The Improbability of Fraud in Accounting for Derivatives: A Case Study on the Boundaries of Financial Reporting Compliance

Abstract

This study responds to recent calls in the literature to examine fraud using detailed case studies, extending knowledge beyond individual incentives and capital market reactions towards a more contextualized understanding of the concept and its social construction. We use an institutional logics perspective to challenge existing assumptions about a universally valid meaning of the central accounting concepts of compliance, fraud, and faithful representation. Presenting the case of the Swedish bank HQ, we show how the interpretation of an accounting standard for option measurement varies because the meaning of compliant practice is socially negotiated across the contradictory institutional logics of markets, financial regulation, and law. The variation of rationales drawn upon in this negotiation makes it difficult to define the boundaries of compliance using a standard across these logics, and thus, to distinguish between fraud and allowable managerial discretion. Faithful representation becomes a complex matter because it can neither be understood as financial statements reflecting a correct value nor as financial statements being prepared in accordance with acceptable practice, as suggested in earlier literature. Instead, faithful representation itself becomes a contextually bound concept.

Keywords: Fraud, Fair Value, Banking Industry, Institutional Logic, Financial Instruments

JEL Classification: M41, G21