Post by Sapphire Capital on Aug 29, 2008 23:23:47 GMT 4
The Attitude Toward and Rationalization of Fraudulent Financial Reporting
Pamela R. Murphy
Queen's University - School of Business
August 13, 2008
Abstract:
Statement on Auditing Standards (SAS) 99 describes three factors, known together as the fraud triangle, that purportedly predict the likelihood of fraudulent financial reporting. The accounting literature largely accepts the first two factors, opportunity and motivation, as being associated with fraud (Graham et al. 2005; Erickson et al. 2004; Wells 2001; AICPA 2002; Murphy 1999), whereas the third factor, attitude/rationalization, remains a relative mystery while SAS 99 provides little guidance. I conduct experiments using an affect-based fraud framework, in which the opportunity and motivation to misreport exist, with participants for whom I previously measure disposition toward misreporting. I also test interventions intended to make the use of rationalizations more difficult. As expected, I find a significant association between predisposition and misreporting. Individuals who misreport experience significantly increased guilt and psychological discomfort versus those who report honestly. When reminded of the flaws in typical rationalizations, significantly fewer participants misreport. The results: 1) inform both the fraud and management reporting literatures, 2) support the validity of the third side of the fraud triangle while providing specific guidance to auditors, 3) suggest the importance of affect in misreporting, and 4) support the notion that interventions aimed at rationalization can reduce the likelihood of misreporting.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1222972
Pamela R. Murphy
Queen's University - School of Business
August 13, 2008
Abstract:
Statement on Auditing Standards (SAS) 99 describes three factors, known together as the fraud triangle, that purportedly predict the likelihood of fraudulent financial reporting. The accounting literature largely accepts the first two factors, opportunity and motivation, as being associated with fraud (Graham et al. 2005; Erickson et al. 2004; Wells 2001; AICPA 2002; Murphy 1999), whereas the third factor, attitude/rationalization, remains a relative mystery while SAS 99 provides little guidance. I conduct experiments using an affect-based fraud framework, in which the opportunity and motivation to misreport exist, with participants for whom I previously measure disposition toward misreporting. I also test interventions intended to make the use of rationalizations more difficult. As expected, I find a significant association between predisposition and misreporting. Individuals who misreport experience significantly increased guilt and psychological discomfort versus those who report honestly. When reminded of the flaws in typical rationalizations, significantly fewer participants misreport. The results: 1) inform both the fraud and management reporting literatures, 2) support the validity of the third side of the fraud triangle while providing specific guidance to auditors, 3) suggest the importance of affect in misreporting, and 4) support the notion that interventions aimed at rationalization can reduce the likelihood of misreporting.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1222972