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Fraud dynamics and controls in organizations

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  • Davis, Jon S.
  • Pesch, Heather L.
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    Abstract

    This paper develops an agent-based model to examine the emergent dynamic characteristics of fraud in organizations. In the model, individual heterogeneous agents, each of whom can have motive and opportunity to commit fraud and a pro-fraud attitude, interact with each other. This interaction provides a mechanism for cultural transmission through which attitudes regarding fraud can spread. Our benchmark analysis identifies two classes of organizations. In one class, we observe fraud tending toward a stable level. In the other class, fraud dynamics are characterized by extreme behaviors; organizations with mostly honest behavior suddenly change their state to mostly fraudulent behavior and vice versa. These changes seem to occur randomly over time. We then modify our model to examine the effects of various mechanisms thought to impact fraud in organizations. Each of these mechanisms has different impacts on the two classes of organizations in our benchmark model, with some mechanisms being more effective in organizations exhibiting stable levels of fraud and other mechanisms being more effective in organizations exhibiting unstable extreme behavior. Our analysis and results have general implications for designing programs aimed at preventing fraud and for fraud risk assessment within the audit context.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0361368212000815
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    Bibliographic Info

    Article provided by Elsevier in its journal Accounting, Organizations and Society.

    Volume (Year): 38 (2013)
    Issue (Month): 6 ()
    Pages: 469-483

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    Handle: RePEc:eee:aosoci:v:38:y:2013:i:6:p:469-483

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    Web page: http://www.elsevier.com/locate/aos

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    1. Merle Erickson & Michelle Hanlon & Edward L. Maydew, 2006. "Is There a Link between Executive Equity Incentives and Accounting Fraud?," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 113-143, 03.
    2. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
    3. Holtfreter, Kristy, 2005. "Is occupational fraud "typical" white-collar crime? A comparison of individual and organizational characteristics," Journal of Criminal Justice, Elsevier, vol. 33(4), pages 353-365.
    4. Joshua M. Epstein & Robert L. Axtell, 1996. "Growing Artificial Societies: Social Science from the Bottom Up," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550253, December.
    5. Bearden, William O & Netemeyer, Richard G & Teel, Jesse E, 1989. " Measurement of Consumer Susceptibility to Interpersonal Influence," Journal of Consumer Research, University of Chicago Press, vol. 15(4), pages 473-81, March.
    6. Robert Axelrod, 1997. "Advancing the Art of Simulation in the Social Sciences," Working Papers 97-05-048, Santa Fe Institute.
    7. Chang, Juin-jen & Lai, Ching-chong, 2002. " Is the Efficiency Wage Efficient? The Social Norm and Organizational Corruption," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 27-47.
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