This paper incorporates important organizational theory into the fraud literature by reporting the presence of an instrumental climate when fraud is being perpetrated within an organization. Internal auditors and those charged with governance could adapt this climate measure as a red flag for potential fraud. 

Murphy, P. R. and C. Free. 2016. Broadening the Fraud Triangle: Instrumental Climate and Fraud. Behavioral Research in Accounting 28 (1): 41-56.

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This paper presents a fraud-detection tool developed based on textual analysis of the MD&A sections in public companies’ annual and quarterly reports. This tool correctly classifies reports into truthful and fraudulent more than 82% of the time. Compared with other fraud-detection approaches documented in prior literature, this tool has the highest predictive power for both annual reports and quarterly reports. Using the tool to analyze a sequence of reports of a company further increases the accuracy of predictions. This paper provides insights for regulators and practitioners in designing fraud-detection tools. As the tool is “trained” using the AAER database, one limitation is the tool may not detect fraudulent reports if the SEC fails to discover certain types of frauds and/or has bias in selecting firms to investigate.     

Purda, L. and D. Skillicorn. 2015. Accounting Variables, Deception, and a Bag of Words: Assessing the Tools of Fraud Detection. Contemporary Accounting Research 32 (3): 1193–1223.

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The findings have important implications for auditors and other individuals responsible for assessing fraud risk and detecting and preventing fraud. First, for certain types of organizations aggregate fraud levels can vary tremendously over time. Furthermore, the effectiveness of mechanisms to prevent and detect fraud can be contingent on the type of organization and related individual susceptibilities to social influence. Therefore, it may be inappropriate for auditors to evaluate fraud prevention and detection mechanisms in a uniform manner. The results suggest that the same fraud prevention and detection mechanisms implemented in a similar manner in two different organizations cannot be expected to be equally effective without considering the average susceptibilities to social influence of the individuals therein.

Davis, J. S., and H. L. Pesch. 2013. Fraud dynamics and controls in organizations. Accounting, Organizations & Society 38 (6/7): 469-483.

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The findings suggest that such sensitization is not merely a “main effect” that shifts the risk-to-resource mapping upward. Rather, human intent appears to exert an interactive effect that flattens the risk-to-resource mapping by changing the cognitive mindset of risk from a magnitude-based calculation. For audit practice, the interaction the authors detect relates to the PCAOB’s efforts to differentiate fraud risks from the more general logic that risks should be evaluated based on magnitudes and likelihoods. The study suggests that people are more comfortable conditioning audit resources on risk magnitudes for unintentional reporting risks than for the same risks arising from human intent.

Kachelmeier, S. J., Majors, T., & Williamson, M. G. 2014. Does Intent Modify Risk-Based Auditing? Accounting Review 89 (6): 2181-2201.

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What appears as a technical and neutral device, that is to say the fraud triangle, actually promotes a vision of fraud anchored in both the individual and the organization, while downplaying the social, political and cultural explanations of fraud. At the end of the day, we are confronted with a series of representations, which lie at the heart of the professional work of a range of actors in the economy, that lead us to view fraud through the lens of individual transgressions being perpetrated while leaving the systemic and socio-political aspects of fraud unchallenged. Would fraud prevention gain in effectiveness if these neglected aspects were dealt with more explicitly? The paper provides reflexivity to practitioners that might help them understand and question the normative and moralizing assumptions that underlie the devices they use.

For more information on this study, please contact Jérémy Morales.

Morales, J., Gendron, Y. and H. Guénin-Paracini. 2014. The construction of the risky individual and vigilant organization: A genealogy of the fraud triangle. Accounting, Organizations and Society 39 (3): 170-194

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