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Understanding the Causes
and Effects of Top
Management Fraud
Fraud by top managers has become a
worldwide problem. Major scandals
have rocked the U.S. (e.g., Enron Corp., Fannie
Mae, Global Crossing and WorldCom Inc.),
drawing attention to the serious consequences
of fraud, not only for companies but also for
their employees, communities and society at
large. But fraud by topmanagement is not just
a U.S. problem; Asian, European, Latin Amer-
ican, African and Australian companies also
have been afflicted. Revelations of such fraud
have been alarming across the political and
ideological divide. After all, how can well
paid and highly respected senior executives
develop such elaborate schemes to defraud
the very people who invested in their compa-
nies? What would lead successful and accom-
plished senior executives to lie for money and
jeopardize their honor, reputations and
careers? Moreover, revelations of fraud by
senior executives have made many wonder:
How can these crimes be committed and per-
sist for years in spite of external audits by
professional companies and monitoring by
boards of directors? What can be done to
reform corporate governance and to instill a
strong ethical perspective among top man-
In this paper, we discuss different types
of fraud by top managers and link them to
various classes of white-collar crime. We
then identify key societal, industry, organi-
zational and individual characteristics that
contribute to such behaviors. Next, we high-
light the various societal, industry and orga-
nizational effects of top management fraud.
Fraud refers to the deliberate actions taken
by management at any level to deceive, con,
swindle or cheat investors or other key sta-
keholders. Fraud can take many forms that
include embezzlement, insider trading, self-
dealing, lying about facts, failure to disclose
facts, corruption, and cover-ups. Top man-
agement fraud may also involve intentional
misrepresentations in financial statements.
Managers might also create schemes to hide
or misrepresent what the firm does or how
the firm does it. Intentionality is the key;
senior managers committing fraud willfully
undertake actions that mislead others.
Some fraud schemes are limited to just
one or a few transactions (e.g., falsifying a
document). Others might encompass multi-
ple, ongoing activities across several organi-
zational functions or units. For instance,
Adelphia Communications Corp.’s founding
family was accused of fraud when it collected
$3.1 billion in off-balance-sheet loans that
were backed by the company. The family also
was accused of overstating the company’s
financial results by inflating capital expendi-
tures and hiding debt. Enron’s top managers,
on the other hand, are accused of developing
an elaborate pyramid-like scheme of ‘‘new
businesses’’ that did not actually exist but
supposedly generated new revenues and
The schemes that senior managers devise
to commit fraud also vary in their magni-
Organizational Dynamics, Vol. 36, No. 2, pp. 122–139, 2007 ISSN 0090-2616/$ – see frontmatter
ß2007 Published by Elsevier Inc. doi:10.1016/j.orgdyn.2007.03.002
tude. Some affect only particular units or
divisions, while others permeate the entire
firms’ operations, as in the case of Enron.
Some of these acts were committed in one
part of the company to cover up acts that
occurred in other parts of the operations.
Fraud schemes also vary in their duration;
the Enron and WorldCom frauds each per-
sisted over a decade.
Some fraud schemes (e.g., falsifying
financial statements to overstate earnings)
are common among companies across differ-
ent industries. Other schemes are industry-
specific, however. For example, the Savings
and Loan (S&L) crisis of the 1980s included
various S&L industry specific frauds, such as
‘‘hot’’ deals involving land flips, nominee
loans, reciprocal lending, or linked financing,
as well as more universal fraudulent activ-
ities such as ‘‘looting’’ by siphoning off funds
and covering up to hide insolvency.
Wrongdoing in and by corporations has been
the subject of considerable concern, study and
analysis. Researchers have used numerous
labels to describe this phenomenon, such as
white-collar crime, corporate wrongdoing,
management fraud, managerial vice, and cor-
porate illegal behavior. White-collar crimes
have distinctive characteristics that include:
the absence of physical violence, the existence
of strong financial motivations, and the invol-
vement of individuals who are otherwise con-
sidered respectable members of society.
White-collar crimes include a wide vari-
ety of managerial actions. Occupational crimes
are those committed against a firm for the
benefit of the individual perpetrator, and
might include embezzlement or padding
expense reports. Corporate crimes are com-
mitted by the perpetrator for the benefit of
the corporation, and might include bribery or
pollution control violations. Corporate crimes
‘‘help’’ the firm – for example, to obtain a
contract or reduce costs – but these crimes
may also lead to indirect benefits for the per-
petrator such as receiving promotions or
bonuses. Further, there are some white-collar
crimes in which an individual perpetrator is
the sole beneficiary and the firm is the victim,
in which the firm is the beneficiary and others
in society are the victims, and finally in which
both the firm and the individual acting on
behalf of the firm are beneficiaries and others
in society are the victims.
White-collar crimes also can be classified
according to the extent of an individual’s
involvement in the crime. This requires us
to distinguish active participation from passive
acquiescence. In the first case, individuals are
actively involved in an illegal activity,
whereas in the latter case managers are aware
of illegality within the organization but are
unwilling to take corrective action. In crimes of
obedience, the individual is caught in the
dilemma of either carrying out a directive that
is wrong or disobeying an order and suffering
the consequences. Finally, there are errors of
negligence or omission that result in harm.
Management fraud can occur as part of
either occupational or corporate crimes per-
petrated by those at the very top or the very
bottom of the managerial hierarchy, and can
result from active participation or passive
acquiescence. Chief executive officers (CEOs),
for example, might actively divert corporate
funds for their own use, or might knowingly
stand aside while others in their firm market
unsafe products. First-line supervisors, simi-
larly, may steal from cash registers, or fail to
discipline subordinates who lie about unne-
cessary repairs and inflate customer bills.
These crimes can be committed by executives
of business firms, managers of public sector
companies, civil servants, or elected officials.
While all types of management fraud can
harm companies, individuals and society,
the most serious effects become evident when
these actions are committed by senior man-
Fraud by top managers, which is a subset
of white-collar crime, is a particularly serious
issue for several reasons. This type of fraud
has devastating effects on a company’s share-
holders and employees, and can ruin the
reputation and credibility of a firm. Just the
suspicion of top management fraud can lead
to dramatic declines in firms’ stock prices, as
was the case with Tyco International and
Global Crossing. Moreover, when the public
loses trust in the firm and its top management,
company survival can become doubtful. How
can customers trust the claims the company
makes about the quality and safety of its
products? How can investors entrust their
money with an institution that has violated
their trust? Arthur Andersen, for example,
folded as a result of its association with the
Enron fraud. Further, top managers’ attitudes
and actions toward fraud can promote similar
behaviors by others throughout the firm.
These managers are inclined to tolerate the
questionable activities of their subordinates.
Indeed, subordinates might come to believe
that the best way to get ahead in the company
is to commit fraud. Employees with high
integrity might find such an environment
inhospitable and leave. With their departures,
in a culture that perpetuates fraud, whistle
blowers have little room to get a fair hearing.
Fraud by top managers is truly shocking to the
public as in the recent mutual fund scandals,
because it represents aserious betrayal of trust
by those who supposedly have been selected
specifically for their leadership, ability, integ-
rity and character.
Ironically, management fraud is com-
mitted by highly successful people who
already have ‘‘made it.’’ These managers
are the leaders of their industries and can lose
nearly everything if their fraud is discovered.
This begs the question: Why in the world do
such accomplished senior executives commit
fraud? Why are they willing to take such
undue risks? Next, we attempt to provide
some answers to this complex question.
Human beings are subject to a number of
influences, and top managers are no excep-
tion. There are several societal, industry and
organizational factors that can pressure man-
agers and even encourage their fraudulent
behaviors. Yet, at a fundamental level, the
motivation to commit fraud might be deeply
embedded in top managers’ personal ambi-
tions, histories, and complex personality
structures. As Fig. 1 indicates, three key sets
of factors – societal-, industry-, and company-
level – serve as serious pressures that increase
the incidence of top management fraud. Fig. 1
also identifies several individual characteris-
tics of top managers that could affect the
degree to which increasing pressures from
society, industry or organization might actu-
ally encourage fraud.
Societal-Level Pressures
Some highlight the social nature of criminal
behavior, offering numerous societal or
group-level theories to explain it. These the-
ories are based on an underlying ‘‘cultural
deviance’’ idea: that all humans conform to
the norms of their group, and crime results
only when a subgroup’s norms conflict with
those of the larger society about the definition
of what is or is not criminal behavior. At the
broader societal level, anomie theory pro-
poses that societal norms affect individuals’
aspirations for things like material goods and
other indicators of success. Individuals who
are unable to achieve their aspirations by
conventional means experience strain, and
may seek to relieve this strain by using deviant
means to achieve their desired ends. This, of
course, suggests a social class basis for crime.
Specifically, those in lower social classes will
experience more strain (because of their pov-
erty or a sense of inequality) and seek to
relieve their strain by turning to criminal
White-collar crimes committed by top
managers present a challenge to social
class/poverty theories of crime. These the-
ories fail to effectively explain criminality
by high status individuals such as senior
executives of the world’s largest corporations.
These people are well paid, are in the upper
socio-economic classes, and are less prone to
experience strain in the traditional sense. To
rise to the top of their companies, it is reason-
able to assume that the values of these man-
agers are somewhat similar to those of their
broader society. Still, these managers may be
subject to the strain of inflated expectations—
where what they receive from their companies
and jobs can never be enough, as we explain
Industry-Level Pressures
Industry conditions can also pressure
senior managers to commit, encourage or
enable fraud. Most generally, challenging
industry conditions often trigger and even
intensify fraud. Further, as we show in
Fig. 1, several industry-related factors may
influence the incidence of top management
fraud: industry cultures, norms and histories;
industry investment horizons, payback peri-
ods and financial returns; industry concentra-
tion; environmental hostility; environmental
dynamism; and environmental heterogeneity.
Industry cultures, norms and histories.
Over time, industries develop unique his-
tories and norms that shape company, man-
agerial and individual behaviors. Some
cultures value aggressive and fast-paced stra-
tegic moves. Others reward calculated and
more deliberate strategic actions. These cul-
tures influence how senior managers define
their company’s status in the industry and
how to improve or simply retain such status.
Executives know well that they have to match
the industry’s rhythms and pace of strategic
change in order to do well.
Industries vary significantly in their experi-
ences with management fraud. In industries
where fierce competition prevails, pressures
to commit fraud mount. A survey of the
highly competitive airline industry reported
several hundred incidents of fraud committed
by employees and management in a 12-
month-period. The construction as well as
casino and gambling industries have had long
histories of managers accepting bribes and
‘‘working around’’ existing laws and regula-
tions. These variations reflect long standing
informal rules of doing business in these
An important variable that can influence
managers’ desire to commit fraud is the pre-
valence of norms of collaboration in the
industry. In those industries where a norm of
reciprocity and collaboration prevails, senior
managers may be less pressured to commit
fraud. For example, inter-firm collaboration
is widespread in the biotechnology industry,
where companies usually face long develop-
ment and regulatory approval cycles. Con-
fronted with huge development costs and
limited resources, companies have found
alliances to be useful in reducing uncertainty
in their research and development (R&D)
and other operations. Collaboration also
helps reduce the odds of failure in new
product development and improve compa-
nies’ financial performance, possibly lower-
ing the incidence of management fraud.
Collaboration puts the credibility of the com-
pany and its managers to test; others are apt
to probe what these managers and compa-
nies do. Mindful of potential scrutiny, execu-
tives are likely to behave in ethical ways.
Industry investment horizons, payback per-
iods and financial returns. Expectations
regarding payback periods, time horizons
and acceptable return rates on investments
also vary from one industry to the next. The
pharmaceutical industry is accustomed to
longer investment horizons, coupled with
high payback from successful products. In
the software industry, upgrades are intro-
duced frequently, and therefore investment
horizons are much shorter and oftentimes
lower margins are expected. These variables
influence stock analysts’ forecasts of a com-
pany’s financial performance, possibly pres-
suring managers to smooth their earnings and
even commit fraud. Senior executives know
that their tenures, compensation packages
and even reputations are determined by the
extent to which their companies perform rela-
tive to analysts’ forecasts. In this context, some
managers might view fraud as a means of
correcting deviations from these forecasts.
Irrational expectations – beliefs that a new
technology or business model will generate
much higher returns than traditional
approaches – can also become the norm
among investors and analysts, pressuring
senior executives to commit fraud by inten-
tionally overstating results. These expecta-
tions often begin in newer industries that
promise to revolutionalize the world, as in
the early years of the boom. How-
ever, they do trickle down to other industries
and infuse a belief that companies can gain big
by taking huge risks in newly defined market
spaces. When these expectations become dif-
fused, a sort of financial frenzy overtakes the
industry, and investors and analysts become
greedy – expecting more gains than compa-
nies are able to deliver. Here, too, some man-
agers might revert to fraud as a means of
inflating earnings and keeping up with the
industry’s expected high returns.
Industry concentration. In a free market sys-
tem, competition disciplines management
and encourages innovation and entrepreneur-
ial risk-taking that creates wealth. When an
industry becomes concentrated (i.e., domi-
nated by a few firms), the possibility of collu-
sion increases. Large companies that
dominate these industries can deploy their
resources to influence regulators, escaping
public scrutiny. Given their vast powers
and resources, these companies also influence
the political system andmay mute its ability to
discipline managers. Even when managers
get caught committing fraud, they can use
their companies’ resources to defend them-
selves. These large monopolies have well
staffed legal departments that work to protect
the interests of their companiesand managers.
Managers can also claim that the very com-
plexity of their companies precludes their
knowing what is going on in each and every
division or operation. Some senior managers
might commit fraud in the knowledge that the
punishment will be delayed or modest. Thus,
as an industry’s concentration increases, both
the incentives and opportunities for top man-
agement to commit fraud also increase.
Environmental hostility. Some industries,
such as the biopharmaceutical, communica-
tions or computer software industries, offer
settings in which resources and growth
opportunities are relatively abundant. Other
industries are ripe with hostility, where a
firm’s major industry’s competitive condi-
tions are not supportive of the company’s
mission or growth goals. The banking and
financial services, metalforming, wood pro-
ducts and clothing and textile industries are
characterized by low or declining demand,
strict regulatory rules, intense competition,
low profit margins, and a high rate of orga-
nizational failures—major conditions that
encourage management fraud. Companies
in these hostile environments often need to
invest heavily in product, process and admin-
istrative innovations. They also have to invest
heavily in advertising and promotion to retain
customer and attract new users. Most of these
investments help the firm to simply stay alive
in an increasingly harsh, demanding and
unmanageable competitive terrain.
Environmental hostility has additional,
though indirect, effects on managerial fraud.
As hostility rises and organizational perfor-
mance deteriorates, some executives centra-
lize their operations. These structures are
characterized by the prevalence of formalized
rules. They also tend to have clear financial
systems of control in place. Such controls
establish specific quotas but rarely ask people
how they are accomplished. These rules might
promote and perpetuate fraud. When the
firm’s environment is hostile,senior managers
might even restrict communication about the
firm’s financial position and performance. For
these reasons, outsiderscannot fully and accu-
rately evaluate what is happening internally.
In turn, this makes it difficult to spot and stop
managerial fraud in a timely fashion. Overall,
high levels of environmental hostility might
encourage centralization that gives top execu-
tives an opportunity to commit fraud and
conceal it from others.
Environmental dynamism. Technological
advances, market changes and competitive
moves alter companies’ external environ-
ments. These changes influence the dyna-
mism of the company’s environment,
meaning the speed and unpredictability of
change in a given industry. Dynamism creates
opportunities that companies can exploit to
achieve profitability and growth by creating
new businesses or acquiring companies
in current or new industries. Witness the
abundant, indeed phenomenal, growth
opportunities companies have in the telecom-
munication industry. With rapid and relent-
less technological change, new niches
continue to emerge and grow. Of course,
companies have to invest heavily in identify-
ing these opportunities and create the infra-
structure necessary to exploit them. These
investments may lower a firm’s short-term
performance. The limited resources available,
intense technological change and the constant
entry of domestic and international competi-
tors – coupled with opportunities for growth –
can both excite managers and heighten their
perceptions of the risks associated with these
investments. Even in the most dynamic indus-
tries, there are no guarantees of long-term
survival or success. Uncertainty raises the
probability of managerial fraud.
One factor that can contribute to a higher
incidence of management fraud in dynamic
industries is the increased specialization of a
company’s key personnel. As the firm
expands its operations, environmental dyna-
mism allows each division or unit to work
independently. Autonomy, in turn, gives
senior managers the opportunity to commit
and conceal fraud. With rapidly changing
market conditions few have the time, energy
or desire to probe deeply into what senior
managers are doing.
Environmental heterogeneity. When a firm
(e.g., IBM Corp., Microsoft Corp. and Hew-
lett-Packard Co.) competes in different mar-
kets, targeting different customer groups who
have divergent needs and expectations, its
business environment is considered hetero-
geneous. Thus, diversified firms (e.g., Dow
Chemical Co.) typically face heterogeneous
environments. This heterogeneity is a major
source of complexity; since it becomes diffi-
cult for top managers to predict forthcoming
changes in their external environments accu-
rately or control the forces that lead to changes
in their operations. Heterogeneous environ-
ments are, therefore, complex business set-
tings with correspondingly complex
organizational structures that makes it hard to
fully comprehend the various transactions a
firm undertakes, which provides opportu-
nities for top managers to commit fraud. Com-
panies address the growing complexity of
their external environments by giving their
managers more discretion and latitude in
making important decisions. This increased
discretion could enable managers to commit
fraud and conceal it.
To recap, several industry factors indivi-
dually or jointly might pressure senior man-
agers to commit fraud, or might provide
particularly attractive opportunities for those
who wish to undertake such fraud. But the fact
remains: while pressures on managers
increase, not every senior executive is willing
to commit fraud. This willingness to engage in
fraud increases when certain organizational
conditions coexist with the mounting pres-
sures created by the external environment.
Organization-Level Pressures
One fundamental characteristic of today’s
large companies is the separation of their
ownership and control systems. The stock of
most of today’s leading public companies is
widely dispersed among millions of owners
around the globe. It is common for the stock-
holders of large, publicly held corporations to
delegate their decision making powers to
hired and paid managers whose only connec-
tion to the company is through their employ-
ment contract. Even with this delegation,
individual stockholders have few incentives
to devote resources to monitoring senior man-
agers, partly because stockholders typically
diversify their risk by owning a portfolio of
securities. Without stockholder monitoring,
some executives may act opportunistically
and enrich themselves while foregoing stock-
holder-desired, long-term value creating
activities for their firms. Managers have
learned that their pay, promotion and tenure
are tied to their company’s short-term perfor-
mance. These managers have devised ways to
inflate earnings, hoping to improve their own
incomes. In fact, researchers have found that
some senior executives have deliberately
managed their companies’ earnings to
increase their cash compensation and
bonuses, and have manipulated earnings to
increase their proceeds from initial public
offerings (IPOs). Thus, some senior executives
make key company decisions (e.g., acquisi-
tions, international expansion and innova-
tion) with an eye on maximizing their own
Several legal and regulatory systems have
been designed to limit the opportunistic beha-
viors of senior managers. These systems
define the roles, rights and responsibilities
of senior managers, especially in protecting
the interests of stakeholders. Besides these
external systems, some companies have also
developed codes of conduct that spell out
expectations of what is acceptable and unac-
ceptable managerial behavior. Companies’
internal control systems have also been
revamped to thwart and uncover manage-
ment fraud. These internal controls are
headed by the board of directors. The efficacy
of boards rests on two other factors that we
will discuss below: senior leadership and
organizational culture.
Board composition. The primary responsi-
bility for monitoring top managers rests with
the board of directors in public corporations.
In the past, however, some boards of directors
did not hold top managers sufficiently
accountable. These boards typically were
appointed by the CEO, who often also served
as board chair. Many directors served simul-
taneously on numerous other boards as well.
A lack of aggressive monitoring by these
boards sometimes allowed fraud to occur
As a result of growing shareholder acti-
vism and mounting threats of litigation,
however, boards are increasingly transform-
ing themselves from ‘‘rubber stamps’’ for
managerial decisions into more active and
vigilant monitors. Audit committees have
become more prevalent, active and watchful
of managerial fraud. These committees have
retained experts and conducted independent
analyses to ensure that corporate financial
statements do not conceal fraud.
Board composition is also changing to
ensure wider representation of shareholders’
diverse composition and interests. This chan-
ging composition has centered on increasing
the proportion of outside directors who serve
on the board, a practice that can be effective
in limiting top management fraud. Some
research reveals that boards that are domi-
nated by outside directors who act indepen-
dently from management are best positioned
to monitor executives and curb their oppor-
tunistism. The recent dismissal of Conrad
Black, CEO of Hollinger International, by
the company’s board is an example of the
growing role outside board members play in
disciplining senior managers to ensure a
focus on long-term value creation. Outside
directors act independently particularly
when they enjoy long tenures on the board
and own some of the company’s stock. In
these cases, outside directors have a vested
interest in company performance and tend to
become more vigilant of senior managers’
actions. Companies have also used stock
ownership to bond their outside directors
with the company’s future. Outside directors
know that effective governance through vig-
ilance is conducive to ethical and responsible
top management leadership that can enhance
the company’s performance. When the com-
pany is doing well financially, the odds are
that the value of outside directors’ stock will
Another important trend in corporate gov-
ernance is the growing separation of the
positions of the board chair and CEO.
Intended to reward good performance by
CEOs, the practice of combining both the
positions in one person has resulted in con-
centrating corporate powers. When one per-
son holds these two positions, the system of
checks and balances needed to retain integ-
rity and objectivity in decision-making is
compromised. Worse, when a corrupt person
holds the two important positions at once, he
(she) can get away with committing fraud
and concealing it. Conversely, when these
two positions are performed by two separate
people, the odds are higher that fraud will be
reduced or uncovered quickly.
Senior leadership. The actions of top man-
agement, especially the CEO, shape the ethical
climate in a company. These actions define
and enforce norms of integrity and honesty
throughout the organization. Ethical leader-
ship encourages employees to honor and pro-
tect the interests of key stakeholders. It also
encourages critical evaluation of those who
are in power. When leaders who espouse and
practice ethical values are in charge, one
would expect top management fraud to be
limited, if not extinct. Conversely, when lea-
ders do not follow these ethical values, fraud
might become more widespread. Even when a
CEO does not engage in wrongdoing, he (she)
can still promote it by rewarding, condoning,
ignoring, or even covering it up.
The influence of the CEO becomes even
more significant when the CEOis particularly
charismatic—a quality that leads to greater
identification, trust, and reflexive obedience
by subordinates. Subordinates frequently
emulate the charismatic CEO’s behavior.
Charismatic leaders usually build coalitions
of unquestioning followers who fail to probe
their leaders’ failings. Recent examples of
such leaders who led their organizations
down a fraudulent path include Michael
Monus of Phar-Mor Inc., John Gutfreund of
Salomon Brothers LLC, Dennis Kozlowski of
Tyco, and Barry Minkow of Zzzz Best Com-
pany, Inc. Powerful and charismatic leaders
are also skilled in silencing dissent and critical
evaluation, possibly neutralizing their ‘‘ene-
mies.’’ When charismatic leaders are at the
helm of organizations and commit fraud,
employees may not come forward and blow
the whistle on their leaders’ corrupt beha-
viors. Clearly, top leaders’ lack of commit-
ment to ethical behavior can encourage and
even facilitate fraud. Unethical charismatic
leaders also consolidate their powers, intro-
duce fraudulent schemes, and use their per-
sonal magnetism to mislead others. These
leaders also shape their firms’ cultures, per-
petuating their dysfunctional influence for
Organizational culture. Over time, some
organizations can develop deviant cultures
in which wrongdoing is rationalized and
institutionalized. These organizations are
often led by leaders who tolerate unethical
behavior and conceal corrupt practices. These
leaders might also encourage gamesmanship
and political maneuvering as a means of get-
ting ahead. Leaders of these companies might
also set unrealistic goals that are hard for their
subordinates to attain, given the resources
and time available. These qualities character-
ize the tenure of John Gutfreund’s leadership
at Salomon Brothers, resulting in a widely
publicized bond trading scandal.
Unethical organizational cultures imbue
lawbreaking with the normative status of
‘‘business as usual’’ and thus facilitate crim-
inal behavior. Enron, Salomon Brothers and
Bank of Credit and Commerce International
(BCCI) are three prime examples. Moreover,
unethical subcultures can become accepted
as the result of compartmentalization of
identities. That is, although a subculture
may hold values that are apart from the
overall social norms and even individual
ethical norms, individuals apply the deviant
values only in the context of their subcultural
identities. People working in organizations
or units with these deviant cultures feel
trapped; they either have to go along with
unethical behaviors such as fraud or exit
their companies. This creates a climate of
fear, where people with few or limited
options for career mobility feel that fraud
is acceptable. These norms often persist
because these companies are led and mana-
ged by corrupt senior leaders, who are will-
ing to cut corners to retain their positions and
advance their own interests. New members
of the top management teams are likely to
learn from those who have made it to the top
of the organizational pyramid and imitate
their behaviors.
We have just seen how societal, industry and
firm characteristics can affect the incidence of
top management fraud. Society, for example,
establishes an individual’s values through
both aspirations and associations. It also sets
the institutions and rules that guard against
opportunism, deceit and dishonesty, aiming
to protect the common good. At the industry
level, highly concentratedindustry structures,
resource scarcity, and rapidly changing envir-
onments often intensify managers’ willing-
ness to commit illegalities, especially fraud.
Further, as we have discussed, organizational
level variations matter. Larger companies are
more complex and often decentralize their
operations, providing an opportunity for ille-
gal acts while reducing chances of detection.
The level of monitoring by boards of directors,
and ethical or unethical corporate cultures,
also affect the likelihood of white-collar crime.
Senior managers at firms with little or no
organizational slack may feel that they must
commit illegal actions just to survive.
Yet, the commission of fraud at the high-
est levels in organizations ultimately
involves individual decisions to participate
or to acquiesce. Therefore, in Fig. 1, we show
how individual level factors can either
weaken or strengthen the effects of indus-
try-level or firm-level pressures on the inci-
dence of top management fraud. Individual
characteristics affect the degree to which
rising pressures from society, the industry
or the organization may result in the decision
to commit fraud or to acquiesce when fraud
is observed. In particular, a manager’s back-
ground could influence his or her willingness
to commit crimes, including fraud. Among
the most relevant variables are age, experi-
ence, education, and gender. In addition,
self-control is an important consideration.
Age influences individuals’ decisions con-
cerning both common ‘‘street’’ crimes and
white-collar crimes. Generally, youth is asso-
ciated with risk-seeking, and with an inabil-
ity to delay gratification or accurately
evaluate long-term consequences. The need
for accomplishment and career advancement
is strongest in a manager’s earlier years.
Older executives might commit fraud to pro-
tect their entrenched and prestigious posi-
tions and perks. Maturity, however, is asso-
ciated with moral development. Further,
managers’ increasing age is associated with:
deliberateness in decision making, seeking
more information for the decision, more
accurate diagnosis of the information gath-
ered, less confidence in being right, and
greater willingness to reconsider. This sug-
gests that older executives are reluctant to
make precipitous decisions under the sway
of industry or organizational pressures.
Thus, all else equal, external pressures are
less likely to influence older top managers to
commit fraud.
Experience may also influence the likeli-
hood of corporate illegalities, especially in
hostile organizational environments (gro-
cery, wood product and textile industries)
where pressures on executives are high. The
length of a manager’s tenure is only one
factor; more mobile, shorter-tenured senior
executives are more apt to engage in illegal
activities. Executives with long tenures may
become ‘‘burned out’’ and may not engage in
fraud because of their resistance to change.
These managers, however, might also pas-
sively acquiesce when fraud occurs. Func-
tional background is another factor that
influences the likelihood of top managers
committing fraud. Manufacturing CEOs
with finance and administrative back-
grounds, for example, were found more
likely to engage in antitrust violations than
were CEOs with other backgrounds. These
managers understand the complexities of the
system and develop their fraud schemes with
this knowledge in mind. In sum, experience-
related factors such as tenure in the job and
functional experience might reinforce indivi-
duals’ decisions to commit fraud, especially
when competitive conditions are challen-
A senior manager’s educational back-
ground also can contribute to the likelihood
of committing fraud. Typically, level of edu-
cation is positively associated with the level
of moral development that defines right and
wrong. Yet, some studies have shown that
business and economics education actually
may cause a decline in moral development,
because such programs can increase self-
interested behaviors in some individuals
and thereby encourage unethical practices
and fraud, if necessary to get ahead. A need
to get ahead at any cost, and to ‘‘play the
game’’ to reap corporate perks, could result
in fraud being considered acceptable beha-
vior if everything else fails.
Some research has related gender to the
proclivity for illegal activities. Typically,
males have been found to be more willing
than their female counterparts to accept
unethical behavior in achieving their goals.
Males are often the key culprits in corporate
fraud, probably because men continue to
dominate corporate leadership positions.
Despite progress made to date, women are
not plugged into existing corporate power
Some criminologists highlight the trait of
self-control as an explanation of both white-
collar and common crimes. They argue that
all crime is associated with one stable indi-
vidual trait – low self-control – that is shared
by all criminals. Individuals with low self-
control are apt to be risk-takers who, when
the opportunity presents itself, opt for the
immediate gratification associated with
criminal behavior. Thus, the firm provides
a setting in which opportunities for white-
collar crimes (including fraud) abound for
top managers who are so inclined. According
to this view, the characteristics of the firm are
not major causal factors determining
whether managers have the propensity
toward criminal behavior. Critics counter
that senior executives must have a certain
level of self-control to have advanced
upward through the organizational hierar-
chy. Of course, there are instances in which
individuals who have reached the highest
levels (e.g., Bill Clinton) have at times exhib-
ited relatively low self-control. The accom-
panying sidebar story of Mr. Walt Pavlo, a
former senior manager at MCI, illustrates
how industry and firm level factors interact
with individual choices to influence the com-
mission of fraud by managers.
Top management fraud has pervasive and
wide reaching effects. It has afflicted share-
holders, employees, the communities in
which firms work, and society at large
(Fig. 1). Fraud can also damage managers’
reputations, end their careers, lead to their
firing, and cause their imprisonment. Under-
standably, recent revelations of massive and
widespread management fraud around the
globe have stirred a heated debate about the
roles of auditing firms, corporate boards of
directors and regulatory agencies in uncover-
ing and preventing such activities.
Effect of Fraud on Shareholders
and Debtholders
Shareholders are invariably the first vic-
tims of top management fraud. When news
of fraud by a firm becomes public knowl-
edge, it immediately reduces the stock mar-
ket value of the companies involved. Bond
holders and other creditors of the firm can
also end up bearing the negative effects of
management fraud. If the company’s credit
rating is lowered when fraud is revealed,
bonds issued by the firm lose value and
the bond holders immediately suffer. In
many cases, banks may have lent money
against either overvalued or nonexistent col-
lateral or inflated cash flow projections. This
makes the recovery of these loans proble-
matic, and shareholders of banks may end
up paying a price because of the decline in
the share prices of the bank itself, if the
amounts involved are substantial.
Revelations of management fraud have
also shaken the public’s faith in the ability
of boards of directors to monitor management
and protect shareholders’ wealth. Through
fraudulent accounting practices, WorldCom
was able to conceal $3.5 billion in losses from
its directors. These revelations have pressured
corporate boards of directors to develop and
enforce effective control systems that reduce
fraud. As a result, audit committees are
increasingly under pressure not to accept
managers’ certification of their companies’
financial results and instead conduct their
own independent evaluations of companies’
financial positions and various business trans-
actions. Shareholders can no longer assume
that management is acting within the law or
with their best interests in mind. Shareholders
now require greater openness on the part of
their senior managers.
Recent revelations of management fraud
have led to a reexamination of the impor-
tance of shareholders relative to other stake-
holders. In some cases, shareholders are now
being given priority over creditors when
fines and penalties are paid out. Tradition-
ally, creditors were always paid first. How-
ever, with Sarbanes-Oxley, shareholders are
considered the biggest victims and therefore
entitled to the relief provided by the penalty.
Interestingly, one of the most far-reaching
consequences of management fraud may
be increased activism and vigilance by share-
holders and other affected stakeholder
groups. For example, reacting to the portfolio
losses of the rank and file, labor unions have
brought as much as 40% of shareholder reso-
lutions during annual meetings in recent
years, and the AFL-CIO is pushing for rules
that would give small investors even more
clout. Fraud by senior executives has
angered shareholders who are increasingly
fighting back, seeking reparations for the
significant losses they have endured.
Effects on Other Stakeholders
Although there are no exact estimates of
the economic costs of management fraud, the
cost to society is considered staggering, with
recent estimates of annual losses because of
fraud ranging from $200 billion to $600 bil-
lion. An analysis of well-known fraud cases
reveals a variety of direct and indirect nega-
tive societal consequences. In the Enron case,
for example, these included: the loss of sev-
eral thousand jobs; the loss of employees’
pensions; and the loss of tax revenue to the
city of Houston, where the company had its
headquarters and was a major employer.
Thus, top management fraud affects society
overall, communities, employees and the
reputations of the managers involved.
Society. Fraud also depresses the overall
moral climate in a society. It can lead to a
general lack of faith in the integrity of senior
managers, erosion in the confidence in the
free market system, including its political
institutions, processes, and leaders, and a
general growth of cynicism in a society.
The most corrosive consequence of an envir-
onment in which individuals do not trust the
leading institutions of society such as large
corporations is the destruction of social capi-
tal. Much of the economic success of capital-
ist societies is based on the level of trust and
resultant cooperative behavior prevailing in
those societies. The recent wave of corporate
scandals in the U.S. and elsewhere has led to
legislation that imposes significant compli-
ance costs on corporations. This has caused
small and medium firms to de-list from stock
exchanges. It has also discouraged many
private firms from going public. The failure
of accounting firms to detect managerial
fraud has also led to less faith in audited
financial statements. Worse still, many
believe that the accounting firms have com-
promised their own integrity because of
the lure of lucrative consulting contracts
from firms they were auditing. Arthur
Anderson’s demise was a direct result of
its implicit complicity in Enron’s fraudulent
financial reporting. Other accounting firms
have had to pay substantial penalties for
their failure to detect fraud during audits.
Not surprisingly, recent occurrences of man-
agement fraud have caused society to take a
much harder line regarding punishment of
those involved.
Local communities. The communities that
house companies found guilty of fraud also
frequently pay a heavy price for manage-
ment’s actions. Unemployment, loss of
endowments for the arts and schools,
depleted stock portfolios and decreased
demand for secondary businesses, such as
restaurants and gas stations, all hurt these
communities. Communities that have suf-
fered the devastating effects of management
fraud include Clinton, Mississippi, where the
world headquarters of WorldCom were
located, and Houston, Texas, where Enron
had its headquarters. When WorldCom chose
Clinton, a small college town, to house its
world headquarters, the town experienced a
boom period. After massive layoffs and bank-
ruptcy, WorldCom officially changed its
name to MCI and moved its headquarters
from Clinton to Ashburn, Virginia. World-
Com’s demise left local stockholders with
worthless stock, and left Clinton without the
company that put it on the map. Although
Houston has proven to be a large enough
community to survive the fall of Enron, it
was nonetheless hurt by the Enron implosion.
The negative impact of Enron’s fraud extends
well beyond those who lost their jobs, and
includes many Houstonians who did not have
a direct interest in the company. Hotels, res-
taurants and catering services, transportation
providers, florists and universities all suffered
significant losses in revenues following reve-
lations of Enron’s fraud.
Employees. Employees of companies whose
top managers engage in fraud often are hit
the hardest, even when they are unaware of
their executives’ illegal activities. Fraud can
cause employees to lose their jobs, their
retirement savings (which often are tied up
in company stock) and their reputations. In
the case of Global Crossing, employees were
not allowed to unload their stock for five
years, according to their employment con-
tract. Adding insult to injury, while this was
happening Chairman Gary Winnick was
spending $94 million to purchase and reno-
vate a massive California estate!
Frequently, the very fact that employees
have worked for a fraudulent company taints
their resumes to the point that some find it
difficult to find jobs elsewhere. For example,
in the aftermath of the crash of BCCI as a
result of fraudulent and illegal actions of its
top management, many of the middle-level
managers who were in no way connected to
these illegalities found it impossible to find
employment in the banking industry. These
seriously negative effects have made some
employees more vigilant of what their top
managers are doing and are more willing to
blow the whistle on suspected offenders.
Companies have also started to develop in-
house whistle-blowing programs, hoping to
stop fraud. These programs encourage
employees to anonymously disclose con-
cerns about accounting and operational
Reputations. Fraud also damages the repu-
tations of the individuals and firms
involved. Revelations of top management
fraud have caused the public to question
the ability of boards of directors to monitor
senior executives and protect shareholders’
wealth. In many fraud cases, senior execu-
tives have been indicted, forced to resign, or
lost their jobs. Some executives have been
found guilty and were fined and sent to jail.
Many of these managers will never recover
professionally from having their reputations
tarnished by committing fraud. The compa-
nies for which they had worked also con-
tinue to struggle with their own image,
hoping to salvage their reputation and
regain public support.
Despite the public outrage about the preva-
lence of fraud, we still do not have clear
answers to a number of simple but important
questions about management fraud. For
example, what motivates successful senior
managers to engage in fraud? How do these
managers succeed in co-opting and invol-
ving others in their fraudulent schemes?
Why do many members of the organization
who uncover fraud, accidentally or other-
wise, nevertheless fail to report it? And what
perpetuates such silence and compliance to
corrupt authority?
There is no doubt that today’s business
environment has spawned vast new oppor-
tunities for fraud in which highly placed
insiders steal from their own institutions.
These crimes are: difficult to detect in the
short run; complex in their design, and there-
fore difficult for even those who are finan-
cially sophisticated to fully comprehend;
several orders of magnitude larger than
the manufacturing sector crimes of earlier
years; and extremely difficult to prosecute
and obtain convictions because of the var-
ious means available to senior executives to
cover their tracks. Fraud by top management
has devastating effects on shareholders,
employees, communities, companies, and
society at large.
Our discussion of the various effects of
top management fraud serves as a reminder of
the critical importance of ethical and respon-
sible senior leadership. Boards of directors
need to make the recruitment, retention, nur-
turing and promotion of such executives a
priority. Companies must also strive to
develop organizational cultures that encou-
rage reporting of abuses and fraud, and
protect whistle blowers. These cultures
emphasize ethical behavior in hiring, evaluat-
ing, rewarding and promoting employees and
managers alike, while setting and reinforcing
realistic performance expectations at every
managerial level.
Detailed discussions of the pressures that can
contribute to managerial fraud, and the per-
sonal characteristics that can affect the like-
lihood of managers bowing to pressure to
commit fraud, can be found in M. S. Baucus,
‘‘Pressure, Opportunity and Predisposition:
A Multivariate Model of Corporate Illegal-
ity,’’ Journal of Management, 1994, 20, 699–721;
and in A. J. Daboub, A. M. A. Rasheed, R. L.
Priem and D. A. Gray, ‘‘Top Management
Team Characteristics and Corporate Illegal
Activity,’’ Academy of Management Review,
1995, 20, 138–170. Insights from the crimin-
ology literature are explained and debated in
M. R. Gottfredson and T. Hirschi, A General
Theory of Crime (Stanford, CA: Stanford Uni-
versity Press, 1990).
For more on factors that contribute to
situations wherein fraud might be considered
‘‘business as usual,’’ see B. E. Ashforth and V.
Anand, ‘‘The Normalization of Corruption in
Organizations,’’ Research in Organizational
Behavior, 2003, 25, 1–52. The debate about
whether it is the individual or the corporate
environment that contributes most to fraudu-
lent behavior is examined by L. K. Trevino and
S. A. Youngblood in ‘‘Bad Apples in Bad
Barrels: A Causal Analysis of Ethical Deci-
sion-Making Behavior,’Journal of Applied Psy-
chology, 1990, 75, 378–385. The potential
detrimental effects of management education
are examined in S. Ghoshal, ‘‘Bad Manage-
ment Theories are Destroying Good Manage-
ment Practices,’’ Academy of Management
Learning & Education, 2005, 4, 75–91. A more
detailed exposition of the evidence concern-
ing business and economics education and
ethical behavior can be found in A. J. Daboub,
A. M. A. Rasheed, R. L. Priem, and D.A. Gray,
‘‘Top Management Team Characteristics and
Corporate Illegal Activity,’’ Academy of Man-
agement Review, 1995, 20, 138–170.
There are a number of books that provide
detailed and highly readable case histories of
companies and their leaders who have
engaged in fraudulent behavior. Power Failure:
The Inside Story of the Collapse of Enron by Mimi
Swartz and Sherron Watkins, as well as Smart-
est Guys in the Room: The Amazing Rise and
Scandalous Fall of Enron by Bethany McLean
and Peter Elkind, are helpful in understand-
ing management fraud at Enron. Daniel
Akst’s Wonder Boy: Barry Minkow-The Kid
Who Swindled Wall Street describes the rise
and fall of Zzzz Best, the company he founded
and its fraudulent history. Bre-X: The Inside
Story by Dian Francis details how a small
Canadian gold mining company defrauded
investors, Wall Street analysts and even the
Indonesian government by making false
claims of huge gold deposits in Busang, Indo-
Finally, for more details of the scholar-
ship behind our review and model, see S.
Zahra, R. L. Priem, and A. M. A. Rasheed,
‘‘The Antecedents and Consequences of Top
Management Fraud,’’ Journal of Management,
2005, 31, 803–828.
Shaker A. Zahra is the Robert E. Buuck Chair of Entrepreneurship and a
professor in the strategy and organization department at the Carlson
School of Management, University of Minnesota, where he co-directs the
Center for Entrepreneurial Studies. He has also been a visiting professor in
several leading universities outside the U.S. His research has appeared in
major scholarly journals. Zahra is chair of the Entrepreneurship Division of
the Academy of Management (Tel.: +1 612 626 6623; fax: +1 612 624 2046;
Richard L. Priem is the Robert L. and Sally S. Manegold Professor of
Management and Strategic Planning and a professor of management in the
Sheldon B. Lubar School of Business at the University of Wisconsin-
Milwaukee. He earned his Ph.D. in strategic management from the
University of Texas at Arlington. He was a Fulbright scholar at the
University College of Belize, and he has visited at the Hong Kong
Polytechnic University, HKU.S.T and Groupe ESCEM in Tours,
France. His research interests include top management decision-making
and processes (Tel.: +1 414 229 6865; fax: +1 414 229 5999; e-mail:
Abdul A. Rasheed received his Ph.D. from the University of Pittsburgh.
His research interests include environmental analysis, corporate govern-
ance, and international comparisons in strategy, outsourcing, and
franchising. He has published in many leading journals such as Academy
of Management Review,Strategic Management Journal, Journal of Management
Studies, Journal of Management, Management International Review, Interna-
tional Business Review, and Strategic Organization. Rasheed teaches in the
areas of strategic management and international business. He has lectured
at universities in Singapore, Hong Kong, China, and Korea and India
(Tel.: +1 817 272 3867; fax: +1 817 272 3122; e-mail:
... Research conducted by Zahra et al. (2007) demonstrates how personal factors can either weaken or strengthen the effects of industrial or organisational pressures on the incidence of top management fraud. Individual characteristics affect the degree to which increasing pressure from society, the industry or the organisation may result in a decision to commit fraud. ...
... Leadership style or "tone at the top" creates an ethical or unethical atmosphere in the workplace (Vinten 2003;Zahra et al. 2007). According to Engelbrecht, Van Aswegen, and Theron (2005), leaders are responsible for developing and sustaining a strong ethical climate. ...
... Management's attitudes and actions have the power to set the ethical tone of an organisation (Simpson and Taylor 2013). Even when leaders do not engage in fraudulent behaviour directly, they can still promote wrongdoing by rewarding it, covering it up, or ignoring or condoning unethical activity (Zahra et al. 2007). Leaders need to behave ethically in their everyday talk, decisions and actions, as the tone at the top (as expressed through the words and actions of senior leaders), plays a vital part in setting the standard of behaviour in an organisation (Kuntz, Kuntz, Elenkov, and Nabirukhina 2013). ...
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Management fraud is a global problem that has become more widespread than ever before. Current modes for detecting and preventing fraud, such as those based on demographic factors, have not been very successful. It is argued that organisational psychology—more specifically the study of organisational climate—provides excellent vantage points from which to understand management fraud. The purpose of this study was to identify organisational climate elements that increase the potential risk of management fraud within an organisation. The study has done this in order to employ these elements in detecting and preventing potential management fraud. A mixed research design was employed, encompassing two broad phases, namely: classification, whereby a framework was developed; and empirical validation, which made use of analytical induction as well as Lawshe’s content validity ratio. It was found that leadership style and managerial values are the elements that relate most to the detection and prevention of management fraud. It was also found that ethical leniency, poor example setting and hypocrisy were likely to create climates in which management fraud takes place. In terms of values, the study found that it is not simply the adoption or communication of values that is important in shaping a fraud-conducive climate, but rather whether or not any professed values are seen to be implemented or lived.
... Concealment of the true financial situation and corruption are accepted as corporate crimes since they are committed largely for the perceived benefit of the organization. Indeed, when there is organizational (corporate) crime, there can be also some significant benefits to the individual in the form of promotion, aids and incentives, bonuses, or other conditional reclamations (Zahra, Priem and Rasheed, 2007). There can be situations also in which only the individual profits from the offence and the organization is just abused or victimized. ...
... Adversely, when the organization has a collaborative culture rather than a stiff competition, there would be less pressure on the employees to use aggressive tactics, unethical approaches and to engage in criminal acts. As Zahra (2007) stated, a hostile environment in which an industry is settled could also encourage white-collar crimes (Zahra, 2007). Price and Norris (2009) noted that the risk of fraud among white-collars could be influenced by the environmental dynamism. ...
... Adversely, when the organization has a collaborative culture rather than a stiff competition, there would be less pressure on the employees to use aggressive tactics, unethical approaches and to engage in criminal acts. As Zahra (2007) stated, a hostile environment in which an industry is settled could also encourage white-collar crimes (Zahra, 2007). Price and Norris (2009) noted that the risk of fraud among white-collars could be influenced by the environmental dynamism. ...
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From a multidisciplinary view, this chapter presents a conceptualization of white-collar criminality and enables understanding the psychological, organizational, and situational motives behind white-collar crimes. This chapter is noteworthy for integrating environmental, psychological, and situational factors influencing the white-collars to engage in crimes in organizations. Specifically, in the study, organization-based situational variables such as perceived ethical climate and opportunities for rule bending are examined among potential antecedents of white-collar crimes. This study enhances organizations to recognize their code of conducts and ethical climate aspects and helps to understand the causes of rule bending and criminal behaviors among white-collars. Further, the chapter provides implications for the practice and the academics regarding the importance of developing effective business ethics codes, prevention issues, and creating a strong ethical climate.
... What is aggravating is that fraud has crossed financial market boundaries to become a widespread industry-wide phenomenon (Reurink, 2018). Fraud perpetrated by top executives has become a worldwide problem like the great scandals that rocked the USA such as Enron and WorldCom, whose consequences were felt globally (Zahra et al., 2007). ...
... In this context, it appears that corporate fraud occurs regardless of the existence of corporate governance and internal controls considered effective (Warren et al., 2011;Griggs and Wild, 2009). Thus, prominent literature begins to shed light on executive behavior, seeking to understand why managers defraud their own companies (Zahra et al., 2007). Inadequate executive behavior is directly reflected in lower stock prices, and this executive profile is more likely to deflect financial statements (Cline et al., 2018;Davidson et al., 2015). ...
Purpose This paper aims to investigate how the literature has been addressing the relationships between corporate fraud and executive behavior and corporate fraud and information technology (IT) controls. Design/methodology/approach A systematic literature review was performed following the planning phases proposed by Levy and Ellis (2006), illuminated by the research onion, developed by Saunders et al. (2007). Findings The main findings of the studies analyzed refer basically to models to assess the risk of fraud. These risks originate from the market, from the organization itself or from individuals and also from their relationship networks. Subsequently, the main risks identified by the authors were classified according to their origin, the main theories approached and the “solutions” for the risks presented by the authors as the product of their work. Research limitations/implications It should be noted that this study is not free of limitations, of which two stand out: the full body of articles on the subject was certainly not evaluated. Although the search has been systematic and judicious both by the combination of keywords for the searches, as well as by the use of the main databases and also by the rigor in the description of the procedures and the analysis of the articles in the light of Research Onion was based on the authors’ knowledge that may have been limited in some respect. Practical implications As a practical implication, there is the relationship of red flags and their classification by origin, as they can be very useful for planning the work of internal and external auditors. Social implications It is considered that this work can be a starting point for scholars who are interested in the corporate fraud phenomenon, given that the data was collected and organized systematically. Originality/value The analysis of the articles in relation to Research Onion shed light on the main philosophical and methodological characteristics of the studies. Also, regarding the relationships between corporate fraud and IT controls, existing scientific research appears to be limited. Searches for the terms information technology and information systems were extended, as well as search strings tested with the terms data governance and IT governance without results. This fact demonstrates that there may be (as far as the results have reached) a vast area of research on corporate fraud in the field of systems knowledge and information technology.
... In the following, we stress the contribution and motivation of our study. We note an increased amount of literature reviews on firms' financial misconduct in general (e.g., Zahra et al. 2005Zahra et al. , 2007Free 2015;Amiram et al. 2018;Sievers and Sofilkanitsch 2019;Montesdeoca et al. 2019;Tutino and Merlo 2019;Albizri et al. 2019) and on related misconduct measures (e.g., Karpoff et al. 2017;Sellers et al. 2020). However, only few literature reviews concentrated on the impact of auditors on firms' financial misconduct. ...
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... The causes of fraud such as, Poor HRM practices, inadequate training, overburden of staff and weak internal control was reported by (Bhasin & Reporting, 2015) moreover the cause element of fraud, weak judicial system was highlighted by (Kingsley et al., 2015) social Pressure and inequality was revealed by (Zahra, Priem, and Rasheed 2007) ...
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The fraud prevention is neither possible nor sustainable without understanding and eradicating the causes of the fraud, reform and align the Internal control mechanism using 21st century technology, public awareness movements promoting “Corruption as social evil” and corrupt people as “Public foes”. This study presents the global perspective on frauds based on quality research published in impact factor Journals only and local scenario based on expert reflections from audit, accounting, operations and management personnel being the stakeholders of the existing system who witnessed the phenomena inside out. The qualitative study was done using interpretivism approach, implying mixed method and conducting interviews, survey and focus group for data collection and analysis. The researcher has developed a Fraud Detection and Prevention mechanism that provides a comprehensive solution and road map to address the issue of Fraud in public sector organizations. This research is equally important for legislature, public sector management, accounts and audit professionals and can be used for capacity building of public sector employees and for developing policy framework.
... In order to propose a testable model of performance cheating, we build on the emerging scholarship on unethical behavior in public administration as well as the longstanding research in other disciplines, most notably behavioral economics, social and cognitive psychology, management, and organizational behavior (e.g., Ayal et al. 2015;Kish-Gephart, Harrison and Treviño 2010;Zahra, Priem and Rasheed 2007). Unlike in previous work, our theoretical interest is not in unethical behavior in general but explicitly cheating behavior within public performance systems, that is, the altering of performance information in government accountability regimes (Benaine and Kroll 2020;Heinrich and Marschke 2010). ...
While research on the dysfunctional uses of performance data is growing, we are still in search of theories that go beyond system-specific explanations and address data manipulation behavior at the level of the employee. In this article, we conceptualize different gaming responses to performance systems and test a model of performance cheating that emphasizes the critical role of employees’ prosocial impact, their job stress, and organizations’ red tape. We screen through a sample of almost 10,000 potential subjects and identify 964 public employees who work with performance data. Conducting a list experiment, a technique known to yield unbiased ratings of sensitive behaviors, we find that all three factors tend to reinforce performance cheating among public employees. The article contributes to the extension of causal chains in performance gaming theory via the inclusion of factors that have proven to be influential in behavioral research.
... Scams and fraudulent practices have grown in recent years, owing to advances in technology, and they come at a huge cost to economies (Zahra, Priem, and Rasheed 2007;Tian and Keep 2002). Fraudulent schemes are rife globally and have morphed over the years from Charles Ponzi's postal stamp scam to forms ranging from phishing, phone call frauds, email scams, identity theft, dating and romance scams, and so on. ...
Although Ponzi schemes have existed since the 1800s, contemporary financial challenges have rejuvenated them while the Internet has enhanced their proliferation, particularly in developing countries. The present study analyses select discursive features for digital deception in Nigerian online Ponzi schemes. We identify the use of stance and linguistic engagement, formulaic expressions and politeness strategies, narrativity, naming, and lexical range as techniques used by scheme creators. These linguistic and discursive choices are wielded as tools to attract customers and, ultimately, to deceive. The overt propagation of financial gains has underlying ideological implications, as it projects a sense of communality and encourages financial leverage which are in turn exploited to con unsuspecting – often greedy – subscribers. We conclude that language use in Ponzi schemes is intentionally crafted to appeal to diverse individual sentiments, particularly within developing economies where poverty is widespread and people seek to make money through any means in order to survive.
This study uses the Signaling Theory to discuss the impact of signaling offenders’ hiring on corporate reputation through a parsimonious conceptual model. It is a survey of 482 respondents from a Brazilian state that, since 2010, has implemented a program to re-socialize criminals. The findings show that corporate social responsibility related to hiring vulnerable and stigmatized groups with bad reputations, such as prisoners, can foster organizations’ reputations. Furthermore, the results indicate that more than signaling offenders’ hiring using a social seal and the informational ambiguity about this corporate social responsibility activities, it is the signal credibility that most affects corporate reputation. Furthermore, it is about the efforts, investments, and resources employed to keep this organizational action and avoid employees’ adverse reactions,
Purpose The purpose of this paper is to explore whether the choice of International Financial Reporting Standards (IFRS) vs Generally Accepted Accounting Principles (GAAP) is associated with the frequency and likelihood of accounting irregularities and fraud in US banks. Design/methodology/approach The authors examine the relationship between financial reporting standards and accounting irregularities in publicly listed US banks. Using a sample of 4,284 banks with accounting irregularities observed in the USA over the period of 1996–2014. They used logit model to estimate the likelihood of corporate misreporting having been committed in terms of accounting irregularities. Findings The authors show that banks that use US GAAP exhibit better operating performance than fraudulent banks that use IFRS except for certain variables. They also find that fraudulent banks are more likely to commit accounting irregularities when they have to follow IFRS and banks have relatively better bank performance. Practical implications Overall, the empirical findings result consistent with Kohlbeck and Warfield’s (2010) find that accounting standards are linked to fewer accounting irregularities. Originality/value In this study, accounting irregularities have a significant effect on bank performance during the Dodd–Frank period. It finds that banks that choose to use IFRS are more likely to have accounting irregularities and to engage in fraud.
Financial Crimes are the fire that has not let off any media platform and are giving jolts to every economy in the world. India in the South Asian Pacific is not an exception to it. The loss to the economy is in Trillion Dollars and is growing daily with a multiplier effect. Several preventive measures have been developed and still in process. One of being Fraud Triangle. The authors in paper have tried to study the Role of Financial Frauds of Nirav Modi in India and tried to analyze what it was like and how it affected the economy and raised a question against the working of the bank. The authors have tried to study how the fraud surfaced and how it was in the news. The fraud triangle can be helpful in it or no. How Nirav Modi was able to pull off such a big fraud and what were the loopholes which pulled it up and how was it unearthed.
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Fraud by top management is a topic that has stirred public interest, concern, and controversy. In this article, the authors analyze fraud by senior executives in terms of its nature, scope, antecedents, and consequences. They draw on the fields of psychology, sociology, economics, and criminology to identify societal-, industry, and firm-level antecedents of management fraud and the individual differences that enhance or neutralize the likelihood and degree of such fraud. The authors also review the consequences of management fraud on various stakeholder groups such as shareholders, debtholders, managers, local communities, and society.
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This study proposed and tested a multiple-influences causal model of ethical decision-making behavior. Social learning, stage of cognitive moral development (CMD), and locus of control (LC) were hypothesized to influence ethical decision making. The mediating influence of outcome expectancies was also hypothesized. Social learning conditions (vicarious reward, vicarious punishment, and control) were manipulated with an in-basket exercise. Path analysis revealed that ethical decision making was influenced directly by CMD. LC influenced ethical decision making directly and indirectly through outcome expectancies. Vicarious reward influenced ethical decision making indirectly through outcome expectancies. No support was found for the direct effects of vicarious reward or punishment. Future research directions and theoretical and practical implications are discussed. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Organizational corruption imposes a steep cost on society, easily dwarfing that of street crime. We examine how corruption becomes normalized, that is, embedded in the organization such that it is more or less taken for granted and perpetuated. We argue that three mutually reinforcing processes underlie normalization: (1) institutionalization, where an initial corrupt decision or act becomes embedded in structures and processes and thereby routinized; (2) rationalization, where self-serving ideologies develop to justify and perhaps even valorize corruption; and (3) socialization, where naı̈ve newcomers are induced to view corruption as permissible if not desirable. The model helps explain how otherwise morally upright individuals can routinely engage in corruption without experiencing conflict, how corruption can persist despite the turnover of its initial practitioners, how seemingly rational organizations can engage in suicidal corruption and how an emphasis on the individual as evildoer misses the point that systems and individuals are mutually reinforcing.
Pressure, Opportunity and Predisposition: A Multivariate Model of Corporate IllegalityTop Management Team Characteristics and Corporate Illegal Activity For more on factors that contribute to situations wherein fraud might be considered ''business as usual
BIBLIOGRAPHY Detailed discussions of the pressures that can contribute to managerial fraud, and the personal characteristics that can affect the likelihood of managers bowing to pressure to commit fraud, can be found in M. S. Baucus, ''Pressure, Opportunity and Predisposition: A Multivariate Model of Corporate Illegality,'' Journal of Management, 1994, 20, 699-721; and in A. J. Daboub, A. M. A. Rasheed, R. L. Priem and D. A. Gray, ''Top Management Team Characteristics and Corporate Illegal Activity,'' Academy of Management Review, 1995, 20, 138-170. Insights from the criminology literature are explained and debated in M. R. Gottfredson and T. Hirschi, A General Theory of Crime (Stanford, CA: Stanford University Press, 1990). For more on factors that contribute to situations wherein fraud might be considered ''business as usual,'' see B. E. Ashforth and V.
Pressure, Opportunity and Predisposition: A Multivariate Model of Corporate Illegality
, can be found in M. S. Baucus, ''Pressure, Opportunity and Predisposition: A Multivariate Model of Corporate Illegality,'' Journal of Management, 1994, 20, 699-721;
Zahra is the Robert E. Buuck Chair of Entrepreneurship and a professor in the strategy and organization department at the Carlson School of Management
  • A Shaker
Shaker A. Zahra is the Robert E. Buuck Chair of Entrepreneurship and a professor in the strategy and organization department at the Carlson School of Management, University of Minnesota, where he co-directs the Center for Entrepreneurial Studies. He has also been a visiting professor in several leading universities outside the U.S. His research has appeared in
Buuck Chair of Entrepreneurship and a professor in the strategy and organization department at the Carlson School of Management, University of Minnesota, where he co-directs the Center for Entrepreneurial Studies
  • A Shaker
  • Zahra
  • E Robert
Shaker A. Zahra is the Robert E. Buuck Chair of Entrepreneurship and a professor in the strategy and organization department at the Carlson School of Management, University of Minnesota, where he co-directs the Center for Entrepreneurial Studies. He has also been a visiting professor in several leading universities outside the U.S. His research has appeared in 138 ORGANIZATIONAL DYNAMICS major scholarly journals. Zahra is chair of the Entrepreneurship Division of the Academy of Management (Tel.: +1 612 626 6623; fax: +1 612 624 2046; e-mail:
His research interests include environmental analysis, corporate governance, and international comparisons in strategy, outsourcing, and franchising. He has published in many leading journals such as Academy of Management Review
  • A Abdul
Abdul A. Rasheed received his Ph.D. from the University of Pittsburgh. His research interests include environmental analysis, corporate governance, and international comparisons in strategy, outsourcing, and franchising. He has published in many leading journals such as Academy of Management Review, Strategic Management Journal, Journal of Management Studies, Journal of Management, Management International Review, International Business Review, and Strategic Organization. Rasheed teaches in the areas of strategic management and international business. He has lectured at universities in Singapore, Hong Kong, China, and Korea and India (Tel.: +1 817 272 3867; fax: +1 817 272 3122; e-mail: