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Meditari Accountancy Research
Looking through the fraud triangle: a review and call for new directions
Clinton Free,
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Looking through the fraud
triangle: a review and call for
new directions
Clinton Free
Australian School of Business, University of New South Wales,
Kensington, Australia
Abstract
Purpose – This article aims to review popular frameworks used to examine fraud and earmarks three
areas where there is considerable scope for academic research to guide and inform important debates
within organisations and regulatory bodies.
Design/methodology/approach – The article reviews published fraud research in the elds of
auditing and forensic accounting, focusing on the development of the dominant framework in
accounting and fraud examination, the fraud triangle. From this review, specic avenues for future
research are identied.
Findings – Three under-researched issues are identied: rationalisation of fraudulent behaviours by
offenders; the nature of collusion in fraud; and regulatory attempts to promote whistle-blowing. These
topics highlight the perspective of those directly involved in fraud and draw together issues that have
interested researchers in other disciplines for decades with matters that are at the heart of contemporary
nancial management across the globe.
Originality/value – In spite of the profound economic and reputational impact of fraud, the research
in accounting remains fragmented and emergent. This review identies avenues offering scope to
bridge the divide between academia and practice.
Keywords Regulation, Fraud triangle, Whistle-blowing, Collusion, Rationalisation
Paper type General review
1. Introduction
By any measure, fraud is big business. Although the extent of undetected and
unreported fraud remains a mystery, it is clear that fraud imposes a huge economic cost
on organisations and society. In its most recent 2014 Report to the Nations, the
Association of Certied Fraud Examiners (ACFE) estimated that the cost of fraud
globally was approximately 5 per cent of revenue or approximately $3.5 trillion
annually (ACFE, 2014). Moreover, dramatic frauds such as Enron, WorldCom and
Parmalat have done more to tarnish the image of the accounting profession than any
other issue. However, despite this widespread incidence and signicant impact, fraud
research in accounting remains fragmented and emergent.
For the purpose of this review, fraud is dened broadly as:
[…] an illegal act or series of illegal acts committed by nonphysical means and by concealment
or guile to obtain money or property, to avoid the payment or loss of money or property, or to
obtain business or personal advantage (Edelhertz, 1970, pp. 19-20).
Financial support provided by the Australian research council is gratefully acknowledged.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2049-372X.htm
Looking
through the
fraud triangle
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Vol. 23 No. 2, 2015
pp. 175-196
© Emerald Group Publishing Limited
2049-372X
DOI 10.1108/MEDAR-02-2015-0009
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As a research area, fraud has often tended to fall between different literatures including
law, criminology, psychology, ethics, accounting and management, with limited
inter-disciplinary integration (Free and Murphy, 2015). Recent years have seen a burst of
fraud-related research activity in accounting, including recent special issues of
Accounting, Organizations and Society, Accounting Forum and other scholarly outlets,
as well as a range of dedicated conferences and practitioner symposia. This research has
made progress in understanding the motivations and means of fraudulent behaviour,
particularly in relation to nancial statement fraud (Hogan et al., 2008;Skousen et al.,
2009;Koornhof and Du Plessis, 2000)[1]. Nonetheless, much remains to be done if
accounting research is to deliver on its promise to offer insights and guidance to
managers, policymakers and regulators in relation to fraud.
This paper reviews the dominant practical frameworks advanced in fraud research
in accounting, with an emphasis on identifying fruitful avenues for future research. The
aim is two-fold:
(1) to understand the existing literature relating to the investigation of fraud; and
(2) to highlight areas where there is a need for future research.
At the outset, some caveats are in order. Unlike some recent broad-ranging reviews
(Trompeter et al., 2013,2014;Dorminey et al., 2010,2012), this review is selective,
focusing on research designed to facilitate fraud examination in practice. It takes as its
centre-piece work seeking to delineate and advance the so-called “fraud triangle”, which
has become cemented into standards and textbooks in auditing and forensic accounting.
In turn, a range of recent studies has sought to build on the fraud triangle to take the eld
forward.
Furthermore, I acknowledge that the thrust of my call for future research is an
idiosyncratic one, designed to advance the research eld in three specic areas:
(1) the rationalisation of fraudulent behaviour by offenders;
(2) the nature of collusion in fraud; and
(3) regulatory attempts to promote whistle-blowing.
I believe these three areas will generate benets to both the academic literature and
practice. These avenues are derived from a critical analysis of gaps in existing
research, as well as expressions of interest among academic leaders in the eld,
practitioners and regulators in Australia and elsewhere. While this is not an
exhaustive list of gaps in the literature, I believe the avenues identied offer the
ability to bridge the growing divide between academic research and practice (see
Parker et al., 2011).
My summary is organised as follows. In the next section, I provide a brief
overview of the history of the fraud triangle as a concept, including attempts to
expand the model to include other considerations. This is followed by a discussion
of the opportunities and challenges posed by direct research with fraud
perpetrators, a voice that I argue has been largely neglected within recent research.
This will provide the context for a call for future research in three areas that I believe
have been relatively neglected by researchers in accounting. The nal section draws
together these themes and concludes the review.
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2. The fraud triangle
An important thrust of fraud research has been the development of frameworks
designed to prevent a perspicacious model of fraudulent behaviour. The dominant
framework relating to fraud is the so-called “fraud triangle” (see Figure 1), which is
embedded in professional auditing standards around the world (IAASB, 2009;PCAOB,
2005) including the USA (SAS No. 99), Australia (ASA 240) and international audit
standards (ISA 240). The fraud triangle comprises three conditions that are argued to be
present whenever a fraud occurs:
(1) a pressure or incentive that provides a motive to commit fraud (e.g. personal
nancial problems);
(2) an opportunity for fraud to be perpetrated (e.g. weaknesses in, or ability to
override, internal controls); and
(3) an attitude that enables the individual to commit fraud or the ability to
rationalise the fraud.
As well as being embedded in auditing standards, the fraud triangle has been widely
discussed in academic textbooks and professional instruction handbooks in the growing
eld of forensic accounting and fraud examination (Albrecht and Albrecht, 2004;Ozkul
and Pamukcu, 2012;Wells, 2011) as well as academic research (e.g. Murphy, 2012;
Murphy and Dacin, 2011;Wilks and Zimbelman, 2004;Free and Murphy, 2015;Andon
and Free, 2015; see Trompeter et al. (2013) for a review of research into each of the
elements of the fraud triangle), practitioner-oriented articles (e.g. Murdock, 2008) and
teaching cases (e.g. Clayton and Ellison, 2011). In a comprehensive review, Smith and
Crumbley (2009) nd that the fraud triangle is the most commonly taught framework in
fraud examination and forensic accounting courses in the USA, UK, Australia, Hong
Kong and Lebanon. It is also a mainstay in the educational curricula of a growing
number of certications in forensic accounting in the USA and elsewhere (Huber, 2012).
Figure 1.
The fraud triangle
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Although the fraud triangle is often credited to the work of American sociologist Donald
Cressey, it is important to note that it represents a peculiar translation of Cressey’s
original work. Indeed, the term “fraud triangle” was rst coined decades after Cressey’s
(1953) pioneering interview work with embezzlement perpetrators by Joseph Wells, a
former Certied Public Accountant (CPA) and Federal and Bureau of Investigation
agent who founded the ACFE[2](Morales et al., 2014). In their critical review, Morales
et al. (2014) highlight that the fraud triangle is predicated upon an individualising
conception of fraud that elevates the imperative of systematic controls to prevent and
detect the attitudes and tendencies of some dangerous individuals. Indeed, Joseph Wells,
the founder of the ACFE, has consistently presented fraud as both an unscrupulous act
perpetrated for personal enrichment as well as a generalised problem that necessitates
effective internal controls and the surveillance of individuals within organisations (see
Wells, 2011). In this way, Morales et al. (2014) argue that the fraud triangle represents a
translation intentionally designed to legitimise the professional intervention of various
professional communities including the ACFE. As Morales et al. (2014, p. 178) put it:
In other words, the triangle provides fraud specialists with an investigative template that
individualizes fraud, holds organizations responsible for controlling it, and renders futile any
systemic questioning. As a result, fraud is circumscribed to the realm of the specic:
individuals subjected to pressure and somehow able to rationalize the act should not be left in
a position to commit fraud. From this perspective, it is incumbent on the organization to ensure
that the three legs of the triangle are properly overseen through a rigorous structure of internal
control. Fraud is thus constituted as a problem at the conuence of the individual and the
organization; it is certainly not represented as a social, political, or historical problem.
2.1 Recongurations and reframings
In spite of this widespread diffusion, the fraud triangle has also been the subject of
considerable debate and criticism in recent years (see Morales et al., 2014;Free and
Murphy, 2015). To provide further insight into fraud perpetrator methods and
motivations and improve an organisation’s ability to prevent, detect and investigate
fraud, researchers and practitioners have sought to offer insights beyond the fraud
triangle (Dorminey et al., 2012). Some scholars have sought to augment it with other
theoretical models in criminology (e.g. Ramamoorti, 2008 who connect the fraud triangle
with routine activity theory) or elsewhere (e.g. Dorminey et al., 2010 who identify a
number of acronyms such as the MICE – money, ideology, coercion and
ego/entitlement – factors of motivation and alternative models). Others have gone
further to even add additional dimensions to the triangle, converting it geometrically to
a fraud diamond (Wolfe and Hermanson, 2004 who propose a fourth dimension of
capability), fraud square (Cieslewicz, 2010 who adds the notion of societal inuences),
fraud cube (Doost, 1990 who argues that computer crime has three additional
dimensions – relationship,expertise and motivation) or fraud pentagon (Marks, 2009
who adds the dimensions of arrogance and competence,orGoldman, 2010 who adds the
dimensions of personal greed and employee disenfranchisement).
The extension that has gained the most attention has been the addition of a fourth leg
of capability by Wolfe and Hermanson’s (2004) fraud diamond (see Figure 2). Wolfe and
Hermanson (2004) present a range of considerations under the heading “capability”
including position, intellectual capacity, condence, resilience to stress and guilt and
ability to coerce and cajole others. In the context of the fraud triangle, their notion of
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capability modies the opportunity construct by limiting opportunity to a small set of
individuals thought to have the necessary capacity (Dorminey et al., 2012). While this
has generated interest in both academic and practitioner circles, it has not penetrated the
ofcial pronouncements of the various audit bodies throughout the world.
Also focusing on individualistic explanations of fraud, the fraud scale was developed
through an analysis of 212 frauds in the early 1980s (Albrecht et al., 1984). Albrecht et al.
(1984) rely on two components of the fraud triangle, pressure (the concept adapted from
Cressey’s original conception of a non-shareable problem) and opportunity, but replace
rationalisation with personal integrity. This representation focuses attention on the morality
of the offender, consistent with popular media images of fraud perpetrators as bad apples
and calculating, callous fraudsters (see Levi, 2006). It also accords with research
contributions that have connected fraud to neurotic personalities (Dorminey et al., 2010),
fraud predators (Dorminey et al., 2012), industrial psychopaths (Ramamoorti, 2008),
pathological gamblers (Kelly and Hartley, 2010), vice-related traits (Kidder, 2005) and
Machiavellianism (Murphy, 2012). Figure 3 is a visual representation of the fraud scale.
In an effort to move beyond the individualising focus of some fraud research,
Ramamoorti (2008) proposes the A-B-C model for the analysis and categorisation of
fraud: a bad Apple, a bad Bushel and a bad Crop. The bad apple is an individual, the bad
bushel addresses collusive fraud and the bad crop refers to cultural and societal
mechanisms that inuence the relative incidence of fraud. Others have attempted to
replace the fraud triangle themes with broader concerns. Free et al. (2007) propose the
concept of the organisational fraud triangle, underpinned by:
• charismatic leadership;
• subverted management controls; and
• a permissive culture (see Figure 4).
A small set of critical articles have traced the impact of societal and organisational
pressures on fraudulent behaviour (Gabbioneta et al., 2013;Free et al., 2007;Free and
Figure 2.
The fraud diamond
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Macintosh, 2008;Stuebs and Wilkinson, 2010;Free and Murphy, 2015), consistent with
a stream of criminology research that has pointed to the criminogenic (tending to
produce crime or criminality) or even criminally coercive nature of certain organisations
and economic environments (e.g. Coleman, 1990;Clinard and Yeager, 1980).
In summary, theoretical models surrounding behavioural aspects of the fraud
perpetrator originated in the 1940s and 1950s with the pioneering white collar crime
works of Sutherland (1940,1944) and his doctoral student, Cressey (1953). This seminal
work, which was translated to formulate the fraud triangle, has been further expanded.
This research has yielded important insights and provided the basis for a growing fraud
examination profession, outlining a range of “red ags”, key parameters of fraudulent
activity and the identication and elaboration of a long list of anti-fraud practices (e.g.
Hammersley, 2011;Koornhof and Du Plessis, 2000;Hogan et al., 2008;Dorminey et al.,
Figure 3.
The fraud scale
Figure 4.
The organisational
fraud triangle
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2012). It has thus become an important foundation for the growing eld of fraud
examination. However, the ongoing exploration and discussion of fraud, its causes and
controls are important to the development of accounting, audit, risk management and
anti-fraud professionals.
3. Talking to perpetrators
Recent research in accounting has made important strides in understanding the
individual drivers of fraudulent behaviour. However, the fraud eld is at risk
of becoming seduced by over-simplied, individual-oriented models that, by
denition, are unable to capture the complex notion of fraud in practice. In short, the
complex and varied nature of fraud means that much work remains to be done to
paint a more complete canvas. Furthermore, while archival (see Eilifsen and Messier
(2000) for a review) and doctrinal (e.g. Labuschagne and Els, 2006) research has
yielded many insights and contributions, I believe that there is considerable scope
for examining the perspective of fraud perpetrators through eld research[3].
Except for some foundational work in criminology (Cressey, 1953), these voices have
been largely absent from fraud research in spite of the fact that they represent the
parties closest to the phenomenon. While interview, survey and experimental
approaches involving fraud perpetrators (who may or may not be incarcerated)
involve problematic issues relating to access, self-serving biases and ethics (see
O’Connor, 2000), these methods also hold a key to opening up the eld as a discipline.
Moreover, thoughtful cross-disciplinary research in these areas has the potential to
drive both important academic insights and practical implications, thereby
connecting academic and practical works that have become increasingly estranged
in other areas of accounting research.
3.1 Reections on conducting research with perpetrators in prison
In broad terms, convicted perpetrators fall into three broad categories:
(1) offenders convicted with a non-custodial sentence;
(2) incarcerated prisoners; and
(3) released offenders.
I have recently been involved in a series of projects that have been based on direct
interviews and/or surveys with fraud perpetrators in prisons (Free and Murphy, 2015;
Murphy and Free, 2015). I count these experiences among the most rewarding and
interesting of my career. Rather than an over-arching analysis of issues involved in
prison (see Liebling 1999,2001), I wish to offer some reections on interviewing
offenders, focusing in particular on access, ethical considerations and the character of
interviewing.
Prisons offer a wealth of challenges and opportunities for research in fraud. In
our experience, the process of obtaining access, documentary requirements and
entry protocols proved to be quite variable in different jurisdictions (Australia,
Canada and the USA). Access is complicated by the need to gain clearance at
multiple ethics boards (at faculty, university and corrective services levels) and the
understandable reluctance of corrective services ethics committees to expose
in-mates to unnecessary intrusion. A demonstrable benet to the corrections or
criminal justice system is also generally required, requiring a re-drafting of
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academic research objectives into more applied, practical terms (Trulson et al. 2004).
In all instances, the clearance process involved an interactive negotiation involving
changes and clarications to ensure data collection methods were as feasible,
minimally disruptive and acceptable to staff and inmates as possible. This was
considerably aided by identifying the appropriate administrator (Trulson et al.
2004). Like most aspects of eld research, perseverance was essential. In short, the
obstacles to entry are difcult but not insurmountable.
Relative to quantitative approaches, interviews with perpetrators offer the
ability to investigate both individual-psychological and situational-sociological
components of fraudulent activity (Liebling, 1999). My interviews with offenders
have been semi-structured, a exible tool permitting the researchers to pursue
unexpected paths and cues suggested by the theoretical sensitivity (Glaser and
Strauss, 1967) and conducted in designated visitor rooms often reserved for lawyer
conferencing. These interviews were carefully prepared (each interview featured a
standardised introduction assuring condentiality, suggesting the approximate
length of the interview and requesting permission to take notes), and designed to
encourage openness and elaboration. In practice, this proved to be a “delicate art”
(Wolcott, 1995, p. 105). The interviews covered many issues of enormous
signicance to prisoners (case histories, trial details, experiences in prison). Two
major challenges were the lack of sufcient time to break down barriers and gain the
trust of the respondents (see O’Brien and Bates, 2003 for a fuller discussion of this
issue), and the limited contact with prison staff. However, for the most part,
respondents participated actively, responding to questions freely with anecdotes,
feelings and questions, often becoming more uent and open as the interview
progressed. All study participants were required to read and sign an informed
consent document and we gave frequent reassurances about the condentiality of
the information and the participant’s prerogative to withdraw from the study at any
time[4]. Inevitably, there were sensitive areas where the information sought was
perceived as risky or uncomfortable such as recollections of criminal acts, arrests,
embarrassment and shame. We did notice some contradictions in responses;
however, we recorded answers as given and occasionally used information received
elsewhere to make judgements about the accuracy or otherwise of our data (in some
prisons, we were given detailed case notes about each of the participants containing
key data such as sentences, the dollar size of the fraud and case facts).
It is important to acknowledge that the interviews were frequently emotionally
confronting for the interviewee and interviewer. As Liebling (1999) notes, the pains and
frustrations of imprisonment are tragically under-estimated by conventional
methodological approaches to crime and regulation. Measured by conventional
standards of scientic objectivity, the accounts took shape as personal stories of human
situations, as complex and uncertain as the people and situations themselves,
harbouring a host of ineffable experiences and emotions. At the end of each interview,
participants were asked if they had any further comments relating to the issues they had
discussed or the study more broadly. Throughout, I hoped to leave prisoners feeling that
the interviews had been a worthwhile experience for them, and that they had received an
opportunity to be heard. As a group of interviewers, we often emerged from the
interviews exhausted, occasionally saddened and sometimes uplifted.
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4. Directions for future research
As others have pointed out (Trompeter et al., 2013,2014;Dorminey et al., 2010,2012),
there is an array of topic areas that warrant further research. Drawing on identied gaps
in the literatures, other calls for work as well as a range of personal interests and
conversations with fraud professionals and other academics in the eld, I wish to focus
attention on three areas where I believe there is scope for research activity. These areas
are:
(1) the notion of rationalisation by fraud offenders;
(2) the phenomenon of collusion or co-offending; and
(3) anti-fraud regulation aiming to facilitate whistle-blowing.
This is, of course, not an exhaustive list of themes that are presently under-researched;
however, I believe each of these areas is likely to be of interest to practitioners,
academics and regulators. For the most part, these topics require engagement with
actors in a fraud (the perpetrators) or those responsible for detection (in the case of
whistle-blowers). Given ongoing calls for academics to concern themselves with
relevance (Broadbent and Unerman, 2011) and the world of practice (Evans et al., 2011;
Tucker and Parker, 2014), these themes directly lend themselves to practical solutions
and tools likely to enhance the understanding of fraud within organisations.
4.1 Rationalisation
To date, research investigating the notion of rationalisation, a phenomenon widely seen
to be “a relative mystery” (Murphy, 2012; see also Hogan et al., 2008;Wells, 2004), has
been scant. The American Institute of Certied Public Accountants goes further to
suggest that this factor “may not be observable” (AICPA, 2002, Sec. 316.35). As noted by
Hogan et al. (2008) and Murphy and Dacin (2011), this element of the fraud triangle has
received the least amount of attention from accounting researchers.
It is possible to delineate ten distinct “types” of rationalisations. These categories are
based on a synthesis of theorising from other research disciplines and are summarised
in Table I.
To date, there has been no empirical work seeking to validate or further investigate
these categories, prompting Murphy and Dacin (2011) to call for eld-based research
into their theoretical categories. In short, much work remains to be done in rening the
concept of rationalisation in the area of fraud. Further research could certainly provide
insights into this construct through directed questioning of convicted fraud
perpetrators. This would not only further delineate rationalisation, but also provide
insight into rationalisation categories that are helpful for educators, auditors and
regulators.
Trompeter et al. (2013) nd that rationalisation (moral justication after the fraud)
and the closely related construct of neutralisation (moral justication before the fraud)
have been examined extensively by non-accounting researchers in a variety of settings.
The timing related to fraud justication is important because it might impact anti-fraud
programs. Generally, the fraud triangle’s construct of rationalisation is thought to occur
before the fraudulent act. As a result, rationalisation is frequently addressed in
anti-fraud efforts through training and awareness; such efforts might not be effective or
cost-benecial if the fraudster does not consider justication for an act until after it has
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Table I.
Categories of
rationalisation in
existing research in
accounting
Category Denition Exemplary statement
1. Moral justication Reconstruing the act as socially worthy
or having a moral purpose. Sometimes
used along with appeals to a higher
authority or loyalty to that authority.
Accounting managers at WorldCom
indicated that they booked fraudulent
accounting entries for Scott Sullivan
because of their loyalty to him. Some
use this category to argue they are
striking back at a malevolent system
“I’m protecting the company
[. . .]”
2. Advantageous
comparison
Comparing the wrongful act against a
much more agrant act, to make the
original act look better. Even if the
infraction is substantial, there are
always larger ones for comparison
purposes
“This is nothing compared
to [. . .]”
3. Euphemistic
labelling
Using convoluted verbiage to make a
wrongful act sound better. Scott
Sullivan, former chief nancial ofcer
(CFO) of WorldCom, wrote a lengthy
white paper to justify the capitalisation
rather than expensing of certain items
in the nancial statements
“I am trying to level the
playing eld”
4. Ignore or
misconstrue
consequences
Minimising, ignoring or misconstruing
any consequences of the act. This
category can include related
rationalisations such as, “no one was
hurt”, or “no one was hurt much”.
Bandura et al. (1996) found that
participants using this category were
less able to recall the harmful effects of
an act while easily remembering other
aspects of the experiment
“I can’t see that it hurts
anyone”
5. Denial of the
victim
Placing blame onto the victim, arguing
the victim is physically absent or
unknown, or dehumanising the victim.
This category does not deny negative
consequences, but rather focuses
attention on the victim
“It all ends up cutting
covered by insurance
anyway”
6. Displacing
responsibility
Placing responsibility for the act with
someone else. Scott Sullivan, CFO of
WorldCom, testied that he was
implicitly told by his boss, chief
executive ofcer (CEO) Bernie Ebbers,
to alter the nancial statements to “hit
the numbers”
“I was just part of a team
that was doing it”
(continued)
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been completed. Understanding the true nature of fraud justication is critical to
properly formulating anti-fraud measures.
Trompeter et al. (2013) further call for research on the relationship between
rationalisation and personality and individual differences, an organisaton’s ethical
culture and leadership and foreign environments and cross-cultural differences. These
themes remain neglected. To these items, I would like to add how rationalisation is
impacted by collusion and organisational climate. The limited work that has been done
on rationalisation has also focused on nancial statement fraud to the exclusion of the
other categories, meaning that our current understanding is partial and incomplete.
4.2 Collusion
The fraud triangle is largely predicated on an individual acting in isolation (Dorminey
et al., 2010). However, the major frauds of recent decades, including Enron, WorldCom,
Parmalat, HealthSouth and Satyam, all illustrate that collusion is a central element in
many complex and costly frauds and nancial crimes. Indeed, it is difcult to identify a
major recent organisational fraud that has not implicated multiple members of the
organisation. Parties involved in collusion may be employees within an organisation, a
group of individuals spanning multiple organisations and jurisdictions or members of a
dedicated criminal organisation or collective (Dorminey et al., 2010;Venter, 2007). The
ACFE’s (2014) Report to the Nation indicates that when collusion is involved, dollar
amounts associated with fraud losses increase dramatically, and recent survey work
reveals an increase in collusive frauds as a percentage of total fraud (KPMG, 2012).
Table I.
Category Denition Exemplary statement
7. Diffusing
responsibility
Sharing responsibility with others.
Richard Scrushy, CEO of HealthSouth,
allegedly instructed his subordinates to
misreport by explaining that
“everybody does it”. This category of
rationalisation is ubiquitous
throughout US society as a way of
justifying cheating
“Everyone else was doing it”
8. Entitlement Deserving of more, regardless of
anything else (Mayhew and Murphy,
2014). Wells (2011) uses the concept of
“wages in kind“ in accounting for
fraudulent behaviour
“I deserved more money”
9. Disbelief Claiming disbelief of how the rules
work. Accountants at Enron argued
that accounting treatments designed to
facilitate off-balanced sheet nancing
were “grey“ zones of legality (Free
et al., 2007)
“What we are doing isn’t
illegal”
10. Temporary loan The perpetrator arguing that s/he plans
to pay it back or x the fraud (Murphy
and Free, 2015)
“I fully intended to pay back
the money that I took”
Source: Adapted from Murphy (2012),Mayhew and Murphy (2014),Free et al. (2007)
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The individualising focus on solo offending in most applications of the fraud triangle
has meant that forensic accounting and fraud examination have fallen behind other
research areas with respect to theoretical work on criminal groups, collusion and
co-offending. Furthermore, although a number of scholars in criminology have focused
on co-offending (Weerman, 2003;Klein, 1995;Klein and Maxson, 2006), these studies
have tended to focus primarily on the area of juvenile delinquency and the extent to
which ndings from these studies generalise to fraudulent activity remains unclear.
There are many differences between the categories of juvenile delinquency and fraud in
terms of age–sex nexus of offenders, conviction rates, opportunity structures,
consequences, rationalisations and motivations. Taken together, these shortcomings in
current practitioner guidance and research underline the lack of a clear understanding
about co-offenders and fraud.
Research in criminology provides a solid basis for theorising about collusion in the
domain of fraud. In a review of the literature, Weerman (2003) discusses four general
theoretical perspectives in criminology relating to co-offending. First, the group
inuence perspective considers collusion to be the outcome of the group inuence
promoting criminal behaviour. Arguably, the most widely applied version of this theory
is the Sutherland’s theory of differential association, which has been recognised as “a
pillar of criminological thought and research” (Hochstetler et al., 2002, p. 559). In essence,
Sutherland (1940,1944) postulates that criminal behaviour, including both the technical
skills necessary to commit fraud as well as the attendant attitudes and rationalisations,
is learned in intimate social groups. Although Sutherland points out that mere exposure
to criminal behaviour is not sufcient to motivate criminal behaviour, his core
proposition is that an excess of criminogenic “denitions” as opposed to conformist
“denitions” are conducive to criminality. As such, Sutherland argues that individuals’
interaction with deviant peers results in cognitive changes that make offending more
attractive. This theorisation has been augmented by several scholars who suggest that
the application of rewards and sanctions (so-called “operant and participant
conditioning”) are an important source of behavioural reinforcement (Akers, 1997).
Although intuitively appealing, empirical investigations of this theory are inconclusive
(Albanese, 1988;Clinard, 1946;Geis, 2002;Lane, 1953).
Second, the social selection perspective considers collusion to be a by-product of the
tendency of offenders to seek each other out proactively as friends and companions.
Although not widely invoked, the most mature version of this view is the notion of
assortative mating processes (Krueger et al., 1998). In short, the underlying argument is
that those who have a tolerance for higher risk tend to be attracted to rms or industries
that have a history or culture of “cutting corners” and offering high rewards. This line of
inquiry focuses attention on the traits and pathologies of individual co-offenders and
their immediate environments. Impulsive, aggressive, ambitious people are, it is argued,
more likely to seek out environments that privilege meeting nancial goals over
business ethics.
Third, the instrumental perspective conceives collusion as the result of a judgement
that co-offending leads to an easier, more protable or less risky execution of a crime.
Strong form Rational choice arguments are a favourite target of critical scholars who
point to occasions where co-offending occurs for limited personal gains or is the
response of spontaneous decisions. Nonetheless, this research has provided evidence of
the role of perceived costs and benets in criminal co-offending. Moreover, there are a
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number of examples of clinical rational calculating in major frauds, such as the
estimating of costs of payouts versus recalls in the Ford Pinto case (Lee, 1998) and
infamous Dalkin Shield case (Kritzer, 1988).
Fourth, borrowing from the elds of social psychology and sociology, the social
exchange perspective conceptualises joint offending as an interpersonal exchange of
material and immaterial goods in which each offender has something to gain from the
co-operation of the other. A social exchange occurs where two actors give something of
value to one another and receive something of value in return (Emerson, 1976). Some
social exchange theorists conceive of relationships in purely instrumental and
transactional terms, however, most social exchange theorists consider both economic
resources – addressing nancial needs – and socio-emotional resources – addressing
social and esteem needs (which are often symbolic and particularistic). Adopting a type
of rational choice epistemology, a key tenet of the social exchange theory is that
individuals form and maintain a relationship as long as the benets from that
relationship exceed those available elsewhere (Emerson, 1976). Also, central to the social
exchange theory is the idea that an interaction that elicits approval from another person
is more likely to be repeated than an interaction that elicits disapproval.
My own recently published research in the eld is directed at the issue of
relationships or bonds between those engaged in collusion. In an interview study of
convicted fraud perpetrators from three large US Federal prisons, Free and Murphy
(2015) found that 37 of 63 (58.7 per cent) of respondents stated that the execution of their
fraudulent activity directly involved more than one person. This sample offers an
interesting window on the nature of co-offending. Free and Murphy (2015) found that
collusion or co-offending bonds could be categorised in three distinct groupings or
archetypes, depending on the primary beneciary of the fraud (individual versus
organisation) and nature of the relationship between co-offenders (functional ties,
essentially brought together for the purpose of perpetrating a fraud, versus affective
ties, that is bound together by an emotive attachment). The three archetypes of
co-offenders identied were as follows:
(1) Individual-serving functional bonds: which characterise actors in a relationship
bonded together by the view that co-offending offers a structure that provides, or
enhances, opportunities for fraud. Here, co-offenders nd it in their own
individualistic self-interest to co-operate with others in the pursuit of
individualistic benets.
(2) Organisation-serving functional bonds: which characterise those bonded
in a fraud to enhance the nancial position of their organisation.
Organisation-serving functional bonds underscore the importance of
workplaces as sites of socialisation and point to the criminogenic aspects of some
organisational contexts.
(3) Affective bonds: which refer to strong emotional attractions between two or more
adults. These bonds are often tied to deep friendships and kinship, reecting
wider research in criminology highlighting the role of family relationships in the
transmission of crime.
This research conrms the heterogeneous nature of collusion in fraud and different
concepts are needed to provide insight into the decision to co-offend. It only scratches the
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surface of a phenomenon that remains poorly understood. Little is currently known
about how collusion impacts individual decision-making and how fraud is perpetrated.
If we accept that collusion is not merely an incidental feature of the crime but a potential
key to understanding its etiology and some of its distinctive features (Free and Murphy,
2015), then it is clear that further work is required to unpack this area.
4.3 Regulatory responses
Whistle-blowing is a cost-effective mechanism for detecting fraud that has been
identied as the major mode of fraud detection in organisations (ACFE, 2014). High
prole cases, such as Sheryl Watkins at Enron and Cynthia Cooper at Worldcom in the
USA, as well as Jeff Morris’ revelations of serious nancial planning fraud at the
Commonwealth Bank in Australia, all underscore the centrality of whistle-blowing in
the detection of fraud. A host of initiatives has been pursued to promote
whistle-blowing. Organisations have invested enormous resources and effort into
building cultures of compliance, including the development of dedicated hotlines for
whistle-blowing and training that elevates the importance of social enforcement of
legitimate corporate conduct. Professional accounting bodies have introduced
principles and obligations to assist decision-making on ethical matters such as
whistle-blowing. At a higher level, a wide range of regulatory strategies have been
pursued by regulatory bodies across the globe to encourage whistle-blowing. Feldman
and Lobel (2010) identify ve primary elements of the “regulatory toolbox” in this
respect:
(1) the creation of internal disclosure procedures involving a formal reporting
channel and anonymous reporting;
(2) providing employees with anti-retaliation protections;
(3) incentivising reporting with money;
(4) creating a duty to report; and
(5) imposing liability for failure to report.
Across the globe, the implementation of these whistle-blowing provisions has been
varied (see Table II, which compares Group of Twenty (G20) nations in relation to
regulatory provisions relating to internal disclosure procedures, condentiality,
anti-retaliation protection and the existence of independent whistle-blower
investigation authorities). The USA has enshrined almost all categories of
whistle-blower provisions in securities legislation. Most notably, the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act) expands upon existing
whistle-blower law. By expanding anti-retaliation protection and monetary incentives,
the Dodd-Frank Act is designed to incentivise whistle-blowers to expose securities
fraud. In contrast, in many well-established countries, such as Germany, Switzerland,
France and Sweden, whistle-blowing provisions are largely absent from corporate
regulation (Hassink et al., 2007). Other countries (such as South Africa, Australia, the UK
and Canada) have adopted some of the whistle-blowing provisions outlined above but
neglected to enact others. These differences demonstrate that while whistle-blowing is
increasingly encouraged, how that can be best achieved through legislation is not well
understood (Feldman and Lobel, 2010).
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Table II.
A global survey of
whistle-blowing
provisions (G20
nations listed in
order of gross
domestic product)
Nation
Requirements for
organizations to have internal
disclosure procedures
Protections include
requirements for
condentiality of disclosures
Anti-retaliation
protection
Existence of independent
whistle-blower investigation/
authority or tribunal
Public sector
laws
Private sector
laws
Public sector
laws
Public sector
laws
Private sector
laws
Private sector
laws
Private sector
laws
Public sector
laws
Argentina 3 3 2 2 3 3 3 3
Australia 1 3 1 2 1 3 1 3
Brazil 3 2 2 2 2 3 3 3
Canada 1 3 1 3 1 2 1 3
China 2 2 2 2 2 3 3 2
European Union
a
13313 1 33
France 3 3 3 3 2 2 2 2
Germany 3 3 3 3 2 2 3 3
India 3 2 1 3 1 3 1 3
Indonesia 3 3 3 3 2 2 2 2
Italy 3 3 1 3 1 3 3 3
Japan 3 3 3 3 1 1 3 3
Mexico 3 3 3 3 3 3 2 2
Russia 2 3 3 3 3 3 3 3
Saudi Arabia 3 3 3 3 3 3 3 3
South Africa 3 2 3 3 2 2 3 3
South Korea 3 3 1 1 1 1 1 1
Turkey 3 3 2 2 2 2 3 3
UK 33221 1 33
USA 22111 1 11
Notes: 1⫽Very/quite comprehensive; 2 ⫽Somewhat/partially comprehensive; 3 ⫽Absent/not at all comprehensive;
a
for the European Union; Private
Sector Laws ⫽Laws applying to European Union institutions as whole; Public Sector Laws ⫽Laws applying to European Commission
Source: Adapted from Wolfe et al. (2014)
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To date, research has begun to ll in some of this uncertainty, though as a body of work,
it remains unsettled in important respects. Xu and Ziegenfuss (2008) nd that internal
auditors are more likely to report wrongdoing to higher authorities when incentives are
provided, a nding conrmed by experimental studies by Brink et al. (2013) and Pope
and Lee (2013). Research in relation to anti-retaliation protection is more mixed. Threats
of retaliation from a supervisor have been found to be of concern to employees who are
contemplating blowing the whistle (Mesmer-Magnus and Viswesvaran, 2005;Miceli
and Near, 1992;Miceli et al., 2008;Arnold and Ponemon, 1991); however, research has
tended to suggest that anti-retaliation statutes have been largely impotent in motivating
whistle-blowing (Dworkin, 2007;Dworkin and Near, 1987,1997;Miceli et al., 2008), and
legal scholars contend that the specic protections provided in legislation to
whistle-blowers are relatively narrow in scope and “more illusory than real” (Seifert
et al., 2010; see also Dworkin, 2007;Earle and Madek, 2007). Research has generally
found that the availability of an anonymous reporting channel increases the propensity
to whistle-blow (Seifert et al., 2010;Atkinson et al., 2012), though Pope and Lee (2013)
nd no effect. Moreover, with few exceptions, research investigating the impact of
multiple regulatory tools has been largely absent, leading Seifert et al. (2010, p. 714) to
conclude that “future accounting research on whistle-blowing should specify the
specic legislative model under which hypotheses are advanced”.
As Carcello et al. (2011, p. 25) conclude, for this reason, it is lamentable that
“notwithstanding the important role that whistle-blowers play in uncovering corporate
fraud […] this area […] is just beginning to be examined by accounting researchers”. It
is clear that future accounting research into factors that contribute to the likelihood of
whistle-blowing would substantially enhance the corporate governance of rms. Given
the international differences in regulatory provisions designed to protect and encourage
whistle-blowing, it is important to enhance understanding of the effects of different
provisions on whistle-blowing activity, both generally and with specic reference to the
form of the whistle-blowing response.
5. Conclusion and suggestions
It is frequently observed that fraud has a greater economic impact on society than any
other category of crime. No other issue has had as strong an impact on the reputation of
the accounting profession. In spite of these impacts, research in accounting on fraud
remains fragmented and emergent. A key objective of this review is to underscore that
fraud represents a promising and exciting area for researchers in accounting. Recent
years have witnessed a proliferation in interest in fraud among practitioners, academics,
researchers and journal editors. One striking outgrowth of this interest has been the
rapid growth of the ACFE, which claims to be the fastest growing professional
designation in the world. Furthermore, there are rich disciplinary theoretical
foundations in criminology, psychology and sociology (see Trompeter et al., 2014 for a
review) which opens up scope for inter-disciplinary research to contribute to research
and practice. To this end, Ramamoorti (2008) makes a strong case for the integration of
additional behavioural sciences content, including psychology, sociology, criminology
and anthropology, into accounting and anti-fraud curricula.
Given the state of the eld, there is an opportunity to build upon prior research in a
number of directions. In this review, I have earmarked three specic avenues for both
theoretical and empirical research studies that have an opportunity to guide important
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debates and challenges within organisations and regulatory bodies. These issues are
susceptible to investigation through a range of methodologies, however, direct
interaction with the eld of interest rather than cross-sectional statistical analysis would
assist in opening up concepts directly relevant to the decision to offend (and report). My
own experience in interviewing people convicted of fraud reinforces the value of
traditional behavioural methods of criminology. Using this call as a foundation, future
research could delve into these areas to develop tools or approaches to enhance detection
procedures.
Notes
1. At a high level, the Association of Certied Fraud Examiners (ACFE) distinguishes between
three major types of occupational fraud: asset misappropriation; corruption; and nancial
statement fraud.
2. The ACFE is the world’s largest anti-fraud organisation with over 60,000 members
throughout the world (Morales et al., 2014). The stated mission of the ACFE is to reduce the
incidence of fraud and white-collar crime and to assist the membership in fraud detection and
deterrence (see www.acfe.com). In its Report to the Nations series (ACFE, 2008,2010,2012,
2014), the ACFE has developed an array of statistics pertaining to various aspects of the fraud
triangle drawn from across the globe.
3. According to Ferreira and Merchant (1992), eld research is characterised by the following:
The researcher has direct, in-depth contact with organisational participants, particularly in
interviews and direct observations of activities and these contacts provide a primary source
of research data; The study focuses on real tasks or processes, not situations articially
created by the researcher; The research design is not totally structured. It evolves along with
the eld observations; The presentation of data includes relatively rich (detailed) descriptions
of company context and practices; The resulting publications are written to the academic
community. For A fuller discussion of eld study methods, see Ahrens and Chapman (2006)
and Baxter and Chua (1998).
4. As Kalmbach and Lyons (2003) note, behavioural science research rests fundamentally on
four tenets: independent review (by disinterested parties); informed consent by participants;
minimisation of harm; and privacy and condentiality. As the authors note, these ideals
require special attention when dealing with special populations who may be more vulnerable,
such as prisoners.
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Carcello, J., Bedard, J. and Hermanson, D. (2009), “Response of the American accounting
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auditing profession”, Accounting Horizons, Vol. 23 No. 1, pp. 69-84.
Corresponding author
Clinton Free can be contacted at: c.free@unsw.edu.au
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