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Fraud dynamics and controls in organizations

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

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.

Suggested Citation

  • Davis, Jon S. & Pesch, Heather L., 2013. "Fraud dynamics and controls in organizations," Accounting, Organizations and Society, Elsevier, vol. 38(6), pages 469-483.
    • Handle: RePEc:eee:aosoci:v:38:y:2013:i:6:p:469-483
    DOI: 10.1016/j.aos.2012.07.005
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    Cited by:

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    2. Monica Ramos Montesdeoca & Agustín J. Sánchez Medina & Felix Blázquez Santana, 2019. "Research Topics in Accounting Fraud in the 21st Century: A State of the Art," Sustainability, MDPI, vol. 11(6), pages 1-31, March.
    3. Lokanan, Mark & Sharma, Satish, 2025. "Reprint of: The use of machine learning algorithms to predict financial statement fraud," The British Accounting Review, Elsevier, vol. 57(1).
    4. Aziza Laguecir & Bernard Leca, 2018. "Strategies of visibility in contemporary surveillance settings: Insights from misconduct concealment in financial markets, Critical Perspectives on Accounting," Post-Print hal-01914996, HAL.
    5. Mark E. Lokanan & Prerna Sharma, 2023. "Two Decades of Accounting Fraud Research: The Missing Meso-Level Analysis," SAGE Open, , vol. 13(3), pages 21582440231, September.
    6. Adrian Gepp & Kuldeep Kumar & Sukanto Bhattacharya, 2024. "Taking the hunch out of the crunch: A framework to improve variable selection in models to detect financial statement fraud," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(2), pages 1569-1588, June.
    7. Christina Philippou, 2024. "Expert Perceptions on Anti-bribery and Corruption Policies in Sports Governing Bodies: Implications for Ethical Climate Theory," Journal of Business Ethics, Springer, vol. 193(2), pages 427-440, August.
    8. Kuang, Yu Flora & Lee, Gladys, 2017. "Corporate fraud and external social connectedness of independent directors," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 401-427.
    9. Wang, Yang & Ashton, John K. & Jaafar, Aziz, 2023. "Financial statement fraud, recidivism and punishment," Emerging Markets Review, Elsevier, vol. 56(C).
    10. Balakrishnan, Ramji & Penno, Mark, 2014. "Causality in the context of analytical models and numerical experiments," Accounting, Organizations and Society, Elsevier, vol. 39(7), pages 531-534.
    11. Liu, Chenyong & Ryan, David & Lin, Guoyu & Xu, Chunhao, 2023. "No rose without a thorn: Corporate teamwork culture and financial statement misconduct," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    12. Lescoat, Pierre & Van den Bussche, Pénélope, 2025. "(E)valuated by the market: The challenges of evaluating the individual performance of sell-side analysts in the quest for narrative authority," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 102(C).
    13. Laguecir, Aziza & Leca, Bernard, 2019. "Strategies of visibility in contemporary surveillance settings: Insights from misconduct concealment in financial markets," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 62(C), pages 39-58.

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