Fraud Theories: Explanation of Financial Statement Fraud

12 Pages Posted: 30 Nov 2017

Date Written: November 28, 2017

Abstract

The knowledge of fraud symptoms and causes is an important factor in preventing and detecting fraud. The fraud occurred in three different ways: lack of awareness of acting fraudulently (by error), awareness coupled with rationalization to avoid negative affect or emotion (individual’s intuition support committing fraud), or awareness coupled with reasoning through cost-benefit analysis (individual’s intuition unclear) (Murphy & Dacin, 2011). Previous studies had attributed the financial statements fraud (management fraud) to different reasons. Williams (2012) suggested that the management fraud is motivated by proposed unrealistic goals supported by attractive compensations. The manager works diligently to meets established goals, such maximizing the wealth of shareholders, which may cause them to manipulate the accounting records. Teed (2013) proposed that managers are emboldened to commit a fraud and financial misbehavior due to the lack of controls by the SEC and others and the inability to deter and detect fraud. Frankel (2012) attributed the management fraud to CEO's unethical financial decisions and the complexity of information technology. The financial fraud is also warranted by a desire to achieve goals and objectives, unhealthy competition, fear of losing one's job/bonuses, criminal collaboration, and challenges in meeting financial targets (Omar & Rizuan, 2014).

Fraud is a worldwide, multifaceted phenomenon, whose contextual factors may not fit into a particular framework (Lokanan, 2015). The management fraud, like human behavior, is an intentional, complex, multidimensional act that results from multiple interactive factors (Hutchison, 2013). It can be viewed from eight different theoretical perspectives: systems, conflict, rational choice, social constructivist, social behavioral, psychodynamic, and developmental perspective (Hutchison, 2013). The system perspective views human behavior as mutual interactions among individuals within a linked system, whereas conflict perspective claims that individuals advance their own interests over others exploiting their powers (Hutchison, 2013). The rational choice perspective proposes that individuals behave in a self-interests manner to accomplish goals by maximizing benefits and minimizing costs through social resources trade-off, whereas social constructivist perspective suggests that social interactions shape individual learning (Hutchison, 2013). The social behavioral suggests that environments interactions shape individual behavior, whereas psychodynamic perspective claims that human behavior is motivated by internal innate/forces such as needs, emotion, and mental activity, and developmental perspective claim that human behavior develops in age- graded stages through interaction of biological, psychological, and social factors.

Suggested Citation

Elsayed, Ashraf, Fraud Theories: Explanation of Financial Statement Fraud (November 28, 2017). Available at SSRN: https://ssrn.com/abstract=3078962 or http://dx.doi.org/10.2139/ssrn.3078962

Ashraf Elsayed (Contact Author)

Northcentral University ( email )

Prescott, AZ
United States

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