Question

In identifying management fraud exposures, it is useful to think of the fraud exposures, it is useful to think of the fraud exposure triangle, which includes (1) management and directors, (2) organizations and industry, and (3) relationships with others.

Answer 1

Management fraud exposures can be examined through the fraud exposure triangle, which consists of management and directors, organizations and industry, and relationships with others. Effective oversight involves the board of directors, auditing firms, and external investors, but failures in governance, as in Lehman Brothers' case, can lead to significant fraud risk.

Step-by-step explanation:

In identifying management fraud exposures, it is important to understand the framework known as the fraud exposure triangle. This concept posits that there are three critical elements that contribute to fraud risk within an organization: management and directors, organizations and industry, and relationships with others. The first line of defense in corporate governance is typically the board of directors, who are responsible for oversight of top executives. The second line of defense is the auditing firm engaged by the company to assess financial records and ascertain their accuracy. Lastly, a third line of defense comes from external parties such as large shareholders or institutional investors. However, as seen in the case of Lehman Brothers, failures in these areas of oversight can lead to significant mismanagement and the masking of true financial conditions.