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    Fraud dynamics and controls in organizations.
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.02 Fraud Risk Models, 06.04 Management Integrity 
    Fraud dynamics and controls in organizations.
    Practical Implications:

    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.

    fraud, fraud dynamics, impact of fraud in organizations, fraud risk assessment, management integrity
    Purpose of the Study:

    Fraud has become a popular area of inquiry among accounting academics because of the magnitude of losses (estimated by the Association of Certified Fraud Examiners in 2010 to be US$2.9 trillion worldwide) and requirements imposed on auditors to explicitly address the problem. To date, very little work has attempted to explicitly link individual behaviors in the organization to organizational outcomes within the fraud context. Understanding the individualorganization link is important because a focus on either individual behavior or the organization in isolation turns a blind eye to the social process through which individuals’ behaviors are influenced by the organization as a whole and vice versa. In other words, a narrow focus on individual behaviors or on the organization ignores the organization’s sociology, which can have profound effects on fraud outcomes and the efficacy of fraud prevention mechanisms.

    The authors develop a model of fraud in organizations that allows an evaluation of the relative efficacy of mechanisms designed to prevent fraud while explicitly recognizing the social processes underlying the formation of organizational norms. To develop the model, the authors use a method that is relatively new in accounting research: agent-based modeling (ABM). Designed to study the emergence of macro-level phenomena from micro-level interactions, ABM is well suited to address questions involving organizational outcomes (e.g., a culture of fraud) resulting from the interactions between individuals within an organization and organizational variables. The use of ABM allows the authors to gain insights into fraud even when data in organizations are censored.

    Design/Method/ Approach:

    The authors develop an agent-based model to examine the emergent dynamic characteristics of fraud in organizations. In the model, individual heterogeneous agents, each of whom can have motive and opportunity to commit fraud and a pro-fraud attitude, interact with each other. This interaction provides a mechanism for cultural transmission through which attitudes regarding fraud can spread.

    • When average susceptibility is low, the number of fraudsters in the organization tends toward a specific level and remains relatively stable over time.
    • When average susceptibility is moderate to high the authors observe a very different pattern in which the number of fraudsters in the organization vacillates over time between extremes; either virtually no one in the organization is a fraudster or virtually everyone is.
    • The impact of mechanisms to prevent fraud is contingent on average susceptibility to social influence within the organization.
    • A reduction in perceived opportunity or the introduction of influential, honest managers (tone at the top) reduces the number of fraudsters, but neither change to their model is effective in eliminating outbreaks of fraud when susceptibility is moderate or high.
    • Allowing honest employees to be more influential than fraudsters has no qualitative effect when susceptibility is low; however, it transforms behavior when average susceptibility is moderate to high, reducing the number of fraudsters to near zero and eliminating fraud outbreaks.
    • Efforts to remove fraudsters can effectively reduce the number of fraudsters to near zero regardless of the level of susceptibility, but such efforts do not eliminate fraud outbreaks when susceptibility is moderate to high.
    Risk & Risk Management - Including Fraud Risk
    Fraud Risk Assessment, Fraud Risk Models, Management Integrity