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Financial fraud: A literature review

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  • Reurink, Arjan

Abstract

This paper describes the empirical universe of financial fraud as it has been documented in the academic literature. More specifically, it describes the different forms of fraudulent behavior in the context of financial market activities, the prevalence and consequences of such behavior as identified by previous research, and the economic and market structures that scholars believe facilitate it. To structure the discussion, a conceptual distinction is made between three types of financial fraud: financial statement fraud, financial scams, and fraudulent financial mis-selling. What emerges is a picture of financial fraud as a complex phenomenon that can take very different forms, depending on the market segments in which it occurs, the financial instruments it pertains to, and the actors involved. Moreover, the findings of the literature review highlight a number of recent developments that scholars think have facilitated the occurrence of financial fraud, including: (1) the development of new fundamental conflicts of interest and perverse incentive structures in the financial industry; (2) an influx of unsophisticated, gullible participants in the financial marketplace; (3) the increasing complexity involved in financial market transactions as a result of rapid technological, legal, and financial innovation and an ever-widening menu of financial products; (4) an increase in the use of justified secrecy in the form of strict confidentiality rules around banking and legal services and the use of off-balance-sheet constructions and shell companies located in secrecy jurisdictions.

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  • Reurink, Arjan, 2016. "Financial fraud: A literature review," MPIfG Discussion Paper 16/5, Max Planck Institute for the Study of Societies.
  • Handle: RePEc:zbw:mpifgd:165
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    1. Emmanuel Laffort & Nicolas Dufour, 2021. "Prise en compte de la fraude dans les organisations : comment libérer la parole ?," Post-Print hal-03336041, HAL.
    2. Ramin Salahshoor, 2018. "A Novel Approach for Circular Trade Detection in Mercantile Exchange," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 3(1), pages 43-56, March.
    3. Madan Lal Bhasin, 2016. "Fraudulent Reporting Practices by Satyam," Traektoriâ Nauki = Path of Science, Altezoro, s.r.o. & Dialog, vol. 2(10(15)), pages 1.7-1.1.21, October.
    4. Mayntz, Renate, 2016. "Illegal markets boundaries and interfaces between legality and illegality," MPIfG Discussion Paper 16/4, Max Planck Institute for the Study of Societies.
    5. Joshua van Vuuren & Gary van Vuuren, 2022. "Detecting Investment Fraud Using the Bias Ratio," SAGE Open, , vol. 12(2), pages 21582440221, May.

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