<p class="Abstract">This paper discusses the origin and problem of
the fault compensation effect. The fault compensation effect is an
underrated common side effect of the fault isolation approaches developed
within the Fault Detection and Isolation (FDI) community. In part, this is
justified due to the relatively low probability of such an effect. On the
other hand, there is a common belief that the inability to isolate faults
due to this effect is the evident drawback of model-based diagnostics. This
paper shows how, and under which conditions, the fault compensation effect
can be identified. In this connection, the necessary and sufficient
conditions for the fault compensation effect are formulated and exemplified
by diagnosing a single buffer tank system in open and closed-loop
arrangements. In this regard, we also show the drawbacks of a bi-valued
residual evaluation for fault isolation. In contrast, we outline the
advantages of a three-valued residual evaluation. This paper also brings a
series of conclusions allowing for a better understanding of the fault
compensation effect. In addition, we show the difference between fault
compensation and fault-masking effects.</p>