and accountability within the organization. They also help catch any suspicious or irregular activity before it becomes costly or harmful.

Effective corporate governance also involves separating the roles of the CEO and chairman of the board of directors. This helps ensure checks and balances are in place and the CEO doesn't have too much power.

In addition, corporate governance requires companies to have robust internal controls and systems to detect and prevent fraudulent and corrupt activities. This includes having clear financial reporting procedures and regular audits to ensure financial statements are accurate and transparent.

Finally, corporate governance requires companies to be accountable and transparent in their operations. This includes disclosing potential conflicts of interest and ensuring that stakeholders, including shareholders, customers and employees, are treated fairly.

Fraud Triangle / Fraud Diamond.

The fraud triangle is a framework commonly used in auditing to explain the reason behind an individual's decision to commit fraud.

The fraud triangle describes three components that contribute to an increased risk of fraud:

(1)??opportunity

?(2)??encouragement and

?(3)??rationalization.

?What is fraud?

? The fraud triangle is used to explain the reason behind a fraud. However, what exactly is fraud?

????????????Fraud is any cunning, deceitful act, in bad faith, with the intention of harming or deceiving others, or of not fulfilling a certain duty. In other words, fraud is a deceptive activity used to gain advantage or generate illegal profit. Furthermore, the illegal act benefits the fraudster and harms other parties involved.

For example, an employee who pockets money from the company's cashier is committing fraud.

?Below, we discuss the components of the fraud triangle.

The Fraud Triangle – Opportunity

Opportunity refers to circumstances that allow fraud to occur. In the fraud triangle, it is the only component over which a company has complete control.

Examples that provide opportunities to commit fraud include:

• Poor internal controls

? Internal controls are processes and procedures implemented to ensure the integrity of accounting and financial information.

Deficiency of internal control occurs when the designed and implemented internal control fails, in a timely manner, to prevent, detect and/or correct misstatements in the financial statements, or there is no such control

Examples of deficient internal controls, such as the lack of separation of duties, lack of supervision and lack of documentation of processes, give rise to opportunities for fraud.

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• Tone at the top

? Tone at the top refers to senior management and the board's commitment to being ethical, showing integrity and being honest – poor tone from key members results in a company more susceptible to fraud.

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• Inadequate accounting policies

? Accounting policies refer to how financial statement items are recorded. Bad (inappropriate) accounting policies can provide an opportunity for employees to manipulate numbers.

The Fraud Triangle – Incentive

? Incentive, alternatively called pressure, refers to an employee's mindset towards committing fraud. Examples of things that provide incentives to commit fraud include:

1. ?Bonuses based on a financial metric

? Common financial metrics used to evaluate performanceof an employee are revenues and net profit.

Bonuses based on a financial metric create pressure for employees not to meet goals, which in turn can cause them to commit fraud to achieve the goal.

2.?Investor and analyst expectations

? The need to meet or exceed investor and analyst expectations to ensure that stock prices are maintained or increased can create pressure to commit fraud.

3.Personal incentives

? Personal incentives can include wanting to earn more money, the need to pay personal bills, a gambling addiction, etc.

Fraud Triangle - Rationalization

? Rationalization refers to an individual's justification for committing fraud.

?Examples of common rationalizations that fraudsters use include:

• ? "They treated me wrong"

? An individual may be spiteful of their manager or employer and believe that committing fraud is a way to get revenge.

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• "Top management is doing it too"

Bad tone at the top can cause an individual to follow in the footsteps of those higher up in the corporate hierarchy.

• "There is no other solution"

? An individual may believe that they can lose everything (for example, lose a job) unless they commit fraud.

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According to the new diamond theory of fraud - even if a fraudster has a strong motive (pressure), opportunity and justification (rationalization) there are chances that the fraudster will not commit fraud if there is no "capacity".

? Capacity here means – Fraudster's position in that organization, – intelligence and certain knowledge needed to commit fraud, coerce others into fraudulent activity, etc.

Corporate fraud is a major concern that can have a devastating impact on an organization's revenue, reputation and even continuity. Therefore, companies must take vigilant measures to address, combat and mitigate the risk of fraud in their organization.

Rio de Janeiro, June 10, 2023 .

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JO?O GALARANI

COMPLIANCE OFFICER, AML / CFT, LGPD.