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Hayley Finke
Ms. Martinez
ENC 1102
2 October 2012
An Insight to Fraud
Introduction
Fraud is a financial crime that has been sweeping the nation, especially within the past
few centuries. The impact of fraud on the business sector has particularly drawn my attention
because I am extremely interested in criminal activities, above all those that directly affect the
economic standing of the society in which I live. Although many people know about the
existence of fraudulent behavior within our community, not many really know about its
foundations or the consequences within the business world. It's apparent that financial fraud has
a darkening blame on accountants and other members within the accounting community and I
think it's important to change this false belief. In order to help further educate myself on this
matter and possibly help prevent its development in our future, I decided to further explore into
its roots. I took a more direct look into the conversations pertaining to fraudulent behavior,
hoping that an accommodation of various works from different scholars would open my mind to
all the tools this field has to offer.
After exploring genres common to the field of Accounting through a preliminary genre
analysis, I continued analyzing the language and genres of my field by tracing an argument
relevant to accountants. I gathered articles relating to the existence and foundation to fraud in our
community. I found academic articles relating to this topic, and traced the arguments and
patterns common to these articles. Through my research, I have found sources that breech on the
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educational aspects of fraud theory (Dorminey et al; Kranacher et al; West Virginia University),
psychological contributions (Devine; Ramamoorti; Wells) upper managements involvement
(Beasley, Cacello and Hermanson; Boyle, Carpenter, Hermanson) and prevention of fraud
(Hermanson and Wolfe; Wolverton.) These sources have helped me identify the various aspects
of this issue in relation to accounting. In addition, these articles have helped me continue
exploring the genre conventions that I will need to learn as I enter a new community through my
major.
Educational Aspects of Fraud Theory
The educational aspects of fraud theory gives insight to financial crime within the context
of the classroom. Many educators would argue that looking into a accumulation of anecdotes,
models, and figures can help establish an understanding into the exploration of fraudulent
behavior (Dorminey et al; Kranacher et al; West Virginia University). More specifically,
Dorminey, Fleming, Kranacher and Riley assert that the presentation of data and materials can be
brought together to form a diagram, which serves as a helpful tool for the educational mindset.
Jack Dorminey, A. Scott Fleming, Mary-Jo Kranacher, and Richard A. Riley, Jr., professors at
West Virginia University and York College, in their 2012 work, "The Evolution of Fraud
Theory," directed towards educators, researchers and students, claim that "The Fraud Triangle
provides an efficient conceptual model that has broadly served as an aid to the anti-fraud
community in understanding the antecedents to fraud," (559). This model depicts why some
individuals commit fraud. Aspects such as opportunity, rationalization and financial pressure are
shown through this model and further explained. The acronym "MICE," (9) for example expands
on the idea of common motivators for crime, which are money, ideology, coercion and ego.
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Similarly, Kranacher, Morris, Pearson, and Riley go forth in developing tools such as
various tables and graphs on different elements on fraud factoids to develop a foundation to the
course of this criminal behavior. Mary-Jo Kranacher, Bonnie W. Morris, Timothy A. Pearson
and Richard A. Riley Jr., professors at West Virginia University and York College, in their 2008
work, "A Model Curriculum for Education in Fraud and Forensic Accounting," claim that "fraud
prevention, deterrence, detection, investigation and remediation," helps generate course and
guide materials (508). Like Dorminey, Fleming, Kranacher and Riley, Kranacher, Morris,
Pearson and Riley are able use these materials to provide the financial society with tools to
analyze these fraudulent behaviors. In their article for example, they examine the
interrelationship between auditing, forensic accounting and fraud to help better capture a
particular set of skills that can be applied to each of these fields. Furthermore, West Virginia
University, a collaborative effort of professors, in its 2007 work, "Education and Training in
Fraud and Forensic Accounting: A Guide for Educational Institutions, Stakeholder
Organizations, Faculty, and Students,"establish this guide in order to train and educate
individuals on various attributes of fraud and forensic accounting. In this article they thoroughly
grasp many contributions to fraud such as asset misappropriation, false representation and
corruption. They believe that this insight, "may be the difference between whether perpetrators
avoid detection of their illegal activities or they are brought to justice," (1). All three of these
articles make it easy to understand the different elements of fraud, by presenting different models
and diagrams, to better educate future generations.
Psychological Contributions to Fraud Theory
The psychological contributions to fraud theory presents that biological as well as
cultural inputs have a major role with fraud in our society. Some scholars would contend that if
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we look more into the predetermined sociological characteristics of an individual that commits
fraud, we will see a stronger function towards the cause of fraud, conditions that implement
societal benefactors (Devine; Ramaoorti; Wells). More exclusively, Thomas Carl Devine, a
professor at the Univeristy of Chicago, in his 1960 work, "Research Methodology and
Accounting Theory Foundation," explores the logical processes that an auditor completes and
behavioral relations that accompany them. He claims that "accountants seem to have waded
through relationships to the intricate psychological network with a heavy- handed crudity,"
meaning that auditors are influenced by the thread of control. In other words, psychological
factors such narcissism and the sway of power, influences individuals to commit fraud (394.)
This article relates to Ramaoorti's "to mind the store" principal, that focuses on the aspect of
control as an implication to fraud.
Sridhar Ramamoorti, partner in the National Corporate Governance Group of Grant
Thornton LLP, in his 2008 work, " The Psychology and Sociology of Fraud: Integrating the
Behavioral Sciences Component Into Fraud and Forensic Accounting Curricula," claims that
fraud develops from a combination of trust violation, cognitive dissonance, and the science of
persuasion. He asserts that there are the "greater good oriented" and the "scheming self-centered"
fraud perpetrators. (527). These seemingly different perpetrators act under what he claims to be,
"Conditions under which dissonance as discrepancy between attitudes and actions produces
attitude change: actions must have consequences perceived to be negative, the actor must feel
personally responsible, and arousal must be both experienced and linked to the dissonance,"
(525). In other words, this cognitive behavior is what roots towards the individuals fraudulence.
Similarly, Wells believes that biological factors are conditioned over time as a product of
cultural implications, resulting in fraudulent behavior. In other words, Joseph T. Wells, a
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certified fraud examiner, in his 2002 work, "Causes of Fraud," claims that "Any act—criminal or
otherwise—can be explained as the product of an individual’s desires and the person’s
understanding of consequences," (2). This shows that a person's roots can help show a better
understanding of the factors that contribute to fraudulent behavior. Like Ramaoorti's belief of a
good and bad fraudster, Well's also believes that fraudsters can be labeled differently, in his case
as either "egocentric" or "reckless and ambitious." These labels help classify the different types
of fraudsters and foundations to their hasty behavior. Overall, both these scholars help determine
that fraudulent behavior can be perceived as a combination of favors, psychological and not.
Upper Management Involvement
Upper Management involvement in fraudulent behavior explores how those in charge are
commonly found to be guilty of fraudulent acts. Many intellectuals would dispute that CEOs,
CFOs, and other top executives use variations of coercion, narcissism and power to facilitate and
undergo fraud (Beasley, Cacello and Hermanson; Boyle, Carpenter, Hermanson). More explicitly
Mark S. Beasley, Joseph V. Carcello and Dana R. Hermanson, professors of accounting, in their
1999 work, "Fraudulent Financial Reporting: 1987-1997," declare that many upper management
take advantage of power. Stating, "most frauds were committed at or directed from the
companies' headquarters locations," shows that those higher up in power are more likely to "cook
the books." They argue that pressures from various expectations such as investment and
compensation plans increases upper managements probability to commit fraud (18.) In other
words their ability to manipulate their position of power, intertwined with expectations in the
work place as well as society help contribute to their fraudulent behavior.
Similarly to Beasley, Carcello and Hermanson, Boyle, Carpenter, and Hermanson claim
that CEOs and CFOs play a key role in the presence of accounting fraud. Douglas M. Boyle,
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Brian W. Carpenter and Dana R. Hermanson, professors of accounting, in their 2012 work,
"CEOs, CFOs, and Accounting Fraud," focus on the implications for detecting and preventing
accounting fraud. Studies within the article reveal "that financial statement fraud cases often
involve the top executives, with the CEO or CFO implicated in 89% of the cases," meaning that
while personal may carry out the mechanics, it's clear that management has the upper hand in
this matter (62.) This article relates to the claims made by Beasley, Carcello and Hermanson, but
they focus more on the pressures made by the nature of the controlled environment, while Boyle,
Carpenter and Hermanson look more into the psychological aspects of upper management
officials.
Prevention of Fraud
The Prevention of Fraud helps to ponder as well as discover ways to stop fraudulent
behavior from continuously infiltrating the business world. Many scholars would argue that there
are various ways to go about preventing fraud from inside as well as outside the context of the
business itself (Hermanson and Wolfe; Wolverton). More specifically Dana R. Hermanson and
David T. Wolfe, a PhD and CPA respectively, in their 2004 work, "The Fraud Diamond:
Considering the Four Elements of Fraud," assert that dealing with the capability to commit fraud,
brings insight on the acts, opening up the knowledge to detect and prevent it. In their 2004 article
they state that "A key to mitigating fraud is to focus particular attention on situations offering, in
addition to incentive and rationalization, the combination of opportunity and capability" (42).
This shows that as we assess an individual's actions, we can recognize particular patterns of
behavior that results in fraud. Using this knowledge of behavior opens a new light into the world
of prevention. For example, "if capability could play a role in influencing or magnifying the
other fraud elements, other checks and balances or detection systems should be implemented, or
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an auditor should expand audit scope, procedures, and testing for potential fraud." In other words
oversight, standard and control contribute to the idea of preventing fraud (41).
Similarly, Randal A. Wolverton, a CPA/CFF, in his 2012 work, "What CPAs Need to
Know About Organized Crime," asserts that organized crime has gradually infiltrated U.S
businesses and it's important we discover ways to prevent it. He opens up the idea of prevention
by stating that, "criminals
can use knowledge of procedures ordinarily performed by financial
statement auditors to hide transgressions and explores warning signs in financial statements that
could alert CPAs to the possible infiltration of legitimate businesses by criminal organizations."
In other words, this means that while fraudsters believe their acting behind the books, they're
acting alerting findings that will help prevent future fraudulent behavior (38.) While both
Wolverton as well as Hermanson and Wolfe explore ways to prevent fraud, Wolverton
approaches the matter by using past fraudulent cases, while Hermanson and Wolfe look at it
from a more broad perspective.
Another Perspective
My sources have covered the psychological contributions to fraud, the educational
aspects to fraud theory, upper management involvement as well as prevention of fraud. However
they have not covered specified case studies and their effects on the economic standing of our
community. Analyzing this fraudulent behavior would further give insight through the eyes of a
criminal and help to better understand the foundation to his/her behavior as well as its effects on
our countries diminishing financial standing. If I were to continue exploring this topic as an
accountant, I would take a more comprehensive look into past fraudulent cases and investigate
its effects on our economy because I want to see its potential contribution to the increasing debt
within our community.