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The Assets Are Virtual but the Behavior Is Real: An Analysis of Fraud in Virtual Worlds and Its Implications for the Real World

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Virtual worlds are computer-generated, immersive environments where participants interact with others while engaging in social, entertainment, and economic endeavors. To illustrate how virtual worlds can be used to study fraud, we examine documented virtual world fraud cases using the "fraud diamond" model (Wolfe and Hermanson 2004). Our findings have real-world implications regarding the causes and prevention of fraud. They include: (1) perpetrator motivations often include nonmonetary achievement and manipulation, as well as financial gain, (2) fraud victims tend to have misplaced trust and overestimate the capability of fraud prevention governance mechanisms, (3) participant-designed record-keeping systems may protect corporate assets from theft, and (4) virtual worlds may serve as a laboratory for evaluating risk management strategies. We also identify future research questions related to these issues. This research illustrates how parallels between fraudulent behaviors in virtual and real worlds can advance our understanding of fraud antecedents.
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JOURNAL OF INFORMATION SYSTEMS American Accounting Association
Vol. 27, No. 2 DOI: 10.2308/isys-50571
Fall 2013
pp. 131–158
The Assets Are Virtual but the Behavior Is
Real: An Analysis of Fraud in Virtual Worlds
and Its Implications for the Real World
William N. Dilla
Andrew J. Harrison
Brian E. Mennecke
Diane J. Janvrin
Iowa State University
ABSTRACT: Virtual worlds are computer-generated, immersive environments where
participants interact with others while engaging in social, entertainment, and economic
endeavors. To illustrate how virtual worlds can be used to study fraud, we examine
documented virtual world fraud cases using the ‘‘fraud diamond’’ model (Wolfe and
Hermanson 2004). Our findings have real-world implications regarding the causes and
prevention of fraud. They include: (1) perpetrator motivations often include non-
monetary achievement and manipulation, as well as financial gain, (2) fraud victims
tend to have misplaced trust and overestimate the capability of fraud prevention
governance mechanisms, (3) participant-designed record-keeping systems may
protect corporate assets from theft, and (4) virtual worlds may serve as a laboratory
for evaluating risk management strategies. We also identify future research questions
related to these issues. This research illustrates how parallels between fraudulent
behaviors in virtual and real worlds can advance our understanding of fraud
antecedents.
Keywords: fraud triangle; fraud diamond; investment fraud; corporate asset theft;
identity theft; fraud risk management; virtual worlds; virtual assets.
We acknowledge helpful comments from anonymous reviewers, Rob Pinsker, Chad Simon, and participants at the Fraud
in Accounting, Organizations, and Society workshop, 2011 American Accounting Association Annual Meeting, and
Purdue University and University of Nevada, Las Vegas Accounting Research workshops.
Supplemental material can be accessed by clicking the links in Appendix A.
Editor’s note: Accepted by Miklos A. Vasarhelyi.
Published Online: July 2013
131
My IPO where I raised $50 billion ISK in exchange for the future promise of my stuff was
a scam. I’m not parting with all my stuff ... I have a really cool shirt that says on the front,
‘‘Social Engineering Specialist’’ and on the back reads, ‘‘Because there is no patch for
human stupidity.’’ I wear it a lot.
Dax (2009)
Curzon Dax, a player who perpetrated a $10,000 fraud in EVE Online
1
I. INTRODUCTION
This quote tells us about the attitudes and perspectives of the perpetrator—either online or
offline, he sees an opportunity for fraud because the perceptions and behaviors of fraud
victims cannot be ‘‘patched.’’ Whether one considers human behavior in ‘‘real’’ life or in
virtual worlds like EVE Online, the fact is that fraud is a common component of market activities
and we can learn about the antecedents and consequences of fraud by examining the attitudes and
behaviors of virtual world participants.
2
Virtual worlds are popular, boasting over 100 million users
monthly and generating more than $4 billion in subscription revenue annually (Public Interest
Advocacy Centre [PIAC] 2011, 4). Depending on the structure of a given virtual world, participants
may accumulate virtual assets by building and running a business to sell wares or services, by
engaging in battle with other users to seize their property, or in some cases, by deceiving others to
misappropriate their virtual property. In many cases, participants in virtual worlds such as EVE
Online, Second Life, and World of Warcraft invest considerable effort to acquire or develop their
virtual assets (Dibbell 2003,2004;Westbrook 2006 ). Regardless of their structure or the rules by
which they are governed, virtual worlds are more than simple entertainment and may contain robust
economies where trading of property or assets takes place (Kirkpatrick 2007). Indeed, Reeves and
Read (2009) argue that virtual worlds incorporate a wide range of substantive real-world work
activities and suggest that the behaviors, institutions, and technical features associated with virtual
worlds will increasingly become part of the real-world work environment.
Social science researchers recognize that because virtual worlds are large-scale, complex, and
sophisticated environments frequented by thousands of people, many characteristics of virtual-
worlds parallel those present in the real world. As a result, in cases where virtual world
environments and institutions parallel the real world, observations of behavior in virtual worlds may
provide insights into real-world behaviors and institutions (Bainbridge 2007;Williams 2010).
3
In
particular, because virtual worlds incorporate economic activity and, in many cases, information
systems for keeping track of such activity, they provide a rich environment for archival studies of
fraudulent behavior.
Indeed, features of virtual worlds make possible research that would be difficult or impossible in
the real world. Each virtual world’s Terms of Service (TOS) spells out the terms under which its
proprietor grants access to that world (e.g., Second Life 2013a). For example, many virtual world
1
EVE Online is one of several virtual worlds where users assume an online game identity and interact, socialize,
conduct business, and engage in a variety of goal-directed activities. ISK (Interstellar Kredits) is EVE Online’s
virtual currency. $10,000 is the estimated real-world value of $50 billion ISK in U.S. dollars.
2
Fraud is ‘‘a representation about a material point, which is false, and intentionally or recklessly so, which is
believed and acted upon by the victim to the victim’s damage’’ (Albrecht et al. 2012, 7). This definition is
consistent with our examination of fraud involving both virtual and real-world assets, as well as with differences
between virtual and real-world regulations.
3
Observation and analysis of virtual world behaviors closely parallels the research technique of ‘‘netnography,’’
or analysis of online communications among groups of consumers (Kozinets 2002). Jeacle and Carter (2011)
have applied this technique to the accounting domain in their analysis of TripAdvisor postings, which shows
how an Internet-mediated abstract system can draw on calculative practices to construct trust.
132 Dilla, Harrison, Mennecke, and Janvrin
Journal of Information Systems
Fall 2013
TOS restrict the conversion of virtual assets into real assets (Castronova 2004;Bloomfield and
Rennekamp 2009). As a result, financial incentives may be less important than a perpetrator’s desire
for achievement or for social manipulation, which can facilitate examining non-financial motivations
for fraud (Yee 2006a). Additionally, virtual worlds can provide insight into a victim’s motivation to
engage in transactions that turn out to be fraudulent because, unlike in the real world, fraud victims in
virtual worlds are often willing to share their experiences (e.g., Egan 2009a;EVE Online Forum
2010). Furthermore, virtual world regulatory environments are dynamic, often changing more quickly
than their real-world counterparts (Harrison et al. 2013). This allows researchers to observe and, in
some cases, test how opportunities for fraud change when, for example, proprietors implement new
regulations and interventions intended to prevent fraudulent activity. As a result, virtual worlds offer
greater transparency and higher velocity, both of which enable researchers to observe causes and
effects unobtrusively and in a timely manner (Williams 2010).
While there is much to be learned from observing the conditions under which fraud involving
virtual assets may occur, it is also important to consider the possibility that virtual world
participants’ real-world assets may be at risk. The possibility that participants may lose real-world
assets through fraudulent activity detracts from the virtual world ‘‘marketable experience,’’ and can
limit the virtual world proprietor’s ability to generate additional revenue or expose the proprietor to
legal liability. Thus, it is also important to understand the circumstances under which virtual world
participants might be exposed to real asset loss from fraud and describe the strategies that virtual
world proprietors use to address this risk.
The objective of this paper is to analyze and explain the phenomenon of virtual world fraud and
how it relates to the real world.
4
This analysis and explanation uses the ‘‘fraud diamond’’ (Wolfe
and Hermanson 2004) as a theoretical lens (see Figure 1).
5
The fraud diamond indicates that fraud
is likely to occur in a virtual world environment when a virtual world participant has the motivation
to commit fraud, weak controls or oversight provide the opportunity to commit fraud, and the
participant can rationalize the fraudulent act. Additionally, the virtual world participant must have
the capability of committing the fraud. This capability may consist of personal traits, such as the
ability to manipulate a victim into erroneously believing that he/she is worthy of being trusted, or
technical knowledge, such as an understanding of how to exploit weaknesses in rules governing
virtual world transactions or economic institutions.
The analysis presented in the paper also incorporates social science research on virtual worlds.
Specifically, it utilizes Yee’s (2006a,2006b) research into the psychology of virtual world
participation to understand virtual world fraud perpetrators’ and victims’ non-monetary
motivations. It also integrates descriptions of virtual world economic (Bloomfield and Rennekamp
2009;Castronova 2004) and socio-regulatory (Harrison et al. 2013) institutions to investigate how
virtual world fraud opportunities might be similar to, or different from, the real world.
The paper reports and analyzes details of 20 cases of virtual world fraud. The analysis provides
four insights into the fraud diamond’s components that are relevant to examining real-world fraud.
First, non-monetary achievement (i.e., attainment of goals and accumulation of items that confer
power) and manipulation (i.e., deceiving and dominating other participants for one’s own enjoyment)
motivations (Yee 2006b) appear to be as prominent in virtual worlds as is financial pressure in
4
Gregor (2006) describes five types of theories in information systems research: (1) analysis, (2) explanation, (3)
prediction, (4) explanation and prediction, and(5)designandaction.AccordingtoGregor’s (2006, 620)
taxonomy, this paper provides an explanation theory, as it says ‘‘whatis,how,why,when,andwhere,’’ with
respect to virtual world fraud. It provides explanations, but does not aim to predict with any precision.
5
The fraud diamond is used in this analysis instead of the fraud triangle (Loebbecke et al. 1989;AICPA 2002;
Hogan et al. 2008;Cohen et al. 2011;Trompeter et al. 2013), because perpetrator capabilities are often important
in virtual world fraud cases.
An Analysis of Fraud in Virtual Worlds and Its Implications for the Real World 133
Journal of Information Systems
Fall 2013
real-world fraud. This finding complements recent practitioner observations that non-financial factors,
such as career advancement and a sense of entitlement, are important motivators of fraud in real-world
contexts (Center for Audit Quality [CAQ] 2010; Dorminey et al. 2011,2012).
Second, virtual world fraud victims often overestimate the ability of governance mechanisms to
prevent fraud and tend to have misplaced trust, which suggests that similar victim characteristics
may factor into real-world fraud. Third, participant-designed record keeping systems and resource
allocation schemes appear to be important in building trust and protecting the assets of virtual
organizations. Examining how these information and control systems shape participants’ attitudes
and behaviors may provide practical insights that can aid in the design of real-world accounting and
control systems. Finally, there is considerable variability in how virtual world proprietors manage
fraud risk. Learning more about the factors that shape virtual world fraud risk management
strategies is important, as real-world business environments incorporate more virtual world features
(Reeves and Read 2009).
The remainder of the paper proceeds as follows. Section II describes the characteristics of
virtual worlds and their economies. Section III describes the methods used to identify cases of
fraud that have occurred in prominent virtual environments, and Section IV presents a
description of these cases. Section V presents an analysis of the cases using the fraud
diamond. The final section identifies opportunities for future research about fraud in virtual
FIGURE 1
The ‘‘Fraud Diamond’’
Adapted From Wolfe and Hermanson (2004).
134 Dilla, Harrison, Mennecke, and Janvrin
Journal of Information Systems
Fall 2013
worlds and describes the implications of this research for learning more about real-world fraud
prevention.
II. CHARACTERISTICS OF VIRTUAL WORLDS
Characteristics of Virtual World Participants
While the popular press perpetuates a stereotype of Internet and video game participants as
adolescents who prefer to engage in violent games (e.g., Holtz and Appel 2010), Yee’s (2006b)
survey of Massively Multi-player Online Role-Playing Game (MMORPG) participants describes a
different picture. While 85 percent of Yee’s (2006b) respondents were male, his results contradict the
stereotype of virtual worlds as an adolescent domain, given that the average age of respondents was
26.6 years, with a range between 11 and 68. Further, 50 percent of respondents worked full time.
Given that at least half of virtual world participants are working adults who use their discretionary
time to engage in virtual world activities, it is important to consider the motivations that ‘‘ drive’’ these
users and the potential economic consequences. Yee (2006a,2006b) identifies five non-monetary
factors—achievement, manipulation, relationship, immersion, and escapism—that motivate individ-
uals to participate in MMORPGs (see Table 1). These five factors can individually, or in combination,
influence users to participate in one or more virtual world activities. The virtual assets that facilitate
achievement in virtual worlds such as EVE Online and World of Warcraft, often take considerable
effort to build or acquire, and confer status or power to individuals who possess them (Dibbell 2003,
2004;Westbrook 2006). As is the case in the real world, a common motivation for fraudulent activity
in a virtual world relates to a participant’s desire to build his or her virtual asset balances more quickly.
Alternatively, a perpetrator with a strong manipulation motivation objectifies others and derives
pleasure from deceiving, taunting, and scamming victims (Yee 2006a). Individuals with an inclination
toward these behaviors may engage in fraudulent activity in order to dominate other participants.
Similarly, a virtual world participant with a strong achievement motivation is likely to become
a victim of fraudulent solicitations that promise easy advancement or accumulation of virtual assets.
Many virtual items are difficult to obtain and promises of these rare and valuable items can be used
to appeal to the naı¨ve, greedy, or desperate. Finally, an individual who possesses a strong desire to
develop meaningful virtual world relationships may be more likely to put misplaced trust in fraud
perpetrators. Consequently, the motivations of both perpetrators and victims are critical for
understanding virtual world interaction and behaviors.
TABLE 1
Yee’s (2006b) Participant Motivations Model
Factor Description
Achievement Desire to become powerful in the context of the virtual environment through the
achievement of goals and accumulation of items that confer power.
Manipulation Objectify other users and manipulate them for one’s personal gain and satisfaction. Enjoy
deceiving, scamming, taunting, and dominating other users.
Relationship Desire to interact with others, willingness to form meaningful relationships that are
supportive in nature, willingness to disclose real-life problems and issues.
Immersion Enjoy being in a fantasy world and being ‘‘someone else.’’ Enjoy storytelling aspects of
virtual world and creating ‘‘history’’ for their avatar.
Escapism Use the virtual world to temporarily avoid, forget about, and escape from real-life stress
and problems.
An Analysis of Fraud in Virtual Worlds and Its Implications for the Real World 135
Journal of Information Systems
Fall 2013
Characteristics of the Transaction Space
Users of virtual worlds ‘‘inhabit’’ virtual spaces using embodied representations called
avatars to interact and carry out transactions with others.
6
Because each virtual world proprietor
sets the rules that define how a user’s avatar is allowed to interact with other participants, the
features of the transaction space can be quite diverse. A particularly important feature with
respect to analyzing fraudulent behavior is whether the environment’s TOS allows users to
convert virtual assets to real assets (Bloomfield and Rennekamp 2009;Castronova 2004;
Mennecke et al. 2007). Closed games like World of Warcraft and EVE Online have TOS that
restrict the direct conversion of virtual assets into real-world currency (Blizzard Entertainment
2012;EVE Online 2012). On the other hand, open games like Second Life allow participants to
trade in-world assets for assets outside of the virtual world using a currency exchange, such as
Second Life’s LindeX (Second Life Wikia 2011). Individuals can earn substantial real-world
wealth in environments that allow virtual assets to be converted into real-world currency
(Freedman 2008;Papagiannidis et al. 2008).
7
Virtual world proprietors also have the discretion to determine which fraudulent acts are
allowed according to their TOS. In EVE Online, participants are informed that it is permissible
‘‘when someone takes advantage of your misplaced trust, temporary confusion, or ignorance of
game rules, and robs you via legal in-game means’’ (EVELopedia 2012a).
8
It is only when a
participant converts virtual assets acquired through fraudulent activity into real currency that he/she
is subject to sanctions by the virtual world proprietor. In such cases, the proprietor punishes the
TOS violation (i.e., converting virtual assets to real currency), not the fraudulent act that was
committed within the virtual world. As a result, actions analogous to those that are illegal in the real
world may be allowed, and indeed encouraged, in the virtual world as long as the assets garnered
from the fraudulent acts remain within the virtual environment.
III. CASE IDENTIFICATION AND SELECTION
Similar to earlier studies of online deception (Grazioli and Jarvenpaa 2003) and fraudulent
financial reporting (Cohen et al. 2011), we identified and analyzed publicly available information
regarding actual frauds. An Internet-based search was used to identify virtual world fraud cases,
first searching three conventional article indices (ABI/Inform, Google Scholar, and LexisNexis),
then using a web search engine to search and identify sources likely to contain information about
virtual world fraud (i.e., sites such as massively.com, Technorati, and virtual world message
boards). The keywords ‘‘virtual,’’ ‘‘ virtual world,’’ ‘‘ virtual fraud,’’ ‘‘ fraud,’’ ‘‘ virtual theft,’’ ‘‘ theft,’’
‘‘con,’’ and ‘‘ scam’’ were used. Cases were corroborated through multiple news articles, legal
documents, research papers, blogs, or original posts made by participating individuals or
organizations. Cases that could be traced back to an edited news source, legal documents, or a
first-person account of the incident were included, and cases that were hypothetical or vaguely
described were deleted. In accordance with the methodology used by Grazioli and Jarvenpaa
(2003), the following criteria were used to filter the cases:
6
Avatars can take on many different representations such as idealistic humanoid forms (an elf, a dwarf, a
superhero, etc.), animals (a bear, a dog, an alien, etc.), or inanimate objects (a spaceship, a car, a credit card,
etc.).
7
The open/closed distinction exists along a continuum. For example, EVE Online, an otherwise closed game,
allows limited trading of the game’s currency (Interstellar Kredits or ISK) for game time, which has a real-world
value (Drain 2010a).
8
At the same time, the use of exploits, or taking advantage of others through bypassing normal game mechanics,
such a utilizing a bug in the game, is expressly forbidden in EVE Online and other virtual worlds (EVELopedia
2012a).
136 Dilla, Harrison, Mennecke, and Janvrin
Journal of Information Systems
Fall 2013
Two parties were in a conflict of interest.
An exchange took place that dealt with the possession or acquisition of virtual world assets.
The deceiver made a misrepresentation (i.e., a deceptive act) that gave him/her an unfair
advantage over the target or targets.
The deceptive act took place within the boundaries of the virtual world.
There were clear indications that the case actually occurred.
The case was sufficiently described to accurately categorize in our framework.
The initial search identified 41 cases of apparent virtual world fraud that occurred between 2004
and 2011. Twenty-one cases were excluded because the deceptive act occurred entirely outside
virtual world boundaries, clear indications that the case occurred were not present, or the case was
not sufficiently described.
9
IV. CASE DESCRIPTIONS
The 20 identified cases are classified into four categories: (1) fraudulent activities in virtual
world markets (seven cases), (2) theft of corporate assets (three cases), (3) identity theft (five cases),
and (4) software exploits (five cases). The first category maps onto the real-world fraud category of
investment scams, where overvalued or non-existent investments are sold to unsuspecting investors
(Albrecht et al. 2012). Theft of corporate assets maps onto the real-world category of employee
embezzlement. Identity theft is one of the most commonly reported types of online consumer fraud
(National White Collar Crime Center [NW3C] 2012). Software exploits are part of the broad
category of hacking, or ‘‘the unauthorized access, modification, or use of ... some element of a
computer system’’ (Romney and Steinbart 2012, 149).
Table 2, Panel A lists the cases involving fraud in virtual world markets.
10
The first four cases
(i.e., EIB, Ginko Financial, Curzon Dax, and Phaser, Inc.) are similar to real-world Ponzi schemes,
where operators of a virtual world bank or investment fund promised high returns to investors, but
at some juncture quickly closed operations and absconded with the remaining virtual currency.
The Second Life Capital Exchange (SLCapEx) was a stock exchange owned and operated by
Second Life participants. Bloomfield and Cho (2011) provide evidence suggesting that CEOs, who
raised large amounts of capital in the SLCapEx while it was in operation, appropriated invested
assets for their own use. The CEOs may also have colluded with large investors to take advantage
of smaller investors by making it appear as if the firms represented an attractive investment.
The remaining two market fraud cases involve the purchase and sale of virtual land in Second
Life. A Second Life participant, Marc Bragg, figured out how to illegally purchase Second Life land
before these properties went up for auction, which allowed him to acquire the land for a price well
below market value (Anderson 2006;Craig 2006). Second Life participant, Juggernaut Stoklitsky,
used a weakness in Linden Lab’s land transfer procedures to sell the same piece of land six times
(Nino 2007). He immediately converted the proceeds into real-world cash, or in some cases,
received payment from victims through real-world transfers (i.e., PayPal).
9
Two types of cases where the deceptive act took place outside the boundaries of the virtual world were excluded.
First, cases where a perpetrator claimed to have virtual world assets to sell online, but failed to deliver the assets
after receiving money from the victim were excluded (Collington 2010;Holisky 2010), since all of the
interaction between the perpetrator and the victim took place online outside of a virtual world. Thus, these cases
fall into the broader category of consumer deception on the Internet (Grazioli and Jarvenpaa 2003;Nikitkov et al.
2011). Second, cases where virtual worlds were used to launder money derived from illegal activities (Monroe
2007;Muttik 2008;Storm 2011) were excluded. virtual world money laundering is a serious and significant
criminal activity; however, the funds only pass through the virtual world—the criminal activities associated with
the money laundering activity occur in a real-world environment.
10
Table 2 contains only brief case descriptions. Detailedcasedescriptionsareavailable(seeAppendixA).
An Analysis of Fraud in Virtual Worlds and Its Implications for the Real World 137
Journal of Information Systems
Fall 2013
TABLE 2
Virtual World Fraud Cases
Panel A: Cases Involving Fraud in Virtual World Markets
Reference Virtual World Brief Case Description
Google Video (2006),
McCarthy (2006), Pollack
(2006)
EVE Online EVE Intergalactic Bank (EIB): Ponzi scheme where
investors were promised a high rate of return, but the
bank was closed and the perpetrator kept the game
currency in his personal account.
Alphaville Herald (2007),
Holyoke (2007), Second
Thoughts (2007), Hsu
(2008), Semuels (2008),
Talbot (2008)
Second Life Ginko Financial: A bank in Second Life that operated as a
Ponzi scheme promising a 40 percent rate of return.
Depositors staged a run on the bank when there were
insufficient funds being deposited to cover customers’
withdrawals.
Dax (2009), Egan (2009a),
EVE Online (2009), EVE
Online Forum (2010)
EVE Online Curzon Dax: EVE Online character Curzon Dax started
with a large, apparently legitimate investment scheme.
Dax dissolved the fraudulent investment scheme upon
leaving the game and distributed all the ill-gotten assets
to another participant.
Ceino (2011a), Ceino
(2011b), Drain (2011)
EVE Online Phaser, Inc.: Perpetrators Eddie Lampert and Mordor
Exuel ran and actively promoted an investment scheme
promising 5 percent weekly returns, until the operators
suddenly shut it down, taking the remaining funds.
Bloomfield and Cho (2011) Second Life Second Life CapEx (SLCapEx): Evidence suggests that
firm CEOs who raised large amounts of capital in the
SLCapEx appropriated invested assets for their own
use.
Anderson (2006), Craig
(2006), Walsh (2006 ),
Cheng (2007)
Second Life Second Life Land Auction: Second Life participant Marc
Bragg bought virtual land by linking to the URL of the
auction site before the land went up for auction, thus
obtaining it for a price well below market value.
Nino (2007) Second Life Juggernaut Stoklitsky: Character Juggernaut Stoklitsky
exploited a weakness in Second Life land transfer
procedures to sell the same piece of land six times.
Panel B: Cases Involving Theft of Corporate Assets
Reference Virtual World Case
Egan (2009b), Graham
(2009)
EVE Online Band of Brothers (BOB): A disgruntled director collapsed
the BOB alliance and transferred its assets to a rival
organization.
Drain (2010b), Geere (2010),
Lau (2010), Polo (2010)
EVE Online Titans 4U: Perpetrator ‘‘Bad Bobby’’ stole all the assets of
this large EVE Online investment fund by exploiting
weaknesses in the fund’s governance structure.
BBC News (2009), Egan
(2009c), Ocampo (2009)
EVE Online EBank: Bank CEO ‘‘Ricdic’’ stole bank assets by
exploiting an internal control feature that gave each
director absolute control over a portion of the bank’s
assets.
(continued on next page)
138 Dilla, Harrison, Mennecke, and Janvrin
Journal of Information Systems
Fall 2013
TABLE 2 (continued)
Panel C: Cases Involving Identity Theft
Reference Virtual World Case
Sophos (2005) Various
Korean
MMORPGs
Korean MMORPG Hacking (malware): A syndicate of
cyber criminals used Trojan horses and other techniques
to obtain game participants’ login credentials, then
access and steal victims’ in-game assets.
Fletcher (2009), Jianwei
et al. (2012)
Various
Chinese
MMORPGs
Panda Burning Incense (malware): A syndicate of cyber
criminals developed and infected victims’ computers
with a worm. The worm installed password-stealing
Trojan horses, which were used to obtain access to
game participants’ virtual assets.
BBC News (2007),
Sophos (2007)
Habbo Hotel Habbo Hotel (phishing): A group of Dutch teenagers set
up fake websites to lure the game’s participants into
giving up their login credentials. The perpetrators used
the credentials to access the participants’ accounts and
steal virtual furniture.
Barrett (2009) World of
Warcraft
World of Warcraft (phishing): Victims were directed to a
phishing site that mimicked an official World of
Warcraft page. Victims’ stolen credentials were used to
loot their accounts of virtual goods.
Ward (2009) RuneScape RuneScape (phishing): Perpetrators allegedly used
phishing emails to collect participants’ login credentials
and steal their virtual assets.
Brewer (2008), Welsh
(2008)
Final Fantasy
XI
Final Fantasy XI (provided password voluntarily): The
victim shared his password with the perpetrator, under
the assumption that the perpetrator would take care of
the victim’s virtual items while he was absent. The
perpetrator used the password to steal about $3,800
worth of virtual items from the victim.
Panel D: Cases Involving Software Exploits
Reference Game Case
Knight (2005a) Lineage II Lineage II (exploit): A Chinese exchange student living in
Japan used an automated program (i.e., a bot) to ‘‘ beat
up and rob’’ virtual characters in this game, then
exchanged the stolen goods for cash.
Knight (2005b), Terdiman
(2005)
EverQuest II EverQuest II (exploit): A group of participants exploited a
weakness in the game’s code to produce large amounts
of game currency and sell it for cash.
BBC News (2011), Daily
Mail (2011), Leyden
(2011), Morris (2011)
Zynga Poker Zynga Poker Chip Theft (exploit): British hacker Ashley
Mitchell funded a gambling addiction by stealing and
reselling online gaming chips from Zynga.
Leyden (2004), Sophos
(2004)
Outwar Outwar (botnet): A group of teenagers from the U.K.,
Canada, and the U.S. distributed the Randex worm to
generate clicks and accumulate points in the Outwar
role-playing game.
An Analysis of Fraud in Virtual Worlds and Its Implications for the Real World 139
Journal of Information Systems
Fall 2013
Table 2, Panel B lists the three cases involving theft of corporate assets.
11
In each identified
case, perpetrators were able to circumvent what appeared to be elaborate and effective corporate
governance and internal control procedures to steal corporate assets. The Band of Brothers (BOB)
asset theft case occurred after a disgruntled director defected to GoonSwarm, a rival organization.
Once assured of a safe place within the rival group, the perpetrator exploited a control weakness to
steal nearly all of BOB’s assets (Graham 2009), which resulted in the organization’s dissolution.
The Titans 4U and EBank frauds were both perpetrated by insiders who were able to act alone to
circumvent controls.
Table 2, Panel C lists cases involving the use of identity theft to steal victims’ virtual assets. In
the Korean MMORPG Hacking case, a group of hackers used Trojan horses and other techniques to
steal participants’ login credentials from several popular Korean gaming sites, then access and steal
victims’ virtual assets (Sophos 2004). The perpetrators in the Panda Burning Incense case (Fletcher
2009;Jianwei et al. 2012) operated in a similar fashion. Additionally, certain individuals were
assigned the responsibility of selling stolen virtual assets on illegal markets and transferring the
proceeds back to the lead perpetrators. Three cases (Habbo Hotel, World of Warcraft, and
RuneScape) involve using phishing schemes to obtain participants’ credentials and steal their
virtual assets.
12
Finally, a Final Fantasy XI participant shared his password with another individual who offered
to take care of his virtual items. The ‘‘ trusted friend’’ instead used the logon credentials to steal the
items (Brewer 2008;Welsh 2008). This case is notable because the victim reported the theft to local
police, who refused to investigate because they determined that no ‘‘ real assets’’ were stolen. The
victim was also unsuccessful in his appeals for restitution to the Final Fantasy XI proprietors
because he had violated the TOS by sharing his password.
Table 2, Panel D lists cases involving exploits (i.e., taking advantage of virtual world code or
other control weaknesses) and other schemes. The Lineage II case involved using an automated
program to take unfair advantage of other participants and collect their virtual goods (Knight
2005a). The perpetrator in the EverQuest II case generated virtual currency by exploiting a
programming code weakness (Knight 2005b). In the Zynga Poker Chip Theft case, the perpetrator
generated online gaming chips by posing as a system administrator (BBC News 2011). In all three
cases, the perpetrators exchanged the fraudulently obtained virtual currency for cash. Finally, a
group of teenagers from the U.K., Canada, and the U.S. distributed the Randex worm to generate
clicks and accumulate points in the Outwar role-playing game (Leyden 2004;Sophos 2004).
V. CASE ANALYSIS USING THE ‘‘FRAUD DIAMOND’’
Perpetrator Motivations
Early research identified non-shareable financial pressure as the primary motivation for fraud,
but subsequent analyses suggest a broader set of motivations: Money, Ideology, Coercion, and Ego
(or entitlement) (i.e., MICE ) (Dorminey et al. 2011,2012). Money and ego are particularly relevant
to virtual world fraud. The money component assumes that some individuals commit fraud for
monetary gain, regardless of whether they are experiencing non-shareable financial pressure. The
ego or entitlement component of the MICE taxonomy is consistent with two of the factors that
11
In many virtual worlds, participants form organizational structures that are analogous to real-world corporations.
Titles for these organizations differ across virtual worlds. They are variously known as ‘‘ corporations,’’ ‘‘clans,’’
‘‘guilds,’’ and ‘‘player associations.’’
12
Only these phishing schemes are listed because they were the most completely described cases found. There are
numerous schemes that attempt to steal users’ virtual world logon credentials. For example, see Johnson (2010)
for a list of common World of Warcraft schemes.
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motivate participation in virtual worlds (Yee 2006a). The perpetrator may simply be motivated to
accumulate virtual currency to further his/her achievement in the virtual world, as opposed to
trading the currency for monetary gains. Alternately, a player with a strong manipulation motivation
may commit fraudulent acts simply because he/she enjoys deceiving or dominating other users. The
following analysis examines monetary and non-monetary motivations for committing virtual world
fraud separately.
Monetary
Two cases clearly involve the ‘‘classic’’ motivation of non-shareable financial pressure. EBank
CEO ‘‘Ricdic’’ admitted to stealing a portion of the bank’s assets and converting them to cash
because of personal financial pressures (Table 2, Panel B).
13
British hacker, Ashley Mitchell, stole
and resold online gaming chips from Zynga to support a real-world gambling habit (Table 2, Panel
D). The publicly stated motivation in the Ginko Financial case was also financial pressure, as the
bank had recently lost its main source of funds and had liabilities to depositors without cash flow to
cover these (Table 2, Panel A). The bank manager’s lack of transparency about the disposition of
customer funds, however, strongly indicates that he was simply motivated to steal their virtual
currency (Holyoke 2007).
Second Life land scam perpetrator, Juggernaut Stoklitsky, was clearly motivated by monetary
gain, given that he is alleged to have converted game currency, or in some cases, was paid directly
in real-world cash (Table 2, Panel A). Presumably, other individuals who perpetrated market-based
frauds in Second Life (SLCapEx and Second Life Land Auction) also had monetary motivations, as
Second Life currency can be readily exchanged for real-world cash. Alternately, it is possible that
some of these individuals viewed fraudulent activity as a means of accumulating virtual assets to
enhance their participation in Second Life. For those individuals, it is therefore difficult to draw a
distinction between the monetary motivation of accumulating in-game currency and the non-
monetary motivations described by Yee (2006a).
There is evidence that participants in the Korean MMORPG Hacking (Sophos 2005) and
Panda Burning Incense (Fletcher 2009;Jianwei et al. 2012) schemes (Table 2, Panel C ) converted
stolen items to substantial amounts of cash. There is no direct evidence that stolen virtual goods
were exchanged for cash in either the World of Warcraft or RuneScape identity theft cases. Given
the size and apparent sophistication of these operations, however, it is likely that the perpetrators’
objective was to convert stolen goods to cash rather than retain the items for in-game use (Barrett
2009;Ward 2009). Finally, there is evidence that perpetrators in the Lineage II (Knight 2005a) and
EverQuest II (Knight 2005b) exploit cases were also motivated by monetary gains (Table 2, Panel
D).
Non-Monetary
EIB perpetrator ‘‘Cally’’ left a rambling video taunting his victims (Google Video 2006;
Pollack 2006), which indicated that he was motivated to manipulate other players (Table 2, Panel
A). Similarly, Curzon Dax made it clear that his scheme was engineered primarily to have the
‘‘pleasure’’ of fooling other participants ‘‘ one more time’’ before his retirement from playing EVE
Online (Dax 2009), which also suggests a manipulation motivation (Table 2, Panel A). The
perpetrator’s motivation in the Band of Brothers case (Egan 2009b;Graham 2009) was apparently
to revenge perceived slights from his former alliance partners (Table 2, Panel B). The revenge
13
Detailed descriptions of fraud diamond components for each case are available (see Appendix A).
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motive does not match any of the motivations suggested by Yee’s (2006a) taxonomy; however, it is
consistent with an ego or entitlement motive (Dorminey et al. 2012).
The perpetrators in the Habbo Hotel identity theft (Table 2, Panel C) and Outwar click fraud
cases (Table 2, Panel D) kept their ill-gotten assets in-game and did not convert these to cash. This
indicates, in both cases, that the perpetrators had non-monetary motivations. Achievement appears
to be the strongest motivation in both cases; however, adding virtual furniture to one’s ‘‘room’’ in
Habbo Hotel also satisfies immersion and escapism motivations.
Two of the remaining cases took place in Eve Online, a closed game that does not readily
permit conversion of virtual assets into real assets. Perpetrators in the Phaser, Inc. case (Table 2,
Panel A), admitted their objective was to quickly accumulate EVE Online currency (Drain 2011).
The primary motivation in the Titans 4U case (Table 2, Panel B) was also to accumulate virtual
currency (Drain 2010b). Thus, it appears that achievement was the primary motivator in both cases.
Nevertheless, because the stolen currency had substantial real-world value (approximately $52,000
in Phaser, Inc. and $45,000 in Titans 4U ), the perpetrators may also have been motivated by
monetary gain. Similarly, it is not clear whether the perpetrator in the Final Fantasy XI identity theft
case (Table 2, Panel C) was motivated to accumulate virtual assets for achievement or planned to
convert the stolen goods into real assets.
Opportunity
The opportunity element of virtual world fraud consists of two sub-elements: environmental
factors and victim characteristics (see Table 3). This analysis identifies three environmental factors
related to virtual world fraud. The first concerns real-world regulatory policies and focuses on the
TABLE 3
Opportunities for Virtual World Fraud
Environmental factors
Real-world regulatory policies
Lack of legal precedent concerning virtual assets
Authorities’ unwillingness to prosecute when virtual world fraud does not involve a real-world
crime
Inconsistent rules across jurisdictions concerning virtual assets
Virtual world regulatory policies and features
Regulation of virtual world markets
Terms of service (TOS)
Monitoring participant activity
Encouraging participants to communicate suspected illegal behavior
Social norms and participant organizational structures
Tolerance for behavior considered illegal in the real world
Virtual organization governance and controls
Collusion among perpetrators
Victim characteristics
Monetary gain or achievement motivations
Misplaced trust
Lack of knowledge of:
Market regulation
Corporate governance structures
Online security
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inconsistent definition and application of real-world law to virtual worlds. The second factor
involves virtual world regulatory policies and features. The third factor involves virtual world social
norms and participant organizational structures.
Real-World Regulatory Policies
Two Second Life land sale cases represent the only virtual world market fraud cases where
real-world regulatory policies were applied (Table 2, Panel A). Second Life proprietor, Linden Lab,
froze Marc Bragg’s account and seized his virtual assets for allegedly engaging in a land-auction
fraud (Anderson 2006;Cheng 2007;Craig 2006;Walsh 2006). Bragg subsequently filed a lawsuit
against Linden Lab claiming that its actions were illegal because Second Life’s TOS states that
Second Life residents have ownership rights to property held within this virtual world. Because
Bragg and Linden Lab entered into a confidential out-of-court settlement (Guadamuz 2007), real-
world law in the United States regarding the conversion of assets illegally obtained within an open
game such as Second Life remains ambiguous.
Real-world implications of the Juggernaut Stoklitsky case appear to be more straightforward,
since it involves fraudulent land sales where proceeds were either converted immediately to, or in
some cases received directly in, real-world cash (Nino 2007). As a result, victims filed charges
against the alleged perpetrator in his home state of Florida; however, no press accounts have
appeared to date regarding the resolution of this case.
These two cases involve fraud alleged to have taken place within the virtual environment, not
in the real world. In cases where fraud or deception involving game assets or identities takes place
outside of the game, effective sanctions exist. Established law generally can be applied when
individuals use real-world techniques such as computer worms, malicious emails, or identity theft to
steal virtual assets (Arias 2008;Fletcher 2009;Leyden 2011;Morris 2011;Shen 2010;Sophos
2004,2005,2007), and virtual world proprietors are usually willing to cooperate with legal
authorities in such cases. Indeed, criminal charges were brought against the perpetrators in the
Korean MMORPG Hacking, Panda Burning Incense, and Habbo Hotel identity theft cases (Table 2,
Panel C) and in the Lineage II and Outwar software exploit cases (Table 2, Panel D).
In contrast, there have been no formal legal consequences to date in the cases where the actions
taken to steal a virtual asset occur entirely within a virtual environment. Attempts to recover virtual
assets taken under these circumstances have been unsuccessful thus far under U.S. law (Brewer
2008). Currently, the only countries known to consider theft of virtual assets a property crime are
China, Taiwan, and South Korea (Arias 2008;Carli 2007).
14
Thus, the impact of real-world
regulation is quite different for fraudulent acts that occur totally within virtual worlds, as opposed to
cases that involve deception occurring outside the virtual environment or that include a transfer of
real-world assets.
Virtual World Regulatory Policies and Features
Regulation of virtual world markets. Virtual world proprietors generally had weak or no
regulations pertaining to investments in virtual corporations, banks, or other institutions at the time
the cases involving market fraud occurred (Table 2, Panel A). There is significant variance in how
proprietors have subsequently responded. EVE Online has steadfastly refused to develop significant
financial regulation, even while substantial frauds continue to occur (Egan 2009c). Indeed, EVE
Online participants tend to view the opportunity to interact in a more or less lawless environment as
14
The arrest of a Chinese exchange student in Japan for the Lineage II exploit case (Knight 2005a) suggests that
Japan may have a similar law; however, there are no available details on the legal grounds for the perpetrator’s
arrest.
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one of this virtual world’s attractive features (McCarthy 2006;Drain 2010a). On the other hand,
Second Life has instituted strict restrictions on certain types of in-world activities. For example,
Second Life closed all of its banks in January 2008 (Semuels 2008;Sidel 2008;Talbot 2008). The
SLCapEx did continue to operate; however, by the end of 2009, 19 out of the exchange’s 24
companies had delisted, effectively ending its activities (Liu 2010). Closing virtual banks and
allowing the virtual stock exchange to cease operations effectively avoids fraud risk exposures for
both Second Life participants and its proprietor.
TOS provisions. Presumably, the proprietor of a closed game should be able to deter fraud
within the virtual environment by ejecting players who convert fraudulently obtained assets into
real currency. There is, however, only one identified case where this occurred. EBank CEO, Ricdic,
was thrown out of EVE Online (BBC News 2009) for converting his illegally obtained virtual
assets to cash (Table 2, Panel B). In reality, the threat of dismissal for asset conversion is likely a
weak deterrent to virtual world fraud. A player who plans to quit playing a game may: (1) realize
that there are no effective real-world sanctions, as long as the fraudulent act takes place entirely
within the virtual world, and (2) not care whether he/she is permanently banned from the game for
converting fraudulently obtained virtual assets for real currency. Therefore, TOS provisions by
themselves are unlikely to serve as an effective deterrent to virtual world fraud.
In addition, TOS rarely forbid an individual from assuming alternate identities within a virtual
world. Alternate identities and lack of transparency regarding transactions between Ginko Bank and
related entities controlled by its owner (Table 2, Panel A) were factors in this investment scheme
(Alphaville Herald 2007;Holyoke 2007). Additionally, lack of information about investor identities
apparently made it possible for perpetrator, Bad Bobby, to seize control of the Titans 4U voting
rights (Table 2, Panel B) and abscond with the organization’s assets (Drain 2010b;Geere 2010).
While avatars are a feature unique to virtual worlds, using a masked identity to commit fraud is not
limited to these environments. Indeed, many real-world schemes involve using a fictitious online
representation to hide the perpetrator’s true identity (Grazioli and Jarvenpaa 2003;Albrecht et al.
2007).
Monitoring and communication. It is difficult, if not impossible, for virtual world proprietors
to fully anticipate and attempt to prevent all unauthorized attempts to misappropriate player assets
through regulations and controls.
15
This is especially true when fraud is being perpetrated by parties
outside the virtual world through identity theft techniques. Therefore, monitoring and
communication serve as an important additional means of mitigating virtual world fraud risk,
just as in the real world (COSO 2004). Many proprietors monitor transactions for behavior
indicative of TOS violations (Egan 2009d;McCarthy 2006;Talbot 2008). They also alert
participants about identity theft schemes and possible game software exploits (e.g., World of
Warcraft [WOW] 2012). Participants are also encouraged to report suspected illegal behavior to the
proprietor (e.g., Second Life 2013b), in much the same fashion as corporate fraud hotlines are used
in the real world (e.g., Tysiak 2012). Monitoring and communication systems may or may not serve
as a deterrent to committing fraudulent acts that are forbidden by a game’s TOS. They do, however,
facilitate detecting participants engaged in unauthorized behavior, so that such individuals can be
sanctioned and if necessary, barred from a virtual world.
Social Norms and Participant Organizational Structures
Tolerance for behavior considered to be illegal in the real world. It is not surprising that
three out of the seven cases involving virtual world market fraud and all of the asset theft cases
15
Of course, virtual world proprietors do not have an interest in preventing ‘‘ authorized’’ fraudulent activities when
these are considered to be an important part of a game’s overall experience, as in EVE Online.
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occurred in EVE Online, given that this virtual world allows and encourages fraudulent acts (Drain
2010a;EVELopedia 2012a;McCarthy 2006). There were also four virtual world market fraud
cases in Second Life, even though this virtual world’s social norms do not explicitly encourage
deception. At the same time, the Second Life TOS and its community standards (Second Life
2013a,2013b) do not explicitly prohibit fraudulent asset trades, either.
Virtual organization governance and controls. All of the virtual organizations where theft of
assets occurred (Table 2, Panel B), had what appeared to be strong, participant-developed internal
control and governance systems. Nevertheless, perpetrators in the BOB (Egan 2009b;Graham
2009) and Titans 4U (Drain 2010b) cases were able to find and exploit weaknesses in controls,
allowing them to steal the all of the organization’s assets in both cases. Further, EBank had a system
that limited the amount of assets controlled by an individual director, but did not eliminate the
opportunity for defalcation (Egan 2009c).
Collusion among perpetrators. Five out of the seven cases involving virtual world market
fraud and two out of the three asset theft cases involved perpetrators working alone. This is
consistent with smaller cases of real-world occupational fraud (e.g., theft of corporate assets).
Nevertheless, it is inconsistent with more significant cases of occupational fraud and with financial
reporting fraud, which are typically perpetrated by groups of two or more co-offenders (Albrecht et
al. 2012, 53; Dorminey et al. 2011,2012;Free and Murphy 2013).
There are only two cases where multiple virtual world participants clearly colluded to commit
fraud within a virtual world. The first is the Phaser, Inc. investment scheme (Ceino 2011a;Ceino
2011b;Drain 2011) where perpetrators, Eddie Lampert and Mordor Exuel, conspired to take control
of the fund and steal investors’ assets. The other is the Band of Brothers case in EVE Online (Egan
2009b;Graham 2009), where the perpetrator colluded with interested third parties from a rival
organization. Additionally, there is indirect evidence that collusion took place in the SLCapEx case,
since Bloomfield and Cho’s (2011) data suggest that large investors may have been working
together to lure smaller investors into the market and later misappropriate their assets. Indeed, the
fact that there is little evidence of fraud perpetrated by groups is somewhat surprising, given the
culture in virtual worlds such as EVE Online, where alliances are commonly formed to engage in
goal-oriented activities (Egan 2009b). It seems that these alliances would be an ideal environment
for forming the co-offender ‘‘bonds’’ described by Free and Murphy (2013).
16
Victim Characteristics
Victim characteristics that provide opportunities for virtual world fraud include motivation,
misplaced trust, and lack of knowledge regarding issue such as market regulation, corporate
governance structures, and online security (see Table 3). These are important to consider, given
research evidence that suggests that fraud perpetrators choose their tactics to take advantage of
victims’ known or perceived weaknesses (Johnson et al. 1993;Grazioli and Jarvenpaa 2003).
Monetary gain or achievement motivation. It appears that victims were motivated by
achievement in the three EVE Online market frauds (Table 2, Panel A). Similarly, Second Life
participants who invested in Ginko Bank or in SLCapEx companies were apparently motivated by
the possibility of earning substantial amounts of virtual currency. Just as gullible real-world
investors can be lured into a Ponzi scheme by the promise of large or consistent returns, a virtual
16
Free and Murphy (2013) describe three types of bonds between co-offenders: (1) individual-serving functional
bonds, (2) organization-serving functional bonds, and (3) affective bonds. The relationship between the Phaser,
Inc. perpetrators is an example of an individual-serving functional bond. The rival group’s collusion in the Band
of Brothers case is an example of an organization-serving functional bond. Affective bonds between co-offenders
are likely to be rare in virtual worlds, as these typically develop over a very long period of time (i.e., 15 to 20
years, on average).
An Analysis of Fraud in Virtual Worlds and Its Implications for the Real World 145
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world participant will be attracted to an investment that promises to increase his/her asset balances
or status in the virtual environment (Talbot 2008).
Misplaced trust. Victims’ misplaced trust was also a factor in the Curzon Dax and Phaser, Inc.
cases, as the perpetrators were well-known EVE Online players who had a reputation for running
successful investment schemes. Further, misplaced trust appears to be a factor in at least two
identity theft cases (Table 2, Panel C ). The victim in the Final Fantasy XI case (Brewer 2008;
Welsh 2008) knew the perpetrator and trusted him with his login information. Victims in the World
of Warcraft case (Barrett 2009) were lured to a phishing site via what appeared to be an in-game
pop-up window, and there are subsequent accounts of attempts to direct World of Warcraft
participants to phishing sites via ‘‘whispers’’ on the game’s chat system (Zorz 2010). Victims appear
to be more likely to trust a link to a phishing site when it is provided through an in-game medium,
as opposed to within an email message.
Lack of knowledge of market regulation. Investors in EIB, Ginko Financial, and the two
fraudulent EVE Online investment schemes (Table 2, Panel A) were apparently unaware of the
risks of unregulated investments. This is similar to real-world investors’ ignorance of the risks
associated with unregistered Ponzi schemes (SEC 2013). Investors in Ginko Financial and the
SLCapEx were also apparently unaware of the lack of standards for record keeping, reporting,
disclosure, or information assurance.
While Second Life financial institutions such as Ginko Bank and its affiliated companies issued
financial statements (Holyoke 2007), there is no evidence that these were audited. Similarly, none
of the firms listed on the SLCapEx from May 2007 to December 2009 disclosed audited financial
statements (Bloomfield and Cho 2011). As a result, these financial statements merely functioned as
an illusionary safeguard, which likely added legitimacy to the organization, despite the fact that the
information they contained had not been verified by an independent party. Further compounding the
financial information reliability problem is the fact that there are no generally accepted accounting
principles (GAAP) for virtual world organizations (Gurley 2010;Holyoke 2010) and attempts to
adapt real-world GAAP to virtual world activities may lead to widely divergent results (Ernst &
Young 2010).
Lack of knowledge of corporate governance structures. In all three asset theft cases listed
in Table 2, Panel B, a trusted organizational member easily circumvented what appeared to be
strong, complex internal control structures. Virtual organization leaders’ lack of knowledge about
corporate governance structures and internal controls contributed to the propensity of these
organizations to become fraud victims. The leaders’ naivete´ resulted in poorly designed control
structures that exposed them to the possibility of exploitation (Drain 2010b;Graham 2009;Ocampo
2009).
Lack of knowledge about online security. Victims’ apparent ignorance of basic online
security procedures appears to be a factor in the Korean MMORPG Hacking, Panda Burning
Incense (Table 2, Panel C), and Outwar (Table 2, Panel D) cases. In other identity theft cases (i.e.,
Habbo Hotel, World of Warcraft, and RuneScape), participants’ lack of experience and lack of
familiarity with common phishing schemes appears to be an important reason the perpetrators were
successful. Also, more experienced participants may have overlooked subtle cues that they were
interacting with a fake game website, consistent with evidence that even experienced Internet users
can be fooled into believing that phishing websites are real (Dhamija et al. 2006 ).
Perpetrator Capabilities
An individual’s perception that he/she has the capability to commit fraud is closely related to
environmental opportunities. Three types of perpetrator capabilities appear to be particularly
important in the virtual world context: (1) an understanding of how to exploit weaknesses in rules
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governing virtual world organizations or economic institutions, (2) the ability to manipulate a
victim into erroneously believing that he/she is worthy of being trusted, and (3) technical
knowledge that provides one with the capability to steal victims’ identities or exploit software
weaknesses. Since the capabilities an individual possesses within a virtual world derive from his/her
applicable real-world capabilities, it is important to recognize that the capabilities that he/she
develops and practices in order to steal virtual world assets can also be applied in real-world settings
(Yee 2006a).
Knowledge about Corporate Governance/Economic Institutions
Perpetrators in the identified fraud cases involving virtual world markets fraud apparently
understood how to exploit weaknesses in rules governing virtual world organizations or economic
institutions (Table 2, Panel A). Similarly, perpetrators in the cases involving theft of corporate
assets understood how to exploit weaknesses in these virtual organizations’ control procedures
(Table 2, Panel B).
Ability to Manipulate Others
The perpetrator’s ability to manipulate others was an additional factor in the Curzon Dax and
Phaser, Inc. market frauds (Table 2, Panel A) and the Titans 4U corporate asset theft case (Table 2,
Panel B). Dax used his fame as an entrepreneur and entertainer to lure investors into a ‘‘ special’’
fund, similar to the way Bernie Madoff enticed victims through his personal relationships and
reputation (Economist 2008;Egan 2009a;EVE Online Forum 2010). Similarly, the Titans 4U fund
manager, Bad Bobby, used his reputation as a successful fund manager to convince other company
directors to authorize the sale of shares that eventually allowed him to take control of the fund’s
assets (Drain 2010b). In contrast, the Phaser Inc. perpetrators automated the workings of their fund
and avoided direct investor contact (Ceino 2011b). Instead, they built investor trust by placing
frequent ads in EVE Online chat channels and building a website that provided the appearance that
the Phaser, Inc. investor fund was legitimate.
Technical Knowledge
Perpetrators in the Korean MMORPG Hacking and Panda Burning Incense cases had the
technical knowledge to develop malware that accessed victims’ computers and enabled theft of
login credentials (Table 2, Panel C). Additionally, the Panda Burning Incense perpetrators
developed a complex ‘‘value chain,’’ (Jianwei et al. 2012) where each individual was responsible for
a single action (i.e., writing virus code, planting code on victim computers, stealing virtual assets,
or converting virtual assets into currency). This system took advantage of each syndicate member’s
individual capabilities and helped to conceal their identities.
The perpetrators of the Habbo Hotel, World of Warcraft, and RuneScape cases (Table 2, Panel
C) had the capability to design and send realistic-looking communications to victims (through
either emails or in-game communication channels) and to create realistic-looking websites to collect
victim login information. The Lineage II and EverQuest II perpetrators knew how to exploit
weaknesses in these games’ software code (Table 2, Panel D). The Zynga Poker Chip Theft
perpetrator knew how to exploit system access weaknesses at Zynga and understood how to conceal
his identity by setting up multiple Facebook accounts (Daily Mail 2011). Finally, the Outwar
perpetrators had the technical knowledge to develop and plant malware on host computers, which
was used to exploit a weakness in the Outwar game that allowed the accumulation of points through
automated play over a botnet (Leyden 2004).
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Rationalization
There is information on perpetrator rationalization in many of the cases involving fraud in
virtual world markets (Table 2, Panel A) and corporate asset theft (Table 2, Panel B), while there is
little or no information on rationalization in the cases involving identity theft or software exploits
(Table 2, Panels C and D). It therefore appears that when the ramifications of a fraudulent act are
confined to a virtual world, perpetrators are willing to publicly discuss their rationalizations. On the
other hand, when virtual world fraud involves actions that are considered illegal in the real world
(i.e., identity theft or hacking) it appears that perpetrators are unwilling to publicly discuss their
rationalizations.
Belief that Violating Rules is Acceptable
Murphy and Dacin’s (2011) framework of psychological pathways to fraud states that once
an individual senses that the motivation and opportunity to commit fraud exist, he/she will ask
themselves if they are aware that the behavior is fraud. If the answer is ‘‘no,’’ then there is no need
to rationalize the fraudulent act. This apparently occurred in two of the Second Life market fraud
cases (Table 2, Panel A). Ginko Bank CEO, Nicholas Portacarrero, denied any responsibility for
the bank’s collapse, instead blaming the failure on Linden Lab’s decision to shut down Second
Life casinos (Alphaville Herald 2007;Second Thoughts 2007). In the Second Life auction fraud
case, Marc Bragg claimed that there was nothing wrong with his actions because the proprietor
made it possible to access land auctions before they were open to the public (Craig 2006). Both
perpetrators appear to have based their actions not on real-world social norms, but instead on a
belief that fraudulent actions are acceptable, as long as they are not forbidden by the virtual
world’s TOS.
Even though EVE Online’s social norms strongly indicate that fraudulent actions are an
acceptable ‘‘normal’’ part of the virtual environment (Drain 2010a;McCarthy 2006 ), Mordor Exuel
and Eddie Lampert, perpetrators of the Phaser, Inc. (Ceino 2011b) investment fraud (Table 2, Panel
A) engaged in a rationalization process. Specifically, they stated that they considered conducting an
investment scam to be a ‘‘moral obstacle’’ and that they ‘‘talked it over for quite a while and came to
the decision that we could live with it.’’ According to Murphy and Dacin (2011), an individual who
is aware that a behavior is fraud may use affect-laden moral intuition to rationalize his/her actions.
Thus, Exuel and Lampert were aware that their behavior was fraud, but rationalized away any
negative affect that might be associated with their actions. They came to an intuitive conclusion that
stealing from other players through an investment scheme was no different from the more common
EVE Online strategy of destroying a player’s virtual assets in battle.
17
Disdain or Lack of Respect for Others
EIB Bank director, Cally, rationalized his fraud (Table 2, Panel A) by stating in an online video
that he thought scamming people was amusing and explained that he was ‘‘not a nice person’’
(Google Video 2006). Similarly, fraudulent investment fund manager Curzon Dax publicly stated
that he considered other players to be stupid and that he wanted to have fun perpetrating a scam
before he left EVE Online (Dax 2009). Thus, both players’ motivation to commit fraud in order to
17
An affective judgment is not the only pathway to fraud. If a person’s intuition indicates that fraud is not
acceptable, he/she may then engage in a reasoning process in which they weigh the costs and benefits of fraud. If,
after that process, a person does decide to commit fraud, he/she may attempt to reduce negative affect after
committing the fraud through ex post rationalization, or alternately, by confessing or attempting to make
restitution (Murphy and Dacin 2011).
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manipulate others is closely related to their intuitive rationalizations (i.e., it is justifiable to commit
fraud against individuals one considers to be intellectually inferior).
VI. OBSERVATIONS, OPPORTUNITIES FOR FUTURE RESEARCH, AND
CONCLUSIONS
Market Fraud
As is often the case in the real world, an important motivation to commit fraud in virtual world
financial markets is the accumulation of wealth, both real and virtual. Even when virtual world
regulations forbid or greatly restrict the conversion of virtual assets to real-world money, as in EVE
Online, perpetrators are motivated to misappropriate virtual funds so they can improve their status
and power. The analysis of virtual world fraud cases provides insights into other perpetrator
motivations, such as the desire to manipulate other participants (Egan 2009a). These insights are
useful, given that fraud investigators and researchers are only now beginning to consider non-
monetary incentives for committing fraud (Dorminey et al. 2012;Trompeter et al. 2013) and little is
known about how these non-monetary incentives might influence perpetrator rationalizations
(Murphy and Dacin 2011).
The analysis presented here also examines the role of victim characteristics in virtual world
market fraud. virtual world market participants are willing to invest, even when these markets are
unregulated and reliable information about the value of virtual assets is lacking (Second Thoughts
2007;Drain 2010a). Further, statements made by virtual world participants (e.g., EVE Online
Forum 2010) suggest that participants’ motivation to build relationships with others and further
their sense of achievement leads to a sense of misplaced trust, making them even more susceptible
to false information about the value of virtual assets (Yee 2006a). As a result, psychological
motivations may outweigh rational economic considerations in making victims susceptible to fraud
in virtual world markets.
On the perpetrator side, two important features of virtual worlds might lead an individual to
rationalize that the benefits of committing fraud outweigh the risks of getting caught and punished.
First, regulations with regard to virtual world fraud are ambiguous, especially in the U.S. and other
Western countries. Second, a virtual world participant has a certain degree of anonymity when
embodied as an avatar. Investors’ psychological motivations, the ambiguity of regulations
surrounding virtual trading environments, and seller anonymity each have real-world implications
because of similarities to new, emerging financial markets. For example, the Securities and
Exchange Commission (SEC) is considering regulations regarding crowdfunding, which is the use
of the Internet to raise money through small contributions from a large number of investors
(Bradford 2012;Hazen 2012;Tozzi 2012). These investors may have limited information about the
venture that they are investing in or the identities of the individuals who are raising investment
capital. We therefore offer the following research questions.
RQ1: Why do investors in virtual world markets invest in unregulated securities?
RQ2: To what extent does the relative anonymity provided by an avatar affect one’s propensity
to commit fraudulent acts?
RQ3: How does the lack of relevant regulation over virtual world markets influence the
psychological processes a person uses to rationalize a fraudulent act?
To address RQ1 and RQ2, researchers could treat virtual world markets as a natural laboratory
and observe participant behavior, as did Bloomfield and Cho (2011). In addition, as suggested by
Bloomfield and Rennekamp (2009), researchers might use virtual worlds as environments for
An Analysis of Fraud in Virtual Worlds and Its Implications for the Real World 149
Journal of Information Systems
Fall 2013
conducting realistic, large-scale economic experiments. This approach allows researchers to query
participants about their motivations and decision processes, therefore providing a means for
addressing RQ3. Regardless of the methodology used, it is important for accounting researchers to
focus on understanding the role of psychological and social factors when studying fraudulent
behavior in virtual world markets.
Theft of Corporate Assets
Three cases in EVE Online where perpetrators defrauded virtual organizations were identified,
but there were no similar reported cases from other virtual worlds. Social norms that require loyalty
to one’s guild or organization provide a possible explanation for the lack of such behavior in other
virtual worlds (e.g., World of Warcraft). Many participants invest considerable time and effort
developing their reputation in a virtual world and risk forfeiting this social capital if they were to
betray their guild-mates’ trust. Thus, participants who have a commitment to a virtual world and to
their guild mates will protect their reputations; this, in turn, discourages corporate asset theft
(Williams et al. 2006).
Information transparency also appears to play a role in preventing theft from virtual world
organizations. Many of these organizations have designed sophisticated systems commonly known
as Dragon Kill Point (DKP) systems for allocating and keeping track of members’ pooled resources
(Castronova and Fairfield 2007;Reeves and Read 2009, 129–132; WoWWiki 2011).
18
As with
real-life management accounting systems, DKP systems are designed to motivate and reward the
organization’s members, as well as function as a control mechanism. Unlike many contemporary
management control systems, which are developed from the top of the organization (Kaplan and
Norton 1996,2001a,2001b;Cooper et al. 2012), DKP systems are developed by participants, in
many cases with little direction from the organization’s leadership (Castronova and Fairfield 2007).
DKP systems apparently solidify the reciprocal relationship between the group and its individual
members by allowing for measurable and equitable compensation to individuals for their
contributions to the group, as well as a means of controlling and securing assets (Malone 2009).
Indeed, the strength of social relationships contributes to the stability of DKP systems, which, in
turn, helps to explain why asset theft from virtual organizations is rare (Castronova and Fairfield
2007).
Future research is needed to examine the role of DKP systems in fraud prevention. This
suggests the following research questions:
RQ4: To what extent do the prevailing social norms in a given virtual world influence the
propensity for corporate asset theft to occur?
RQ5: What role do corporation or guild record-keeping systems (e.g., DKP systems) play in
preventing corporate asset theft?
Given the large number of virtual world organizations and ample opportunities to observe
behavior within these entities, case studies appear to be an appropriate approach to investigate RQ4
and RQ5. Retrospective analysis of documents, records of past behaviors, and digital archives of
participant verbal interactions would also be useful in addressing these questions.
18
The term ‘‘Dragon Kill Points’’ originated in fantasy role-playing games such as EverQuest and World of
Warcraft (Malone 2009). The term ‘‘DKP system’’ refers generically to any systemusedtokeeptrackof,and
distribute, a virtual world organization’s assets, regardless of game context.
150 Dilla, Harrison, Mennecke, and Janvrin
Journal of Information Systems
Fall 2013
Identity Theft and Software Exploits
The risk response of virtual world proprietors’ to the possibility of identity theft and software
exploit fraud has implications for real-world fraud prevention. Management (i.e., virtual world
proprietors) can elect to accept, reduce, share, or avoid risk in accordance with the entity’s risk
tolerances and risk appetite (Kinney 2000;COSO 2004). Risk management strategies vary among
proprietors. EVE Online’s proprietor, CCP Games, warns participants that they accept the risk of
virtual asset theft (EVELopedia 2012a,2012b) because theft and fraud is considered to be
sanctioned behavior within that virtual world (EVELopedia 2006).
At the same time, CCP Games actively reduces the risks of threats to the integrity of its virtual
economy and of player identity theft by monitoring the game environment for actions that violate its
TOS, such as conversion of in-game assets to virtual assets (Egan 2009d,2009e;Kuchera 2009).
World of Warcraft proprietor, Blizzard Entertainment, also attempts to reduce identity theft risk by
informing participants of the risks of trading with gold farmers (Blizzard Tutorial 2011;WOW
2012), who are players that play for the express purpose of gaining virtual world assets and
exchanging them for real-world currency. Finally, after Zynga received extensive adverse publicity
when customers signed up and were billed for unwanted items and services, it started managing risk
in its social network games by policing and banning fraudulent third-party offers (Arrington 2009;
Shambora 2009) and warning participants about the risks of accepting such offers (Zynga 2012).
Virtual world proprietors often share or transfer fraud risk using practices such as outsourcing
their virtual currency exchange function to a reliable third-party provider (e.g., Egan 2009f;Live
Gamer 2012). Second Life’s proprietor apparently decided to avoid further investment loss risk by
closing all of its banks after fraudulent trading schemes caused participants to incur substantial
losses (Semuels 2008;Sidel 2008;Talbot 2008).
The proprietor’s role in protecting participants from fraud is important, since putting
participants’ real-world assets at risk detracts from a virtual world’s marketable experience and
potentially exposes the proprietor to litigation from participants who have been fraud victims. This
suggests the following research questions:
RQ6: How do proprietors identify fraud risks?
RQ7: What strategies (i.e., accept, reduce, share, or avoid) do proprietors use to manage fraud
risks)?
Case studies are an effective way to study RQ6 and RQ7. As a particular virtual world
increases in popularity, new exploits and threats will be discovered and proprietors will usually
react by changing their TOS and risk management procedures. This provides the opportunity to
address these questions through longitudinal analysis of changes in the virtual world’s policies over
time.
Conclusions
The analysis of virtual world cases presented in this paper indicates that the study of virtual
world fraud has potential real-world implications and provides opportunities for further research in
four areas:
(1) fraud perpetrators’ non-monetary motivations and rationalizations in financial market
frauds;
(2) victims’ motivations and lack of knowledge in financial market frauds;
(3) how corporate culture and transparent internal accounting systems might help prevent
corporate asset theft; and
(4) factors that shape management’s fraud risk tolerance and risk management strategies.
An Analysis of Fraud in Virtual Worlds and Its Implications for the Real World 151
Journal of Information Systems
Fall 2013
Virtual worlds provide a unique environment for studying the conditions that lead to fraud.
One important advantage of virtual worlds for research is that archival or conventional experimental
data that are difficult or impossible to collect in the real world may be more accessible in a virtual
world. The transparency of virtual worlds facilitates the collection of data pertaining to fraud
perpetrator and victim characteristics, motivations for committing fraud, and institutional and
regulatory structures.
Despite the promise of archival, experimental, and survey techniques for studying fraud in
virtual worlds and its implications for the real world, researchers should proceed with a degree of
caution. Because proprietors seek to offer distinctive products to their participants, each virtual
world typically has a unique set of rules and regulations, which makes mapping findings to real-
world phenomena challenging (Williams 2010). Embedding controlled experiments in virtual
worlds is one way to avoid these problems; however, as Duffy (2011) and Harrison et al. (2011)
observe, this approach is not without potential difficulties. Even so, carefully designed studies in
virtual world environments have considerable potential for advancing researchers’ and
practitioners’ understanding of the antecedents of fraud.
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APPENDIX A
Appendix: http://dx.doi.org/10.2308/isys-50571.s1
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... Virtual worlds are computer-generated, immersive environments where participants interact with others while engaging in social, entertainment, and economic endeavors. To illustrate how virtual worlds can be used to study fraud, Dilla et al. (2013) examined the documented virtual world fraud cases using the "fraud diamond" model (Wolfe and Hermanson 2004) and their findings have real-world implications regarding the causes and prevention of fraud. They include: ...
... This research illustrates how parallels between fraudulent behaviors in virtual and real worlds can advance our understanding of fraud antecedents (Dilla et al, 2013). ...
Book
Full-text available
PREFACE The second edition of ICAFI was dedicated to the reflection on Accounting, Finance and Technologies in Learning Organization. This was the specific challenge of the 2021 conference edition, and different and complementary perspectives on this theme were sought from multidisciplinary fields. Thus, in the second edition of ICAFI 2021, we got dozens of interesting approaches and contributions related to Learning Organization, which is a very dynamic and challenging environment, with an international perspective. We addressed accounting, finance and technology in learning organizations, with inspirational sessions related to artificial intelligence, digital assets and reporting of social and corporate responsibility. The parallel sessions covered topics related to the history of accounting, standardization, taxation, sustainability, management control, performance evaluation, social economy, corporate governance models, among others. Adapting to the demands placed on us by Pandemic Covid 19, this year's ICAFI 2021 took place digitally. However, the digital environment, which seemed like an obstacle before, turned out to be an excellent way to stimulate knowledge sharing and strengthen community spirit. Now and looking to the near future, we will be back in June 30 - July 1, 2022 with the third edition of ICAFI, fully focused on Sustainability Business and Innovation. We will be waiting for you! See our website for more details: http://icafi.pt/. On the following pages you will find the submissions presented at ICAFI 2021. They are sorted alphabetically after the first author's last name.
... The Fraud Diamond Theory (FDT) is considered an extension of the FTT by adding a fourth element, namely capability. It has been argued that in order to commit a fraud, the individual/business must have the capability in terms of skills and ability to commit the fraud such as for example the ability to manipulate others (Dilla et al., 2013). ...
... This delay left millions of gamers unprotected, and their virtual assets were vulnerable to cybercriminal activity. Similar to the value chain for stealing real assets, the value chain for virtual assets starts from acquiring account information and login credentials (Dilla, Harrison, Mennecke, & Janvrin, 2013). Once an account is hacked, criminals will transfer the virtual assets in the account to another account, or change the password and account settings in order to take control of the account. ...
Article
China has witnessed a rapid growth in internet use alongside an unprecedented increase in cybercrimes. Although studies have suggested that there are many factors that may contribute to the growing number of cybercrimes, such as the widespread use of online gaming, the low average income of internet users, and an increased access to IT skills, systematic analyses of actual convictions are rare. As the level of domestic cybercriminal activities increases rapidly, there is a growing call for empirical studies on cybercrime in China. Through the extraction of data from China Judgements Online, the newly released Chinese judgements service, this study examines the basic characteristics of cybercrimes in China by analysing 448 sentencing documents that cover four types of computer crimes: online frauds, real asset theft, virtual asset theft, and stolen accounts. We analyse cybercrime cases from the perspective of the underground economy, focusing on the roles that cybercriminals play in the value chains of the online underground market; more specifically, what kind of products and services are enabled through cyber theft, and how those products and services are integrated as components of the underground economy.
... Aber auch nicht-monetäre Anreize können zu Betrugshandlungen führen (Dorminey, Fleming, Kranacher & Riley, 2012), darunter der soziale Druck, sich als erfolgreich, mächtig oder wohlhabend darzustellen (Dilla, Harrison, Mennecke & Janvrin, 2013) oder das Bedürfnis, bei Statusvergleichen besser abzuschneiden (Ramamoorti, Morrison & Koletar, 2009). Auch der Wunsch, Selbstbild und Identität zu schützen, wenn diese mit einem gewissen finanziellen Status assoziiert sind, kann ein Motiv für Betrug darstellen (Coleman, 1987). ...
Article
Full-text available
Betrugsdelikte führen in Deutschland jährlich zu Schäden in Milliardenhöhe. Betroffene Organisationen stehen vor der Herausforderung, den Methoden der Betrüger entgegenzutreten. Viele Ermittlungsansätze konzentrieren sich auf die technischen Vorgehensweisen und erfordern eine hohe technische Anpassung. Unabhängig von der technischen Methode können psychologische Ansätze die zugrunde liegenden Prozesse erklären und die Aufdeckungsrate erhöhen. Diese Arbeit gibt einen Überblick über den aktuellen Stand der Forschung zu Betrug aus psychologischer Sicht. Der Schwerpunkt liegt auf den Persönlichkeitseigenschaften der Täter. Sie stellen einen Hauptaspekt zur Erklärung der Begehung von Betrugsdelikten dar. Es wird ein integratives Modell der Betrugsbegehung postuliert, das verschiedene Erklärungsansätze verbindet und den Weg von der psychologischen Prädisposition hin zu einer Tatintention und schließlich Tatbegehung nachzeichnet.
... Pressure usually comes in two forms: personal and company. Personal pressure is normally associated with financial pressure, although nonmonetary achievement can be the other perpetrator motivation (Dilla et al., 2013). An individual feels worried if he is unable to maintain a required lifestyle with a limited income. ...
Article
Purpose The purpose of this study is to examine whether policies and procedures, one of the fundamental elements in the internal control environment, are adequate and effective to prevent fraud and unethical practices committed by the employee of the company. In addition, this study also attempts to assess the awareness and understanding of employees on the existence of relevant company policies and standard operating procedures for internal fraud and misconduct deterrence. Design/methodology/approach Five cases from one Malaysian telecommunication company were randomly selected as a case study. Content analyses were conducted on actual cases of internal fraud and wrongdoings that were investigated and the enforcement that was discharged by the company. Findings This study found that the company has sufficient policies and standard operating procedures to curb internal fraud and wrongdoing. However, they are ineffective and malfunction when responsible personnel violate or override the policies and procedures, irrespective of whether this is due to carelessness, poor knowledge, or clear intention to act dishonestly. Research limitations/implications This study was conducted on only one company with a limited number of investigated fraud cases. Access to higher number of fraud cases particularly that involved large amount of losses and considered as high profile cases were denied due to confidentiality. Practical implications The study found that weak compliance to internal controls provides opportunities for fraud to occur, consistent with the fraud triangle theory. Fraud, committed both outside and inside the organization, can be considered as a worrying problem in the organization due to its severe impact to the reputation and bottom line figures of the company. The study provides important information to management to strengthen their compliance with the internal control system generally and policies and procedures particularly. Originality/value This study is original as it focuses on the actual fraud cases that occur in the telecommunication industry, which is under-researched in fraud literature, particularly in developing markets such as Malaysia. Prior empirical research on fraud and unethical practices has concentrated on the factors that contribute to fraud and the financial and non-financial impacts of fraud in an organization.
Article
Objective. To explain fraud occurrence —under three theoretical models— and apply it to the organization’s hierarchy. Methodology. Based on the IIA risk outlook for 2021, an exploratory theoretical scope of analysis was constructed. Risks were considered under the umbrella of three fraud theories: Triangle of Cressey; Diamond of Wolfe and Hermanson; and Pentagon of Crowe. Results. Fraud occurrence may be explained by the perpetrator’s position across the hierarchical organization chart: where it is stressed that arrogance from the Pentagon fits the top management position; competence from the Diamond fits the middle management; and need, opportunity and pressure from the Triangle fit mainly the lower management. Conclusions. Fraud was considered under three main models, concluding that it may be explained through different worker motivations related to their management position in the company.
Article
Purpose The purpose of this paper is to examine Toshiba’s fraudulent financial reporting in relation to the fraud diamond (pressure, opportunity, rationalisation and capability). Design/methodology/approach A quantitative empirical research, analysing secondary data from Toshiba’s published annual reports before restatement, from 2008–2014 has been used. A simultaneous equations approach was used to test the hypothesis. Excel software was used to analyse secondary data and to carry out correlation analysis and descriptive statistics analysis. Findings This study uncovers evidence that pressure proxied by return on assets (ROA), the opportunity proxied by ineffective monitoring (BDOUT), rationalisation proxied by audit opinion (AO) and capability proxied by board member changes (BCHANGE) had moderate to strong relationship to financial statement fraud (FSF) (proxied by Beneish M-score model). However, ROA has a negative and significant effect on Toshiba’s FSF. BDOUT, AO and BCHANGE have positive and significant effect on Toshiba’s FSF. Furthermore, there is no multicollinearity problem within the four variables. Overall, this study has statistically proven that all dimensions of fraud diamond are required for the explanation of Toshiba’s accounting scandal. Originality/value Although a few studies discuss the four dimensions (fraud diamond), none, to our surprise, exists which explain the circumstances led Toshiba’s high-level executives to commit fraud. This study is the first thorough investigation of Toshiba’s accounting scandal that uses all four dimensions to explain Toshiba’s FSF.
Article
The taxation of virtual world economies is uncharted terrain, one that both researchers and government officials are just beginning to scrutinize. Taxes are inevitable in any economy, but what about the increasingly lucrative virtual world economies? The market for virtual goods and services is estimated to be in the millions of dollars, so it is no wonder that governments are beginning to take notice. Experts are divided as to the feasibility of taxation of virtual economies. Most experts agree however that there is significant ambiguity in the current U.S. Internal Revenue Code with respect to virtual worlds. It is unclear if transactions occurring in a virtual world are taxable in the U.S., and the Internal Revenue Service has to date not offered any strong guidance regarding the issue.In this article, we argue that virtual transactions are already subject to taxation under current U.S. law, at any point in time that the U.S. Internal Revenue Service should decide to enforce the current law, whether taking place in game worlds or unscripted worlds. This would include virtual-to-virtual transactions as well as virtual-to-real transactions, as the issue at hand is whether or not virtual activity is taxable, regardless of realization, because all goods and services have a fair market value.
Article
Online consumer fraud is a problem with significant consequences. While a substantial body of research examines the strategies used to defraud consumers in online environments, little is known about the decision processes that perpetrators follow before engaging in fraud. To address this issue, we develop an ethical decision-making model of online consumer fraud based on the fraud diamond. The model also includes anonymity, a key feature of online environments, which can influence sellers' ethical decision-making processes. We empirically evaluate the model first by asking participants to consider the misrepresentation of an asset's value in an online transaction, and then by having participants engage in a real-life version of that scenario. Results indicate that perceived anonymity affects the influences of capability, opportunity, and motivation on rationalization. Further, greater perceived anonymity increases the influence of rationalization on one's intent to act. The paper concludes with a discussion of the implications of these findings for theory, research and practice with respect to fraud in online selling environments.
Article
It is frequently observed that fraud has a greater economic impact on society than any other category of crime. Arguing that both research and practitioner frameworks in auditing and forensic accounting have tended to adopt an individualizing perspective predicated primarily on solo-offending, this article adopts an inductive approach to consider why individuals co-offend in fraud. It reports the results of a set of interviews with 37 individuals convicted of a range of frauds including financial statement fraud, insider trading, credit card fraud, money laundering and asset misappropriation. In each instance, the fraud was perpetrated by a group of two or more co-offenders. Based on inductive, exploratory case coding, we find that reasons for co-offending vary according to the type of bond that exists between co-offenders. Two dimensions of fraudulent co-offending are identified – the primary beneficiary of the fraud and the nature of group attachment – to derive three distinct archetypes of bonds between co-offenders: (i) individual-serving functional bonds, (ii) organization-serving functional bonds and (iii) affective bonds. Key elements of each archetype as well as their impact on the decision to co-offend are examined. Our findings suggest that the social nature of fraud is not merely an incidental feature of the crime, but is instead a potential key to understanding its etiology and some of its distinctive features. They also support the need for diagnostic tools to move beyond individualistic analyses of fraud toward a broader, group sensitive assessment of fraud risk.
Chapter
Where do virtual worlds end and the real world begin? Many consider the boundary between virtual worlds and real-world phenomena to be quite distinct, with the delineation drawn based on criteria such as representations (e.g., avatar appearance, behavior), functions and capabilities (e.g., communication through voice, movement, and gestures; flying or teleporting), social dynamics (e.g., the social system, norms, social structures, and composition), and artifacts (e.g., electronically generated objects). There are many problems with relying on these criteria alone or in combination. Chief among these problems is that the criteria for drawing these boundaries are often chosen based on preconceptions involving the social construction of what defines value to the user (e.g., a physical chair is more valuable than a virtual chair) or the limited frame of reference used to define differences (e.g., in many virtual environments, an avatar can fly or carry out other superhuman feats; however, with proper technology support, one could also fly in the ‘real world’). Given this, we conclude that these commonly applied criteria for establishing boundaries are arbitrary, ill-defined, and ultimately unstable.
Chapter
Based on evidence from press articles covering 39 corporate fraud cases that went public during the period 1992–2005, the objective of this article is to examine the role of managers’ behavior in the commitment of the fraud. This study integrates the fraud triangle (FT) and the theory of planned behavior (TPB) to gain a better understanding of fraud cases. The results of the analysis suggest that personality traits appear to be a major fraud-risk factor. The analysis was further validated through a quantitative analysis of keywords which confirmed that keywords associated with the attitudes/rationalizations component of the integrated theory were predominately found in fraud firms as opposed to a sample of control firms. The results of the study suggest that auditors should evaluate the ethics of management through the components of the TPB: the assessment of attitude, subjective norms, perceived behavioral control and moral obligation. Therefore, it is potentially important that the professional standards that are related to fraud detection strengthen the emphasis on managers’ behavior that may be associated with unethical behavior.
Article
The impact of fraud allegations on those who perceive virtual worlds as future centers of e-commerce is discussed. Stephanie Roberts, who works with social networking system called Second Life, suffered losses when Ginko, operated by an avatar called Nicholas Portocarrero, vanished after amassing money by persuading people to deposit their Linden dollars. Some Second Lifers have reported losing thousands of dollars in Ginko. In another case involved Marc Bragg, a Pennsylvania lawyer, who signed up with Second Life and started whiling away his off hours amassing and selling virtual land and selling virtual fireworks to other residents. He was doing well until May 2006, when Linden Lab accused him of manipulating an auction to acquire virtual land at a below-market price. The company closed his account and confiscated all his virtual holdings.
Article
Focuses on the use of the elements of the fraud diamond to prevent and detect accounting fraud. Essential traits for committing fraud; Steps in assessing fraud risk through the use of the fourth element of the diamond; Ways for auditors to prevent potential fraud.
Article
We synthesize academic literature related to fraudulent financial reporting with dual purposes: (1) to better understand the nature and extent of the existing literature on financial reporting fraud, and (2) to highlight areas where there is need for future research. This project extends the work of Hogan et al. (2008), who completed a similar synthesis project, also sponsored by the Auditing Section of the American Accounting Association, in 2005. We synthesize the literature related to fraud by examining accounting and auditing literature post-Hogan et al. (2008) and by summarizing relevant fraud literature from outside of accounting. We review publications in accounting and related disciplines including criminology, ethics, finance, organizational behavior, psychology, and sociology. We synthesize the research around a model that illustrates the auditor's approach to fraud. The model incorporates auditors' use of the fraud triangle (i.e., management's incentive, attitude, and opportunity to commit fraud), their assessment of the existence and effectiveness of the client's anti-fraud measures (e.g., corporate governance mechanisms and internal controls), and their consideration of possible fraud schemes and concealment techniques when making an overall fraud risk assessment of the client. The model further illustrates how auditors can incorporate this assessment into an overall strategy to detect fraud by implementing appropriate fraud-detection procedures. We summarize the recent literature of each component of the model and suggest avenues for future research.