Which element of the Fraud Triangle is most directly increased when a company faces high levels of debt, thereby creating financial risk and instability?

• A. Collusion
• B. Opportunity
• C. Pressure (Incentive)
• D. Rationalization

Answer: (C)

Verified step by step guidance

1. Understand the Fraud Triangle, which consists of three elements: Pressure (Incentive), Opportunity, and Rationalization. These elements explain the conditions under which fraud is likely to occur.
2. Recognize that 'Pressure' refers to the financial or personal stress that motivates an individual to commit fraud. This can include factors like high levels of debt, financial instability, or unrealistic performance expectations.
3. Analyze the scenario where a company faces high levels of debt. This creates financial risk and instability, which directly increases the pressure on individuals within the organization to find ways to alleviate the financial strain.
4. Compare the other elements of the Fraud Triangle: 'Opportunity' refers to the ability to commit fraud due to weak internal controls, and 'Rationalization' involves justifying fraudulent behavior. Neither of these is directly tied to the financial risk caused by high debt levels.
5. Conclude that the element most directly increased by high levels of debt and financial instability is 'Pressure (Incentive)', as it creates a strong motivation for individuals to engage in fraudulent activities to resolve financial challenges.