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Insights in Financial Fraud Research

Akademische Arbeit 2015 88 Seiten

BWL - Rechnungswesen, Bilanzierung, Steuern

Leseprobe

Table of Contents

Overview of Financial Fraud Research

Research in Financial Fraud

Practical Applications of Financial Fraud Research

The Theories Underlying Financial Fraud Research

Ethics in financial fraud research

Future directions

Addendum: Selected Fraud Cases

Abstract

Insights in Financial Fraud Research is intended to be a brief review of financial fraud research and the trends this type of research is currently taking. There is an examination state of research in this field to date. This book also looks at the practical applications of financial fraud research. In addition there is a review of theory in financial fraud research and the role of ethics in this research field. The future direction of financial fraud research is also reviewed. The final chapter looks at some selected fraud case studies from the archives of the Federal Bureau of Investigation (FBI), the Internal Revenue Service (IRS), and the Security and Exchange Commission.

Overview of Financial Fraud Research

Research in the area of financial fraud has often been something that has morphed from wholly quantitative in nature to purely qualitative in nature. There is a need to approach financial fraud research from a more organized direction and one that can fuse theory with practical application. This text is intended to provide a synthesis of theory, fraud research methods and an ethical prospective on the topic. The text is organized into six primary chapters plus a seventh addendum chapter on actual case studies from the US Federal Bureau of Investigation (FBI), the Security and Exchange Commission (SEC), and the US Internal Revenue Service (IRS) archives. Chapter one provides an overview of what many have called the financial fraud epidemic that has occurred over 15 to 20 years. Chapter two provides a summary of research in financial fraud. Chapter three provides a look at the practical applications of financial fraud research. Chapter four explores theories of financial fraud research. Chapter five examines ethics in financial fraud research. Chapter six addresses future directions for research in financial fraud.

Spicer (2016) asserted that financial fraud has become a global issue from 1995 to the present. There have been many previously high performing enterprises victimized by fraudulent acts of executives and other employees in positions of trust (Bann, 2009). In his seminal work, Donald Cressey (1973) studied the characteristics for people who committed fraud and the common circumstances that lead to their fraudulent acts. The result of Cressey’s (1973) case study was the development of the Fraud Triangle Theory which identifies three aspects contributing to the commission of fraud (a) perceived pressure, (b) perceived opportunity, and (c) rationalization. While the Fraud Triangle Theory has provided a sound basis for studying financial fraud, various factors have been identified that may affect how useful this theory is in understanding fraud (Murphy & Dacin, 2011; Dorminey, Fleming, Kranacher & Riley, 2010, 2012). The additional factors affecting the commission of financial fraud include the complex psychological factors of those who commit the fraud act (Chang & Chong, 2010; Dorminey, Fleming, Kranacher & Riley, 2010, 2012; Murphy & Dacin, 2011), infrastructure issues such as a lack of internal controls (Doinea & Lapadat, 2012), and the complexity of rationalization (Rabl & Kuhlmann, 2009). The problem that these factors create in the application of the fraud triangle theory (Cressey, 1973) can have a profound effect on the detection and deterrence of financial fraud (Dorminey et al., 2010, 2012). Given the same pressure and opportunity some people will commit fraud and others will not commit fraud (Spicer, 2016).

Spicer (2016) further asserted that the significance of the factors that might affect Cressey’s (1973) fraud triangle theory should be researched. These factors include organizational circumstances, personal characteristics of those who commit the act of fraud, and weaknesses in internal control infrastructure (Murphy & Dacin, 2011; Dorminey et al., 2010, 2012).

Factors that might affect the commission of fraud may vary in each documented case but there are certain commonalities found among these factors (Spicer, 2016). Financial circumstances of the company defrauded might be a motivator for the commission of fraud (Cecchini, Aytug, Koehler & Pathak, 2010; Sudjianto, Yuan, Kern, Nair, Zhang & Cela-Diaz, 2010). Psychological factors of those who commit fraud have an effect on the commission of fraud (Murphy & Dacin, 2011; Dorminey et al., 2010, 2012). The variability of rationalization given different situational circumstances can have an effect on the commission of fraud (Chang & Chong, 2010; Cohen, Ding, Lesage, & Stolowy, 2010; Rabl & Kuhlman, 2009). Understanding the infrastructure issues of the company such as the presence or lack of internal control mechanisms need to be studied further (Hollister & Shoaf, 2010; Kaplan, Pope, Samuels, 2011).

The consequences of financial fraud can be far reaching for the defrauded company and its stakeholders such as employees, owners, and suppliers (Spicer, 2016). According to Wells (2011) the Global Fraud Survey of 2009 estimated the cost to businesses of fraud and financial abuse is five % of annual revenue. The global dollar loss due to fraud amount is approximately 2.7 trillion dollars annually (US Department of Agriculture, 2013). US businesses lose approximately 710 billion dollars annually based on a GDP for 2013 of 14.444 trillion dollars (US Department of Agriculture, 2013). It is clear that financial fraud is major problem that needs to be studied more deeply to understand the reasons for these staggering economic loses Spicer, 2016).

There is a need for more explanatory case study research to understand the factors related to the commission of fraud and to enhance the understanding of organizational factors, personal characteristics and infrastructure on the circumstances that lead to the commission of financial fraud, which are still not widely understood (Spicer, 2016). There is a need to be address contingency factors such as financial position, organizational infrastructure, and psychological profiles of individuals who commit fraud that may contribute to internal financial pressure to perform, internal control weaknesses, and the personal characteristics of the individuals who have committed acts of financial fraud (Dorminey et al., 2010, 2012). These personal characteristics include (a) the presence or absence of narcissistic tendencies, (b) the need to engage in risk taking, and (c) the ends justify the means behavior pattern (Dorminey et al., 2010, 2012). Such a case study needs to use data collected from credible government agencies responsible for investigating financial fraud. The information from these agencies should include legal proceedings of financial fraud cases including transcripts of interviews, bank records, surveillance testimony and physical evidence of financial fraud (Spicer, 2016).

Background

We will first consider what many have called the bedrock of financial fraud research, namely the Fraud Triangle (Cressey, 1973). The Fraud Triangle does not fully account for contributory contingencies that affect the commission of fraud. Contingency factors examined in the research include personal integrity and situational dynamics (Dorminey, Fleming, Kranacher & Riley, 2010). Dorminey et al (2010) examined factors that were found that modified or totally negated some aspects of the fraud triangle (Spicer, 2016).

The fraud triangle formulated by Cressey (1973) was from the perspective of the person committing the fraud (Dorminey et al., 2010). Two of the attributes of the fraud triangle according to Dorminey et al. 2010 were not observable, namely pressure and rationalization. Dorminey et al (2010) further concluded that Cressey’s (1973) fraud triangle does not explain the behavior of pathological perpetrators of fraud. Various extensions to the fraud triangle are proposed by Dorminey et al (2010) such as extent the triangle to a diamond by adding a fourth attribute of capability which observable while perceived pressure and rationalization are not. Perceived pressure can also be more readily understood by applying motivations such as the MICE concept consisting of money, ideology, coercion, and ego (Dorminey et al., 2010). Cressey’s concept of perceived opportunity fails to consider collusion among employees (Dorminey et al., 2010). Rationalization which is unobservable can be more readily examined by using the fraud scale which replaces rationalization with integrity. Dorminey et al., 2010 propose the total reconfiguring of the fraud triangle by changing it to a fraud diamond, using both MICE and the fraud scale to improve its overall effectiveness in fraud prevention programs. Figure 1 below shows the summary of Dorminey et al., 2010 work on ways to remake Cressey’s fraud triangle into a much more effective antifraud tool. Dorminey et al., (2010) focus the weaknesses of Cressey’s Fraud Triangle concluding that neither perceived pressure or rationalization can be observed which complicates antifraud efforts.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1. Summary of Fraud Triangle and Model Extensions

Adapted from Beyond the Fraud Triangle by J. Dorminey, A.S Fleming, M. Kranacher & R.A. Riley Jr. 2010 page 18 The CPA Journal 80 (7)

Dorminey, Fleming, Kranacher, and Riley (2012) in a follow up to their 2010 article address various aspects of the fraud triangle by applying a fraud scale to rationalization this which introduced personal characteristics of the perpetrators such as integrity and self-image. Dorminey et.al. (2012) found that the situational dynamics of the business enterprise might also affect the opportunity side of the fraud triangle, as well as how money, ideology, ego or coercion modified the pressure side of the fraud triangle.

Murphy and Dacin (2011) developed a framework that can be used to identify three psychological pathways to the commission of financial fraud. According to Murphy and Dacin (2011) the framework they developed was supported by multiple theories such as moral intuition, disengagement, and negative effect. The framework was developed to aid in research on ethical decision making and to increase the understanding of fraud psychology (Murphy & Dacin, 2011). The framework developed by Murphy and Dacin (2011) was based upon Cressey’s theory of the fraud triangle (1973) and AU 316, the auditing guideline issued by the Public Company Accounting Oversight Board (PCAOB), which must be used by auditors to detect and measure risk.

Another contingency factor influencing financial fraud examined in the research literature included inter-corporate relationships (Doinea & Lapadat, 2012). Mazumder and Ahmad investigated the 2007 to 2009 financial crisis from the viewpoint of professors of finance and accounting and practicing accountants and financial managers. Mazumder and Ahmad (2010) concluded that poorly managed financial products, laxity in regulatory oversight, the existence of a ‘shadow banking system’ and stock market volatility worsened the 2007 to 2009 financial crisis

An interesting study in the dynamics of whistleblowing illustrates how complex the contingency factors affecting the commission of financial fraud have become. Robinson, Robertson and Curtis (2012) researched the effect of contextual and attributes of wrongdoing as they related to the willingness of an organizational whistleblower to come forward. Robinson et al (2012) believed that legislation passed to control the incidence of financial fraud and protect whistleblowers, such as the Dodd-Frank Act and the Sarbanes-Oxley Act, would have led to an increased incidence of fraud whistleblowing. Robinson et al (2012) concluded that the relative unwillingness of employees in an organization to have indicated that they would have reported the fraud incident brought into question the effectiveness of the Sarbanes-Oxley Act mandated confidential hotlines. Robinson et al (2012) also concluded that the financial incentives offered in the Dodd- Frank Act for reporting a fraud incident that had occurred would ultimately result in an increased incidence of reported financial statement fraud.

The research literature has extensive research on the psychological factors that affect the commission of financial fraud (Spicer, 2016). Chang and Chong (2010) examined the near explosion of email based financial scams and fraud and postulated possible psychological influences that tend to make some people more prone to falling victim to those types of fraud. This fraud as postulated by Chang and Chong (2010) was attributed to the proliferation of the Internet and a near epidemic of e-mail scams.

Research on other psychological factors that have influenced the commission of financial fraud have examined the personality traits of managers who committed acts of fraud (Spicer, 2016). Cohen et al (2010) integrated Cressey’s fraud triangle theory (1973) with the theory of planned behavior which led them to the conclusion that individual manager personality traits were a major contributing factor in the commission of these fraud cases. The personal characteristics of fraudulent managers was researched further by Boddy (2011) who postulated that the sharp increase in financial fraud cases could be attributed to managers possessing psychopathic tendencies.

Research on the detection of financial fraud by auditors (Jaffar, Haron, Iskandar & Salleh, 2011) examined the moderating effects of personality on the ability of external auditors to detect the occurrence of fraud in financial statements. Jaffar et al (2011) concluded that personality did not have an effect on the auditor’s ability to detect fraud or the likelihood of fraud. Kaplan, Pope, and Samuels (2011) conducted an experiment testing the effect of inquiry on auditor type and reporting intentions for fraud. Kaplan et al (2011) concluded that auditors that inquire about acts of fraud are more likely have acts of fraud reported to them and that internal auditors were more likely to have those acts of fraud reported to them by employees.

Other research on the phenomenon of financial fraud has focused on the psychological dynamics of rationalization (Spicer, 2016). Rabl and Kuhlmann (2009) researched the fraud triangle theory rationalization phase in an attempt to determine if such rationalization occurs before or after the act of fraud. Rabl and Kuhlmann (2009) found that the rationalization that occurred after the act of fraud was focused upon the positive intentions of that fraud not the ‘person’ driven determinants of fraud such as need or greed which are considered before the act of fraud.

References

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Chang, J.S. & Chong, M. D. (2010). Psychological influences in e-mail fraud. Journal of Financial Crime 17 (3), 337-350. (5)

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Cressey, D.R. (1973). Other people’s money: A study in the social psychology of embezzlement. Montclair, New Jersey. Patterson Smith. (2)

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Dorminey, J. Fleming, A.S., Kranacher, M. & Riley, R.A. Jr. (2010). Beyond the fraud triangle: Enhancing deterrence of economic crimes. CPA Journal 80. (7) 17-23.

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Hollister, J. & Shoaf, V. (2010). An international investigation of conservative bias and accounting practices. International Business & Economics Research Journal 9 (7). 91-105.

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Mazumder, M. L. & Ahmad, N. (2010). Greed, financial innovation or laxity of regulation? A close look into the 2007-2009 financial crisis and stock market volatility. Studies in Economics and Finance 27 (2), 110-134.

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John Wiley and Sons, Inc.

Research in Financial Fraud

The five peer reviewed articles that will be analyzed for this research are Champion and Wilson (2010) investigated the influence of contingency factors on the validation of problem- structuring methods; Dorminaey, Fleming, Kranacher and Riley (2012) studied the evolution of fraud theory; Murphy and Dacin (2011) examined the psychological pathways to fraud; Rabl and Kuhlmann (2009) investigated rationalization in corrupt organizations; Zona, Minoja, and Coda (2013) researched the antecedents of corporate fraud scandals. Cressey (1973) is presented here as the seminal study in financial fraud. These articles will be analyzed in part one in the areas of (a) the research problem, question, or hypotheses used, (b) the research purpose, (c) the research design used, (d) threats to research validity, and (e) the research findings. Each of these peer- reviewed articles, which are central to the proposed dissertation research on the effect of contingency factors and the commission of financial fraud, add to the theory of the antecedents of financial fraud. The significance of the findings of each of these research articles will be evaluated in part one, as well. Part two presents a literature review of the five articles cited above. Part three will present research questions developed for the proposed dissertation study.

Part One: Critical review of Five Empirical Financial Fraud Studies

Champion and Wilson (2010) researched the influence of contingency factors on validating problem-structuring methods used in operational-research. The research problem focused on by Champion and Wilson (2010) were contingency factors related to the nature and complexity of the decision, the desired outcome, and the experience of the stakeholders. Champion and Wilson (2010) proposed that the research literature of operational research had emphasized hard decision support models (DCM) and had paid too little attention to validating soft (DCM) models. The research design employed by Champion and Wilson (2010) was the examination of public service organizations, business organizations and broader community settings.

Champion and Wilson (2010) investigated the (a) level of risk/importance of decision, (b) complexity of system/problem being modeled, (c) significance of system to decision, (d) contentiousness of the decision, and (e) type of outcome sought. The effect of people on problem solving models, according the Champion and Wilson (2010) depended on the (a) system builder competence (b) politics and personalities of those involved, and (c) experience of the stakeholders. These various contingency factors affect complex problem solving models and also demonstrate the importance of understanding the affect various non-systematic factors may have on complex phenomenon (Champion and Wilson, 2010) and can provide a theoretical framework for investigating contingency factors that affect financial fraud.

The validity of the study completed by Champion and Wilson (2010) is based on a process of intense literature review on the field of operational research and the use of retroductive reasoning (Harlow, 2009), which is the integration of both inductive and deductive reasoning processes. Champion and Wilson integrated the prevailing theory with their research, creating an empirical wholeness that Gelso (2006) stated as essential to good research. Champion and Wilson (2010) offer a good example of well-thought-out problem based research as advocated by Ellis and Levy (2008). Champion and Wilson (2010) demonstrated the use of reductionism, instrumentalism and realism, which Stam (2000) posited as the building blocks of theory and used models to construct their research answers (Stam, 2010). Champion and Wilson (2010) meet the four basic criteria of theory; (a) definitions of concepts, (b) limitations of domains, (c) relationship-building, and (d) the ability to make predictions (Wacker, 1998).

Dorminey, Fleming, Kranacher and Riley (2012) researched the Cressey’s (1973) fraud triangle as the basis of understanding the antecedents of fraud especially contingency factors that modified aspects of the fraud triangle theory. Dorminaey et al., (2012) postulate the Cressey’s (1973) fraud triangle should be used as only one component in understanding this complex behavioral phenomenon. The research questions formulated by Dorminaey et al., (2012) on the contingencies that affect the occurrence of financial fraud were based on human psychological dynamics, organizational dynamics, and ignorance. From this Dorminaey et al., (2012) developed a fraud scale that modified rationalization by the introduction of the probability someone might have rationalized fraud based on personal characteristics such as personal integrity and situational dynamics such as pressure, opportunity and organizational conditions. Dorminey et al., (2012) also examined how factors such as money, ideology, coercion, and ego modified the financial pressure leg of the fraud triangle and the fraudster’s capability to commit fraud, as well. The impact of predators on the commission of financial fraud was examined by Dorminaey et al., (2012), and they concluded that such predators would have had a criminal mindset that negated the need for financial pressure and rendered rationalization totally moot. Dorminey et al., (2012) found there were situations that have shown some fraud was committed by ‘accidental-fraudsters’ who blundered into the committed fraud act and engaged in a post event cover-up of the fraud.

Dorminaey et al., (2012) synthesized a review of prevailing research literature using Harlow’s (2009) retroductive reasoning and existing theory to establish the validity of their research and provided a theoretical reference for further study into financial fraud. The research conducted by Dorminaey et al (2012) is positivist in nature and modernist in outlook (Stam, 2000). Since the research conducted by Dorminaey et al., (2012) is essentially a synthesis of the prevailing research literature it provides a good review of the evolution of fraud theory as the articles title implies it overstates theory at the expense of actual research and is not a good empirical mix as Gelso (2006) recommended and this research is not problem-based as Ellis and Levy recommended (2008). The fraud scale proposed by Dorminaey et al (2012) is a model as reported by Stam (2010). The research by Dorminaey et al (2012) does meet Wacker’s (1998) criteria of theory since Dorminaey et al. research does demonstrate (a) definitions of concepts, (b) limitations of domains, (c) relationship-building, and (d) the ability to make predictions.

Murphy and Dacin (2011) developed a framework to be used to identify three psychological pathways to the commission of fraud. According to Murphy and Dacin (2011), the framework they developed was facilitated by multiple theories such as moral-intuition, disengagement, and negative effect. The framework was developed to aid in research on ethical decision-making and to increase the understanding of fraud-psychology (Murphy & Dacin, 2011). Murphy and Dacin (2011) based their research on the theory of the fraud triangle and AU 316, the auditing guidelines issued by the Public Company Accounting Oversight Board (PCAOB), which must be used by auditors to detect and measure risk.

Murphy and Dacin (2011) examined three pathways fraud as their research problem using Cressey’s (1973) fraud triangle theory. Murphy and Dacin postulated that three psychological-pathways to fraud nestled within rationalization; (a) a lack of awareness, (b) personal intuition, and (c) ego driven reasoning. These pathways have significance in fraud prevention as each has a different psychological mechanism. Murphy and Dacin (2011) developed a framework that they labeled the psychological pathways to fraud and claimed that this framework (a) would identify situational factors that have led individuals to unwittingly commit fraud, (b) would provide a better understanding of how rationalization has been used by individuals to reduce negative affect, and (c) has provided insight into other methods employed by individuals to reduce negative affect. The proposed benefits of the framework developed by Murphy and Dacin (2011) can be used as a method to prevent fraud. Much of what Murphy and Dacin (2011) presented was integrated with the theory of negative affect on feelings.

Murphy and Dacin (2011) provided an interesting synthesis of prevailing theory and used retroduction as suggested by Harlow (2009) in examining the rationalization side of the Cressey’s (1973) fraud triangle. Murphy and Dacin (2011) problem is centered on the vagueness of Cressey’s (1973) rationalization postulate and do meet Ellis and Levy’s (2008) general guidelines for a well-articulated problem. The framework developed by Murphy and Dacin (2011) is a model as defined by Stam (Stam, 2010). The article by Murphy and Dacin derives its validity based on a thorough integration of research literature in the field by is almost totally focused on theory and does not provide a clear empirical basis as suggested by Gelso (2006). Murphy and Dacin (2011) research is positivist (Stam, 2000) and does meet Wacker’s (1998) criteria of theory (a) definitions of concepts, (b) limitations of domains, (c) relationship-building, and (d) the ability to make predictions.

Rabl and Kuhlmann (2009) researched the fraud triangle theory rationalization phase in an attempt to determine if such rationalization occurs before or after the act of fraud. Rabl and Kuhlmann (2009) used a business simulation game that provided the participants, both university and high school aged students, the opportunity to commit fraud to score well in the game. Despite the prevailing literature in the field of fraud stating that rationalization occurs before the event, Rabl and Kuhlmann (2009) found that rationalization occurred after the event. Rabl and Kuhlmann (2009) found that the rationalization that occurred after the act of fraud was focused upon the positive intentions of that fraud not the ‘person’ driven determinants of fraud such as need or greed which are considered before the act of fraud. This would imply that the act of fraud may be committed either under a sense of extreme pressure or in the case where opportunity knows no bounds. Rabl and Kuhlmann (2009) concluded that the degree of perceived behavioral control determined the type of rationalization strategy employed not the other way around and stated that the theories underlying rationalization based on person related determinants of fraud, which are supposed to be culturally learned and reinforced, are not relevant to the commission of fraud. Rabl and Kuhlmann (2009) stated that a person will commit fraud because they see no other means to complete a task.

Rabl and Kuhlmann (2009) used an empirical testing format in a study that integrated theory and research well (Gelso, 2006) and used a clearly articulated problem statement as suggested by Ellis and Levy (2008). Rabl and Kuhlman (2009) used Harlow’s (2009) retroductive reasoning in there positivist oriented research (Stam, 2000) , but used an empirical hypotheses testing format , not a model as suggested by Stam (2010). They did meet Wacker’s (1998) criteria of theory (a) definitions of concepts, (b) limitations of domains, (c) relationship-building, and (d) the ability to make predictions. This study’s validity is derived from its quantitative, empirical research design.

Zona, Minoja, and Coda (2013) examined the complex relationship between personality, corporate strategy, and stakeholder cohesion. Managerial fraud studies in the past have focused on the causes of fraudulent behavior in isolation from corporate strategy and the unique personality traits of the firm’s Chief Executive Officer (Zona et al., 2013). This study was based upon a case study review of the Banca Popolare di Lodi case and demonstrates the use of inductive reasoning (Harlow, 2009) in correlating the complex interactions of CEO personality, corporate strategy and stakeholder perception of success of this Italian Bank and followed the Harlow’s (2009) recommendations of case study base research. The interplay of factors like CEO domineering personalities, the need for stakeholder buy-in and the dynamics of corporate strategy ultimately led to the over extension of the bank’s financial position and its resulting collapse. This study is a pure qualitative review that does not use an empirical testing format but examines how factors that might be said to be bigger than the individual or the organization to research the question of how corporate fraud is committed in a fluid, highly complex business environment in which events shape the behavior of the players and the players in turn shape events which are perceived in ways that may differ from stakeholder to stakeholder. The approach used by Zona et al (2013 is post positivist (Stam, 2000) and has a clearly stated research problem as advocated by Ellis and Levy (2008). Zona et al (2013) did meet Wacker’s (1998) criteria of theory (a) definitions of concepts, (b) limitations of domains, (c) relationship-building, and (d) the ability to make predictions. Zona et al., (20130 does provide useful insight into how complex the phenomenon of financial fraud is in a modern corporation.

Part Two: Literature Review of Five Empirical Financial Fraud Studies

There are research articles published in peer reviewed academic journals that set the parameters of the proposed research on contingency factors that affect the commission of financial fraud. The research on the possible influences on the commission of financial fraud can be grouped into two broad categories internal/external contingency factors and psychological factors. Cressey (1973) wrote the first comprehensive work on embezzlement studied from a social psychology perspective. Cressey looked at those aspects of a person’s environment that could be called motivating factors. Cressey (1973) theorized that people that commit fraud, such as embezzlement, are faced with a problem that they do not feel they can share with anyone, the opportunity to resolve that problem with their own actions, and the ability to absolve any personal blame. Cressey (1973) studied inmates in the Illinois correctional system from 1947 to 1950. These inmates were serving time for embezzlement, were all male, and generally middle aged. Cressey (1973) based his theories on interviews with these inmates in trying to ascertain why they embezzled the funds from their employers. Cressey (1973) concluded that a need for money (pressure), the ability to obtain the money by embezzling (opportunity) and the belief that such actions were justified on the basis that the money would be restored in the future or that the embezzler was actually entitled to the funds (rationalization) constituted the social-psychological factors that constituted fraud. Cressey’s (1973) fraud triangle theory has been the foundation of much of the research in fraud since its introduction. Nonetheless, as useful a construct as the fraud triangle theory has proven to be it is affected by other factors that may radically change how that theory actually works in the corporate environment. These other factors have been generally labeled contingency factors.

Contingency factors in general may affect human behavior in many different environments and are not the exclusive domain of research into financial fraud. Contingency factors have usually been studied from a problem-solving perspective in an operational context but not from a human dynamics viewpoint (Champion & Wilson, 2010). Dorminaey, Fleming, Kranacher, and Riley (2012) have focused on the human contingencies in financial fraud research as have Murphy and Dacin (2011), and Rabl and Kuhlmann (2009).

Champion and Wilson (2010) conducted research on the influence of contingency factors in validating problem-structuring methods used in operational-research. According to Champion and Wilson (2010) most of the research literature on validating decision support systems was focused on ‘problem-solving’ operational research. Champion and Wilson (2010) placed their research focus on validating problem structuring methods for soft operational research. Validation in problem structuring methodologies, such as inquiries of participants in the problem structuring methodologies process, was previously ignored in soft operational research (Champion & Wilson, 2010). Champion and Wilson (2010) examined validation in soft operational research where they found that problem structuring in highly complex organizational settings demanded a holistic methodology used for validation founded in a rigorous theoretical base. Champion and Wilson (2010) examined public service organizations, business organizations and broader community settings and developed a contingency theory for validating problem structuring methods (PSM). According to Champion and Wilson (2010) contingency factors that affect PSM were divided into decision and outcome and people. Factors that affected decision and outcome according to Champion and Wilson (2010) included the (a) level of risk/importance of decision, (b) complexity of system/problem being modeled, (c) significance of system to decision, (d) contentiousness of the decision, and (e) type of outcome sought. Champion and Wilson (2010) found the effect of people on PSM depended on (a) system builder competence (b) politics and personalities of those involved, and (c) experience of stakeholders.

Contingency factors examined in the research include personal integrity and situational dynamics (Dorminaey et al., 2012). Dorminey et al., (2012) examined factors that were found that modified or totally negated some aspects of the fraud triangle. Dorminey et al., (2012) applied the fraud scale in their examination of the rationalization, one of the legs of the fraud triangle. The fraud scale presented by Dorminey et al., (2012) modified rationalization by the introduction of the probability someone might have rationalized fraud based on personal characteristics such as personal integrity and situational dynamics and how money, ideology, coercion, and ego modified the financial pressure leg of the fraud triangle.

Murphy and Dacin (2011) developed a framework to be used to identify three psychological pathways to the commission of fraud. According to Murphy and Dacin (2011), the framework they developed was facilitated by multiple theories such as moral-intuition, disengagement, and negative-effect. The framework was developed to aid in research on ethical decision-making and to increase the understanding of fraud- psychology (Murphy & Dacin, 2011). The framework developed by Murphy and Dacin (2011) was based upon the theory of the fraud triangle and AU 316, the auditing guideline issued by the Public Company Accounting Oversight Board (PCAOB), which must be used by auditors to detect and measure risk. According to Murphy and Dacin (2011), the fraud triangle theory was developed with three aspects to be used to better understand fraud (a) perceived pressure, (b) perceived opportunity, and (c) rationalization. Murphy and Dacin postulated that three psychological pathways to fraud nestled within rationalization, (a) lack of awareness, (b) intuition, and (c) reasoning. The three pathways presented by Murphy and Dacin (2011) have significance in fraud prevention as each has a different psychological mechanism. Murphy and Dacin (2011) claimed that the framework developed by them (a) would identify situational factors that have led individuals to unwittingly commit fraud, (b) would provide a better understanding of how rationalization has been used by individuals to reduce negative affect, and (c) has provided insight into other methods employed by individuals to reduce negative affect. The proposed benefits of the framework developed by Murphy and Dacin (2011) can be used as a method to prevent fraud. Much of what Murphy and Dacin (2011) presented was integrated with the theory of negative affect on feelings. Individuals raised to value ethical behavior would have sought to avoid any feelings that their past actions were wrong or fraudulent according to Murphy and Dacin (2011).

Rabl and Kuhlmann (2009) researched the rationalization phase of the fraud triangle by using a simulation game to determine if the act of rationalization occurred before or after the act of fraud. Rabl and Kuhlmann (2009) found that rationalization occurred after the act of fraud was committed and was focused upon the positive intentions of that fraud not the ‘person’ driven determinants of fraud such as need or greed which are considered before the act of fraud. This would imply that the act of fraud may be committed either under a sense of extreme pressure or in the case where opportunity knows no bounds. Once the act of fraud is committed then the individual will seek to rationalize his or her actions, after the fact. Rabl and Kuhlmann (2009) concluded that the degree of perceived behavioral control determined the type of rationalization strategy employed not the other way around. Rabl and Kuhlmann (2009) stated that the theories underlying rationalization based on person related determinants of fraud, which are supposed to be culturally learned and reinforced, are not relevant to the commission of fraud which they concluded was driven by the specific situation than by any precursor to that situation. Rabl and Kuhlmann (2009) stated that a person will commit fraud because they see no other means to complete a task or in this study to win a business simulation game.

Zona, Minoja, and Coda (2013) examined the complex relationship between personality, corporate strategy, and stakeholder cohesion. Most of the previous research about the causes of fraudulent behavior focused the individual executive as a criminal but failed to examine the impact of corporate strategy and the unique personality traits of the firm’s Chief Executive Officer on the fraudulent behavior (Zona et al., 2013). This study presented by Zona et al (2013 was based upon a case study of the Banca Popolare di Lodi in which the overriding personality traits of the Bank’s CEO drove the commission for financial fraud in an attempt to acquire another Italian bank in the face of intense completion. Zona et al (2013) used what they claimed was inductive reasoning in their review of the Bank’s fraud case. The senior management of the Lodi bank was so intent on beating a rival for the acquisition of another bank that they engaged in an act of active fraud by presenting misleading financial data to entice the other bank to agree to the acquisition (Zona et al., 2013). The corporate strategy of the Lodi Bank was heavily built on the need to make significant acquisitions to meet desired growth goals and the various stakeholder groups of the Lodi Bank were invested in a cult of personality in the CEO whose control of the financial statement of the Lodi Bank was absolute. Stakeholder expectations were that the bank would continue to enjoy good results but those expectations were based upon the false financial data presented by the bank’s senior management.

Part Three: The Unknowns of Financial Fraud and Proposed Research Questions

The research questions that should be examined in any qualitative research on financial fraud is what are the circumstances of the financial fraud committed in the case studies and what contingency factors affected the behavior of the fraudster examined from the perspective of (a) perceived pressure, (b) perceived opportunity, and (c) rationalization.

The purpose of this research should be to examine the impact of contingency factors such as (a) internal and external pressures, (b) personality characteristics of those who committed the act of fraud, (c) internal control weaknesses, and (d) corporate dynamics that may affect the commission of financial fraud (Dorminaey et al., 2012; Murphy & Dacin, 2011). Case studies can be used from known corporate financial fraud crimes published in the FBI and IRS websites, as well as case studies from peer reviewed academic journals. Harlow (2009) stated that case study based research can be used to test or develop theory. The proposed research question is intended to provide insight into the effectiveness of the fraud triangle theory in delineating why some people behave differently even when subjected to the same internal and external circumstances. The value of case study based research is that if the research is well grounded in known theory it can be used to make theoretical contributions to a body of knowledge (Harlow, 2009). The principal weakness of case study based research is it is hard to quantify and can be highly subjective (Stam, 2000, 2010). The proposed research will be a qualitative case study review intended to identify factors that affect human fraudulent behavior. The findings from a case study analysis should be categorized by type and nature of the factors found such as (a) degree of internal and external pressures present, (b) personality characteristics of those who committed the act of fraud, (c) internal control weaknesses, and (d) corporate dynamics. Percentages of common characteristics identified will be examined against existing theory in the field of financial fraud providing a straight forward quantitative summary. The trustworthiness of the sources of the cases studies, the IRS, FBI websites and peer reviewed academic journals will assure the conclusions are based on well recognized and reliable sources. The data collected from the case studies will be categorized according to characteristics of fraudulent behavior identified in peer reviewed academic journals. The conclusions reached from the case study analysis should be well founded in existing theory thus assuring quality. The case study approach is most appropriate to study in that it will allow a comparison across different industries and will provide context and insight that will serve to answer the research question and contribute to the study of financial fraud. The data analysis applied will be transparent and allow for conclusions that can be broadly generalized.

The proposed qualitative research question, as drafted, should be consistent with case observations of financial fraud and existing research literature in this field (Dorminaey, et al., 2012; Murphy & Dacin. 2011). The questions formulated for any study may provide context and meaning for the financial data being studied from a forensic accounting perspective (Dorminaey, et al., 2012; Murphy & Dacin. 2011). . Based upon the research literature on financial fraud, the question above does address the perceptions of people who are involved in the actual act of fraud and their perceptions of how and why that fraud occurred (Dorminaey, et al., 2012; Murphy & Dacin. 2011).

The Question is intended to determine to what extent financial problems at the company victimized by the fraud created added pressure to commit fraud and to what extent that added pressure may have shaped the perception of opportunity and influenced rationalization.

Recommendations

Research in the field financial fraud focused on the antecedents of financial fraud has been an apparent need for some time. Cressey’s (1973) fraud triangle theory is a useful construct for use in attempting to understand why financial fraud occurs but this theory does not take into consideration various contingency factors that may modify or even negate some aspects of this seminal theory. More research, especially on the rationalization of acts of fraud is recommended to further the practice of fraud detection and deterrence.

Conclusions

Problem focused research is the cornerstone of good science (Gelso, 2006). The research could be quantitative or qualitative, positivist or post-positivist (Stam, 2000; 2010). Good research adds to theory and should be consistent with the research design chosen (Harlow, 2009). Good theory should meet four criteria (a) definitions of concepts, (b) limitations of domains, (c) relationship-building, and (d) the ability to make predictions (Wacker, 1998).

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Details

Seiten
88
Jahr
2015
ISBN (eBook)
9783668866683
ISBN (Buch)
9783668866690
Sprache
Englisch
Katalognummer
v451206
Institution / Hochschule
Northcentral University
Note
1
Schlagworte
insights financial fraud research

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Titel: Insights in Financial Fraud Research