Motivation for Occupational Fraud: An Analysis of the “Fraud Triangle” Using Economic Logic

By Terry Boulter, Avik Mukherjee and Sukanto Bhattacharya.

Published by The International Journal of Interdisciplinary Organizational Studies

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The “fraud triangle” constitutes a very popular criminological model of occupational fraud that explains the dynamics underlying occupational fraud. However, given that occupational fraud is essentially an economic crime, there is little evidence in the extant literature that provides an explanation of the “fraud triangle” in purely economic terms. In this paper, we separately consider each of the three vertexes of the "fraud triangle" and establish an underlying economic linkage that coherently connects each of the vertexes. We first consider the "incentive" vertex and hypothesize and prove that in equilibrium, the "net valence" (i.e. net incentive to an employee from an act of occupational fraud) is zero. It is when the equilibrium is disturbed that a positive "net valence" for fraud arises, identified in our framework by an increase in the probability of an employee not being caught after committing fraud. We then move to the second vertex i.e. "opportunity" and derive, using a finite-state Markov chain, a separate, closed-form expression for the equilibrium probability measure identified in our analysis of the first vertex. Finally, we show that the last vertex - "rationalization"; represented in our framework via an equilibrium penalty-to-reward ratio for an act of occupational fraud from an employee's viewpoint is very sensitively dependent on the likelihood of the organizational culture towards fraud continuing to remain in a slack state in the future given that it is currently in a slack state. We also provide a hypothetical numerical illustration of our framework for a specific setting of the Markov state transition matrix. We believe that our analysis is a first step in providing a rigorous mathematical ratification of the criminological theory of "fraud triangle" and therefore helps to open up the field for more meaningful empirical enquiry in future.

Keywords: Occupational Fraud, Organizational Culture, Finite-State Markov Chain

The International Journal of Interdisciplinary Organizational Studies, Volume 7, Issue 1, pp.47-57. Article: Print (Spiral Bound). Article: Electronic (PDF File; 299.634KB).

Dr Terry Boulter

Senior Lecturer, Deakin Graduate School of Business, Deakin University, Melbourne, Victoria, Australia

Dr. Terry Boulter heads the Finance/Insurance discipline group in the Deakin Graduate School of Business. In his PhD, he conducted a set of four empirical studies using financial econometrics to examine volatility and speed of adjustment within foreign exchange markets. His current interests are with countries within the South East Asian regions, focusing on emerging economy exchange rate policies, and with the hedging practices of companies within the region. Currently, he is the principal supervisor of two PhD students – one of them is examining indirect government intervention within currency markets and the other is examining the relationship between optimal capital structure and hedging policy. His research interests are in currency markets and exchange rate issues facing emerging economies. His most recent research paper (currently under review) is titled: “The Hedging Practice of Thai Companies Post Asian Financial Crisis.”

Mr. Avik Mukherjee

Assistant Professor, Globsyn Business School, Kolkata, West Bengal, India

Dr Sukanto Bhattacharya

Senior Lecturer, Deakin Graduate School of Business, Deakin University, Melbourne, Victoria, Australia

Dr. Sukanto Bhattacharya received his PhD from the School of Information Technology, Bond University, Australia in 2004. He has served as an Assistant Professor of Finance at Alaska Pacific University, Anchorage, USA and also at Dickinson College, Pennsylvania, USA prior to returning to Australia in 2008 and subsequently joining as a Postdoctoral Research Fellow at University of Queensland's KPMG Centre for Business Forensics. He is currently a Senior Lecturer in Finance in the Deakin Graduate School of Business and features among the Who's Who in Collegiate Faculty. His main area of research interest covers mathematical models for fraud detection and business failure prediction. He has published his research in peer-reviewed international journals of high standing like Decision Support Systems, Journal of Forecasting and Minds & Machines.